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File Nos. 333-81859
811-8114
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 2
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 29
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)
Mary Eldridge, Secretary
First Allmerica Financial Life Insurance 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:
X immediately upon filing pursuant to Paragraph (b) of Rule 485
-----
on (date) pursuant to Paragraph (b) of Rule 485
-----
60 days after filing pursuant to Paragraph (a) (1) of Rule 485
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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 CONTRACTS
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, 1999 was filed on or
before March 30, 2000.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUSES OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUSES
- ----------------- -----------------------
1...................Cover Page
2...................Special Terms
3...................Summary of Fees and Expenses; Summary of the Contract
Features
4...................Condensed Financial Information
5...................Prospectus A: Description of the Companies, the Variable
Accounts, the Trust, Fidelity VIP, Fidelity VIP II, T.
Rowe Price International Series, Inc. and DGPF.
....................Prospectus B: Description of the Companies, the Variable
Accounts and The Underlying Investment Companies.
6...................Charges and Deductions
7...................Description of the Contract
8...................Electing the Annuity Income Date; Choosing an Income Option;
Description of Annuity Benefit Options; Variable Annuity
Payments
9...................Death Benefit
10..................Variable Annuity Payments; Distribution
11..................Withdrawals; Charge For Surrender and Withdrawal; Texas
Optional Retirement Program
12..................Federal Tax Considerations
13..................Legal Matters
14..................Statement of Additional Information - Table of Contents
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- ----------------------------------------------
15..................Cover Page
16..................Table of Contents
17..................General Information and History
18..................Services
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19..................Underwriters
20..................Underwriters
21..................Performance Information
22..................Annuity Payments
23..................Financial Statements
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
SEPARATE ACCOUNT VA-K
This Prospectus provides important information about the Allmerica Immediate
Advantage Variable Annuity contracts issued by Allmerica Financial Life
Insurance and Annuity Company (in all jurisdictions except New York) or by First
Allmerica Financial Life Insurance Company (in New York). The Contract is a
single payment immediate combination variable and fixed annuity offered on both
a group and individual basis. PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE
INVESTING AND KEEP IT FOR FUTURE REFERENCE. ANNUITIES INVOLVE RISKS INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information dated May 1, 2000 containing more
information about this annuity is on file with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. A copy may be
obtained free of charge by calling Allmerica Investments, Inc. at
1-800-723-6550. The Table of Contents of the Statement of Additional Information
is listed on page 3 of this Prospectus. This Prospectus and the Statement of
Additional Information can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
The Contract offers a Variable Income Option and a Fixed Income Option. The
Variable Income Option is supported by a legally segregated separate account of
the Company called the Variable Account. The Variable Account is subdivided into
Sub-Accounts. Each Sub-Account invests exclusively in shares of the following
funds:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Emerging Markets Fund Overseas Portfolio
Select International Equity Fund Equity-Income Portfolio
Select Aggressive Growth Fund Growth Portfolio
Select Capital Appreciation Fund High Income Portfolio
Select Value Opportunity Fund
Select Growth Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Select Strategic Growth Fund Asset Manager Portfolio
Core Equity Fund
Equity Index Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Select Growth and Income Fund T. Rowe Price International Stock Portfolio
Select Investment Grade Income Fund
Government Bond Fund DELAWARE GROUP PREMIUM FUND
Money Market Fund DGPF International Equity Series
</TABLE>
The Company's General Account will support the Fixed Income Option.
THIS ANNUITY IS NOT A BANK DEPOSIT OR OBLIGATION; FEDERALLY INSURED; OR ENDORSED
BY ANY BANK OR GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IN THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED MAY 1, 2000
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND EXPENSES................................ 6
SUMMARY OF CONTRACT FEATURES................................ 10
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND
DGPF....................................................... 14
INVESTMENT OBJECTIVES AND POLICIES.......................... 15
PERFORMANCE INFORMATION..................................... 18
DESCRIPTION OF THE CONTRACT................................. 20
A. Single Purchase Payment.............................. 20
B. Right to Cancel...................................... 20
C. Electing the Annuity Income Date..................... 21
D. Choosing an Income Option............................ 21
E. Description of Annuity Benefit Options............... 22
F. Variable Annuity Payments............................ 23
Net Investment Factor............................... 23
The Annuity Unit and Annuity Unit Value............. 23
Determination of First Annuity Payment.............. 23
Determination of the Number of Annuity Units........ 23
Dollar Amount of First Variable Annuity Payment..... 24
Dollar Amount of Subsequent Variable Annuity
Payments............................................ 24
Payment of Annuity Payments......................... 24
G. Transfers of Annuity Units........................... 24
Automatic Account Rebalancing....................... 25
H. Withdrawals.......................................... 25
Calculation of Proportionate Reduction.............. 26
Calculation of Present Value........................ 27
I. Death Benefit........................................ 28
Death of an Owner or an Annuitant Before the Annuity
Income Date......................................... 28
Payment of the Death Benefit........................ 28
The Spouse of the Deceased Owner as Beneficiary..... 28
Death of the Owner or the Annuitant After the
Annuity Income Date................................. 29
J. General Restrictions on Payments..................... 29
K. Telephone Authorization.............................. 29
L. Assignment........................................... 29
M. NORRIS Decision....................................... 29
CHARGES AND DEDUCTIONS...................................... 30
A. Variable Account Deductions.......................... 30
Mortality and Expense Risk Charge................... 30
Administrative Expense Charge....................... 30
Expenses of the Underlying Funds.................... 30
B. Premium Taxes........................................ 30
C. Transfer Charge...................................... 31
D. Withdrawal Adjustment Charge......................... 31
FEDERAL TAX CONSIDERATIONS.................................. 32
A. Annuity Contracts in General......................... 32
B. Tax on Annuity Payments.............................. 32
C. Tax on Withdrawals................................... 32
Withdrawals Before the Annuity Income Date.......... 32
Withdrawals After the Annuity Income Date........... 33
D. Exchanges............................................ 33
E. Tax Withholding...................................... 33
</TABLE>
2
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<TABLE>
<S> <C>
F. Diversification and Control of Underlying Assets..... 34
STATEMENTS AND REPORTS...................................... 34
LOANS....................................................... 34
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 34
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 35
VOTING RIGHTS............................................... 35
DISTRIBUTION................................................ 35
LEGAL MATTERS............................................... 36
FURTHER INFORMATION......................................... 36
APPENDIX A -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND
PAYMENT WITHDRAWALS........................................ A-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................................................ 4
ANNUITY BENEFIT PAYMENTS.................................... 5
EXCHANGE OFFER.............................................. 5
PERFORMANCE INFORMATION..................................... 7
FINANCIAL STATEMENTS........................................ F-1
</TABLE>
3
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SPECIAL TERMS
ANNUITANT: the person who must be alive for annuity payments to be made (unless
payments are guaranteed). Joint Annuitants are permitted and, unless otherwise
indicated, any reference to Annuitant shall include Joint Annuitants. In
contrast, the person to whom annuity payments are made is the Owner (or a person
requested by the Owner). The Annuitant and the Owner may be the same individual.
ANNUITY INCOME DATE: the date annuity payments begin. The Annuity Income Date
must be within twelve months of the Contract's Issue Date.
ANNUITY UNIT: a measure used to calculate annuity payments under a Variable
Income Option.
ASSUMED INVESTMENT RETURN (AIR): used to calculate the initial variable annuity
payment and to determine how the payment will change over time in response to
the investment performance of the selected Sub-Accounts.
BENEFICIARY: the person, persons or entity entitled to the Death Benefit upon
the death of the Owner prior to the Annuity Income Date or remaining annuity
payments, if any, upon the death of the Owner on or after the Annuity Income
Date.
CHANGE FREQUENCY: the frequency (monthly, quarterly, semi-annually or annually)
that the dollar value of an annuity payment under a Variable Income Option will
change due to investment performance.
COMPANY (WE, US OR OUR): Allmerica Financial Life Insurance and Annuity Company
(in all jurisdictions except New York) or First Allmerica Financial Life
Insurance Company (in New York).
CONTRACT VALUE: the Present Value of all future and/or remaining annuity
payments. (See the section entitled "Present Value Determination").
CONTRACT YEAR: a period of twelve consecutive months starting on the Contract's
Issue Date or on any anniversary of the Issue Date.
DATE OF FIRST CHANGE: the date on which your variable annuity payment will
change in value for the first time.
FIXED INCOME OPTION: an income option with annuity payments that are fixed in
amount (unless a withdrawal is taken or as a result of the death of the first
Joint Annuitant).
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
ISSUE DATE: the date the Contract is issued and the date that is used to
determine Contract days, Contract months, Contract years and anniversaries.
NET PAYMENT: the Single Purchase Payment less any premium tax.
OWNER (YOU OR YOUR): the person, persons (Joint Owners) or entity entitled to
exercise the rights and privileges under this Contract. Unless otherwise
indicated, any reference to You and Your shall include Joint Owners.
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 Fidelity
Variable Insurance Products Fund ("Fidelity VIP"), the Asset Manager Portfolio
of the Fidelity Variable Insurance Products Fund II ("Fidelity VIP II") or the
T. Rowe Price International Stock
4
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Portfolio of T. Rowe Price International Series, Inc. ("T. Rowe Price"); or the
DGPF International Equity Series of the Delaware Group Premium Fund ("DGPF").
UNDERLYING FUND (FUNDS): an investment portfolio of the Trust, Fidelity VIP,
Fidelity VIP II, T. Rowe Price or DGPF in which a Sub-Account invests.
VALUATION DATE: a day on which the net asset value of the unit values of the
Sub-Accounts are determined. Valuation Dates currently occur on each day on
which the New York Stock Exchange is open for trading.
VALUATION PERIOD: a period used in measuring the investment experience of a
Sub-Account. The Valuation Period begins at the close of one Valuation Date and
ends at the close of the next succeeding Valuation Date.
VARIABLE ACCOUNT: one of our separate accounts, which we call Separate Account
VA-K, consisting of assets segregated from our other assets. The investment
performance of the assets of each of our separate accounts (and, under the
Contract, each Sub-Account) is determined separately from our other assets and
the assets are not chargeable with liabilities arising out of any other business
which we may conduct.
VARIABLE INCOME OPTION: an income option providing for annuity payments varying
in amount in accordance with the investment experience of the Underlying Funds
selected.
VARIABLE INCOME OPTION RATE: the factor applied to the portion of the Net
Payment allocated to the Variable Income Option and used to determine the number
of Annuity Units in each annuity payment. The factor takes into account the
Issue Date, the Annuity Income Date, annuity benefit option, the Assumed
Investment Return, the Change Frequency and Date of First Change.
5
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SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Allmerica
Immediate Advantage Variable Annuity Contract. The purpose of the following
tables is to assist you in understanding these fees and expenses. The tables
show (1) charges under the Contract, including (2) annual expenses of the
Sub-Accounts, and (3) annual expenses of the Funds. Contract charges including
the annual Sub-Account expenses are specified under the terms of the Contract.
Annual Fund expenses are not fixed or specified under the terms of the Contract
and will vary from year to year. In addition to the charges and expenses
described below, premium taxes are applicable in some states and deducted as
described under "B. Premium Taxes" under CHARGES AND DEDUCTIONS.
<TABLE>
<CAPTION>
CHARGE
(1) CONTRACT CHARGES: ------
<S> <C>
None
TRANSFER CHARGE:
We currently do not charge for processing transfers and
guarantee that the first 12 transfers in a Contract year
will not be subject to a transfer charge. For each
subsequent transfer, we reserve the right to assess a
charge, guaranteed never to exceed $25, to reimburse us
for the costs of processing the transfer.
WITHDRAWAL ADJUSTMENT CHARGE:
After the Issue Date, you may request withdrawals, which
will result in a calculation by the Company of the Present
Value of future annuity payments. For withdrawals taken
within 5 years from the Issue Date, the Assumed Investment
Return ("AIR") you have chosen (in the case of a Variable
Income Option) or the interest rate (in the case of a Fixed
Income Option) used to determine the Present Value is
increased by a Withdrawal Adjustment Charge in the following
manner:
ADJUSTMENT TO AIR OR INTEREST RATE:
If 15 or more years of annuity payments are being 1.00%
valued, the increase is
If 10-14 years of annuity payments are being valued, the 1.50%
increase is
If less than 10 years of annuity payments are being 2.00%
valued, the increase is
The increase to the AIR or interest rate used to determine
the Present Value results in a greater proportionate
reduction in the number of Annuity Units (under a variable
income option) or dollar amount (under a fixed income
option), than if the increase had not been made. Because
each variable annuity payment is determined by multiplying
the number of Annuity Units by the value of an Annuity
Unit, the reduction in the number of Annuity Units will
result in lower future variable annuity payments. See "H.
Withdrawals" under DESCRIPTION OF THE CONTRACT for
additional information.
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as a percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
------
Total Annual Expenses: 1.45%
</TABLE>
6
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(3) ANNUAL UNDERLYING FUND EXPENSES: In addition to the charges described above,
certain fees and expenses are deducted from the assets of the Underlying Funds.
The levels of fees and expenses vary among the Underlying Funds. The following
table shows the expenses of the Underlying Funds as a percentage of average
daily net assets for the year ended December 31, 1999, as adjusted for material
changes. For more information concerning fees and expenses, see the prospectuses
of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND
(AFTER ANY (AFTER ANY EXPENSES (AFTER ANY
FUND VOLUNTARY WAIVERS) REIMBURSEMENTS) WAIVERS/REIMBURSEMENTS)
- ---- ------------------ --------------- -----------------------
<S> <C> <C> <C>
Select Emerging Markets Fund............ 1.35% 0.57% 1.92%(1)(2)
Select International Equity Fund........ 0.89% 0.13% 1.02%(1)(2)
DGPF International Equity Series........ 0.83% 0.12% 0.95%(3)
Fidelity VIP Overseas Portfolio......... 0.73% 0.18% 0.91%(4)
T. Rowe Price International Stock
Portfolio.............................. 1.05% 0.00% 1.05%
Select Aggressive Growth Fund........... 0.81%* 0.06% 0.87%(1)(2)*
Select Capital Appreciation Fund........ 0.90%* 0.07% 0.97%(1)*
Select Value Opportunity Fund........... 0.90% 0.07% 0.97%(1)(2)
Select Growth Fund...................... 0.78% 0.05% 0.83%(1)(2)
Select Strategic Growth Fund............ 0.85% 0.35% 1.20%(1)(2)
Core Equity Fund........................ 0.43% 0.05% 0.48%(1)(2)
Fidelity VIP Growth Portfolio........... 0.58% 0.08% 0.66%(4)
Equity Index Fund....................... 0.28% 0.07% 0.35%(1)
Select Growth and Income Fund........... 0.67% 0.07% 0.74%(1)(2)
Fidelity VIP Equity-Income Portfolio.... 0.48% 0.09% 0.57%(4)
Fidelity VIP II Asset Manager
Portfolio.............................. 0.53% 0.10% 0.63%(4)
Fidelity VIP High Income Portfolio...... 0.58% 0.11% 0.69%
Select Investment Grade Income Fund..... 0.43% 0.07% 0.50%(1)
Government Bond Fund.................... 0.50% 0.12% 0.62%(1)
Money Market Fund....................... 0.24% 0.05% 0.29%(1)
</TABLE>
*Effective September 1, 1999, the management fee rates for the Select Aggressive
Growth Fund and Select Capital Appreciation Fund were revised. The Management
Fee and Total Fund Expense ratios shown in the table above have been adjusted to
assume that the revised rates took effect January 1, 1999.
(1)Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of 1.50% of
average net assets for Select International Equity Fund, 1.35% for Select
Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25% for Select
Value Opportunity Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Select Investment Grade Income Fund
and Government Bond Fund, and 0.60% for Money Market Fund and Equity Index Fund.
The total operating expenses of these Funds of the Trust were less than their
respective expense limitations throughout 1999.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-advisor.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
7
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The declaration of a voluntary management fee or expense limitation in any year
does not bind AFIMS to declare future expense limitations with respect to these
Funds. These limitations may be terminated at any time.
(2)These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. These amounts have been treated as reductions
of expenses. After reduction of the rebate, the total annual fund operating
expenses would have been 1.01% for Select International Equity Fund, 1.88% for
Select Emerging Markets Fund, 0.84% for Select Aggressive Growth Fund, 0.88% for
Select Value Opportunity Fund, 0.81% for Select Growth Fund, 1.17% for Select
Strategic Growth Fund, 0.45% for Core Equity Fund, and 0.73% for Select Growth
and Income Fund.
(3)The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
(4)A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, through arrangements with certain funds', or
Fidelity Management & Research Company on behalf of certain funds', custodian
credits realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expenses. Including these reductions, total operating
expenses presented in the table would have been 0.87% for the Fidelity VIP
Overseas Portfolio; 0.56% for the Fidelity VIP Equity-Income Portfolio; 0.62%
for the Fidelity VIP II Asset Manager Portfolio and 0.65% for the Fidelity VIP
Growth Portfolio.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
Expense limitations described above may not include extraordinary expenses, such
as litigation.
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets and assumes that the Underlying Fund expenses
listed above remain the same in each of the 1, 3, 5 and 10-year intervals.
Because the expenses of the Underlying Funds differ, separate examples are used
to illustrate the expenses incurred by an Owner on an investment in the various
Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE ASSUMED
5% ANNUAL RETURN IS HYPOTHETICAL AND IS NOT A REPRESENTATION OF PAST OR FUTURE
RETURNS.
8
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Table (1) If you do not surrender your Contract at the end of the applicable
time period, you would pay the following expenses on a $1,000 investment,
assuming the election of a 10-year period certain option, a 3% AIR and a 5%
annual return on assets:
<TABLE>
<CAPTION>
FUNDS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund............................... $34 $94 $143 $206
Select International Equity Fund........................... $25 $69 $105 $151
DGPF International Equity Series........................... $24 $67 $102 $146
Fidelity VIP Overseas Portfolio............................ $24 $66 $100 $144
T. Rowe Price International Stock Portfolio................ $25 $70 $106 $152
Select Aggressive Growth Fund.............................. $23 $65 $ 98 $142
Select Capital Appreciation Fund........................... $24 $67 $103 $148
Select Value Opportunity Fund.............................. $24 $67 $103 $148
Select Growth Fund......................................... $23 $63 $ 97 $139
Select Strategic Growth Fund............................... $26 $74 $112 $162
Core Equity Fund........................................... $19 $54 $ 82 $118
Fidelity VIP Growth Portfolio.............................. $21 $59 $ 90 $129
Equity Index Fund.......................................... $18 $50 $ 76 $110
Select Growth and Income Fund.............................. $22 $61 $ 93 $134
Fidelity Equity-Income Portfolio........................... $20 $56 $ 86 $123
Fidelity VIP II Asset Manager Portfolio.................... $21 $58 $ 88 $127
Fidelity VIP High Income Portfolio......................... $21 $60 $ 91 $131
Select Investment Grade Income Fund........................ $19 $54 $ 83 $119
Government Bond Fund....................................... $21 $58 $ 88 $126
Money Market Fund.......................................... $17 $48 $ 74 $106
</TABLE>
Table (2) If you surrender* your Contract at the end of the applicable time
period, you would pay the following expenses on a $1,000 investment, assuming
the election of a 10 year period certain option, a 3% AIR, and a 5% net annual
return on assets:
<TABLE>
<CAPTION>
FUNDS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund............................... $106 $141 $169 $206
Select International Equity Fund........................... $ 97 $116 $131 $151
DGPF International Equity Series........................... $ 96 $114 $128 $146
Fidelity VIP Overseas Portfolio............................ $ 96 $113 $127 $144
T. Rowe Price International Stock Portfolio................ $ 97 $117 $132 $152
Select Aggressive Growth Fund.............................. $ 95 $112 $125 $142
Select Capital Appreciation Fund........................... $ 96 $115 $129 $148
Select Value Opportunity Fund.............................. $ 96 $115 $129 $148
Select Growth Fund......................................... $ 95 $111 $123 $139
Select Strategic Growth Fund............................... $ 99 $121 $139 $162
Core Equity Fund........................................... $ 91 $101 $108 $118
Fidelity VIP Growth Portfolio.............................. $ 93 $106 $116 $129
Equity Index Fund.......................................... $ 90 $ 98 $103 $110
Select Growth and Income Fund.............................. $ 94 $109 $119 $134
Fidelity Equity-Income Portfolio........................... $ 92 $104 $112 $123
Fidelity VIP II Asset Manager Portfolio.................... $ 93 $105 $115 $127
Fidelity VIP High Income Portfolio......................... $ 93 $107 $117 $131
Select Investment Grade Income Fund........................ $ 92 $102 $109 $119
Government Bond Fund....................................... $ 93 $105 $114 $126
Money Market Fund.......................................... $ 89 $ 96 $100 $106
</TABLE>
*A surrender is only available if the Payment for a Certain Number of Years
option is elected.
9
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SUMMARY OF CONTRACT FEATURES
WHAT IS THE ALLMERICA IMMEDIATE ADVANTAGE VARIABLE ANNUITY?
The Allmerica Immediate Advantage Variable Annuity contract ("Contract") is an
insurance contract designed to provide you, the Owner, with monthly annuity
income during the lifetime of the Annuitant or Joint Annuitants, or for a period
of years. The Contract combines the concept of professional money management
with the attributes of an annuity contract. Features available through the
Contract include:
- A menu of investment options that you can customize to support your
annuity payments;
- Underlying Funds managed by experienced professional investment advisers;
- Income that you can receive for life;
- Access to your money through withdrawals; and
- The ability to tailor your income stream by choosing from multiple annuity
benefit options and selecting the first date the amount of your payments
will change.
You may allocate your Net Payment to the Fixed Income Option or the Variable
Income Option, or a combination of both. If you select the Variable Income
Option, you may allocate your money to the Sub-Accounts investing in the
Underlying Funds. You select the investment allocation most appropriate for your
income needs. As those needs change, you may also change your allocation without
incurring any tax consequences.
WHAT CHOICES DO I MAKE WHEN I PURCHASE THE CONTRACT?
At the time you apply for the Contract, you choose:
- the Annuitant(s) and the Beneficiary(ies);
- the date annuity payments begin, which must be within twelve months of the
Contract's Issue Date;
- the annuity benefit option;
- whether you want variable annuity payments based on the investment
performance of the Underlying Funds (the Variable Income Option), fixed
annuity payments with payment amounts guaranteed by the Company (the Fixed
Income Option), or a combination of fixed and variable annuity payments;
- a Change Frequency, if you allocate any portion of the Net Payment to the
Variable Income Option (and you may select the first date your annuity
payment will change); and
- one of the available Assumed Investment Returns ("AIR") if you allocate
any portion of the Net Payment to the Variable Income Option.
On the Annuity Income Date, you, or the payee you designate, will begin to
receive income based on one of the several annuity benefit options available
under the Contract.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
New York) or First Allmerica Financial Life
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Insurance Company (for contracts issued in New York). Each Contract has an Owner
(or Joint Owners), an Annuitant (or Joint Annuitants) and one or more
Beneficiaries.
The Annuitant is the person whose life is used to determine the duration of
annuity payments involving a life contingency, unless payments are guaranteed
for a certain number of years. The Beneficiary is the person, persons or entity
entitled to the Death Benefit upon the death of the Owner prior to the Annuity
Income Date or remaining annuity payments, if any, upon the death of the Owner
on or after the Annuity Income Date. If the contract has Joint Owners and one
Owner dies, the surviving Joint Owner is the primary Beneficiary.
HOW MUCH CAN I INVEST?
You may make a single purchase payment to the Contract. This payment is subject
to a $75,000 minimum. The maximum single purchase payment is $5,000,000 without
our prior approval. No additional payments may be made.
WHAT ARE MY INVESTMENT CHOICES?
You may allocate the Net Payment to the Fixed Income Option, the Variable Income
Option, or a combination of both. Once selected, the Income Option may not be
changed. If you select the Variable Income Option, you can allocate the Net
Payment among the Sub-Accounts investing in the Underlying Funds.
VARIABLE INCOME OPTION: You have a choice of Sub-Accounts investing in the
following Underlying Funds:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Emerging Markets Fund Overseas Portfolio
Select International Equity Fund Equity-Income Portfolio
Select Aggressive Growth Fund Growth Portfolio
Select Capital Appreciation Fund High Income Portfolio
Select Value Opportunity Fund
Select Growth Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Strategic Growth Fund II
Core Equity Fund Asset Manager Portfolio
Equity Index Fund
Select Growth and Income Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Select Investment Grade Income Fund T. Rowe Price International Stock
Government Bond Fund Portfolio
Money Market Fund DELAWARE GROUP PREMIUM FUND
DGPF International Equity Series
</TABLE>
FOR A MORE DETAILED DESCRIPTION OF THE UNDERLYING FUNDS, SEE INVESTMENT
OBJECTIVES AND POLICIES.
FIXED INCOME OPTION: If you select the Fixed Income Option, your money will be
supported by the General Account, which consists of all the Company's assets
other than those allocated to the Variable Account and any other separate
account.
CAN I MAKE TRANSFERS AMONG THE VARIABLE SUB-ACCOUNTS?
If you select the Variable Income Option, you may transfer among the
Sub-Accounts investing in the Underlying Funds. You will incur no current taxes
on transfers while your money remains in the Contract. See "G. Transfers of
Annuity Units" under DESCRIPTION OF THE CONTRACT.
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
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charge guaranteed never to exceed $25. The automatic rebalancing under an
Automatic Account Rebalancing program counts as one transfer for purposes of the
12 transfers guaranteed to be free of transfer charge in each Contract year.
Each subsequent automatic rebalancing is without charge and does not reduce the
remaining number of transfers which may be made free of charge in that Contract
year.
WHAT IF I NEED TO MAKE A WITHDRAWAL?
You have the right to make withdrawals after the Annuity Income Date. The type
of withdrawal and the number of withdrawals that may be made each calendar year
depends upon whether the annuity benefit option is based upon the life of one or
more Annuitants with no guaranteed payments (a "Life Annuity" option), under a
life annuity benefit option that in part provides for a guaranteed number of
payments (a "Life Annuity with Payment for a Certain Number of Years" or "Life
Annuity with Cash Back" option), or an annuity benefit option based on a
guaranteed number of payments (a "Payment for a Certain Number of Years"
option). Under a Life Annuity option, the Owner may make one Payment Withdrawal
each calendar year. Under a Life Annuity with Payment for a Certain Number of
Years or a Life Annuity with Cash Back option, the Owner may make one Payment
Withdrawal and one Present Value Withdrawal in each calendar year. Under a
Payment for a Certain Number of Years option, the Owner may make multiple
Present Value Withdrawals each calendar year. For more information, see "H.
Withdrawals" under DESCRIPTION OF THE CONTRACT.
WHAT HAPPENS UPON DEATH OF THE OWNER OR THE ANNUITANT?
Before the Annuity Income Date, if an Owner or an Annuitant dies, a death
benefit will be paid.
After the Annuity Income Date, if an Owner or an Annuitant dies, we will
continue to pay remaining annuity payments, if any, in accordance with the terms
of the annuity benefit option selected. See "I. Death Benefit" under DESCRIPTION
OF THE CONTRACT.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
We 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 Fund. The Funds will incur certain
management fees and expenses that are described in "Expenses of the Underlying
Funds" under "A. Variable Account Deductions" and in the Fund prospectuses
accompanying this Prospectus. These charges vary among the Underlying Funds and
may change from year to year. In addition, management fee waivers and/or
reimbursements may be in effect for certain or all of the Underlying Funds. For
specific information regarding the existence and effect of any
waivers/reimbursements see "Annual Underlying Fund Expenses" under SUMMARY OF
FEES AND EXPENSES.
Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "B. Premium Taxes" under
CHARGES AND DEDUCTIONS.
You may request a withdrawal after the Annuity Income Date. Any withdrawals will
result in a calculation by the Company of the present value of future annuity
payments. For withdrawals taken within 5 years from the Issue date, an
adjustment is made to the Assumed Investment Return ("AIR") you have chosen (in
the case of a Variable Income Option) and/or the interest rate (in the case of a
Fixed Income Option) used to calculate the present value of the future annuity
payments.
The adjustment to the AIR or the interest rate used to determine the Present
Value results in lower future annuity payments than if the adjustment had not
been made. See "H. Withdrawals" under DESCRIPTION OF THE CONTRACT for additional
information.
For more information regarding the charges applied to your Contract, see CHARGES
AND DEDUCTIONS.
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CAN I EXAMINE THE CONTRACT?
Your Contract will be delivered to you after your purchase. If you return the
Contract to the Company within ninety days of receipt, the Contract will be
canceled. See the "Right to Examine" provision on the cover of your Contract. If
you cancel the Contract within ninety days after you received it, you will
receive a refund of the Contract Value on the date the Contract is returned to
us, plus any premium tax deducted on the Issue Date. However, if state law
requires or if the Contract was issued as an Individual Retirement Annuity
("IRA"), and if you return the Contract within ten days after you have received
it, you will receive a refund of the Single Purchase Payment less any annuity
payments made and/or withdrawals taken. See "B. Right to Cancel" under
DESCRIPTION OF THE CONTRACT.
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- You may change the Beneficiary, unless you have designated a Beneficiary
irrevocably;
- You may change the person(s) you have designated to receive your annuity
payments;
- If you selected the Variable Income Option, you may make transfers among
your current investments without any tax consequences;
- You may make withdrawals; and
- You may cancel the Contract within ninety days of delivery.
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DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS,
THE TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE, AND DGPF
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1999,
Allmerica Financial had over $17 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a wholly owned subsidiary of First Allmerica Financial
Life Insurance Company that, in turn, is a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company (First Allmerica), organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1999, First Allmerica and its
subsidiaries had over $25 billion in combined assets and over $43 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its present
name. First Allmerica is a wholly owned subsidiary of AFC. First Allmerica's
principal office ("Principal Office") is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both Allmerica Financial and First Allmerica are charter members of the
Insurance Marketplace Standards Association ("IMSA"). Companies that belong to
IMSA subscribe to a rigorous set of standards that cover the various aspects of
sales and service for individually sold life insurance and annuities. IMSA
members have adopted policies and procedures that demonstrate a commitment to
honesty, fairness and integrity in all customer contacts involving sales and
service of individual life insurance and annuity products.
THE VARIABLE ACCOUNTS. Each Company maintains a separate account called
Separate Account VA-K (the "Variable Account"). The Variable Account of
Allmerica Financial was authorized by vote of our Board of Directors on
November 1, 1990. The Variable Account of First Allmerica was authorized by vote
of our Board of Directors on November 1, 1990. Each Variable Account is
registered with the SEC as a unit investment trust under the 1940 Act. This
registration does not involve the supervision or management of investment
practices or policies of the Variable Accounts or the Company by the SEC.
Separate Account VA-K is a separate investment account of the Company. 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. Each Sub-Account is administered and accounted
for as part of our general business, 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. Obligations under
the Contracts are our obligations. Under Delaware and Massachusetts law, the
assets of the Variable Account may not be charged with any liabilities arising
out of any other business of the Company.
We reserve the right, subject to compliance with applicable law, to change the
names of the Variable Account and the Sub-Accounts. We also offer other variable
annuity contracts investing in the Variable Account which are not discussed in
this Prospectus. In addition the Variable Account may invest in other underlying
funds which are not available to the Contracts described in this Prospectus.
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ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust (the "Trust") is an
open-end, diversified management investment company registered with the SEC
under the 1940 Act. Thirteen investment portfolios of the Trust are currently
available under the Contract, each issuing a series of shares: the Core Equity
Fund, Select Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, Select International Equity Fund, Select Emerging Markets
Fund, Select Strategic Growth Fund, Select Aggressive Growth Fund, Select
Capital Appreciation Fund, Select Growth Fund, Select Growth and Income Fund and
Select Value Opportunity Fund. Shares of the Trust are not offered to the
general public but solely to such variable accounts.
Allmerica Financial Investment Management Services, Inc. ("AFIMS"), a wholly
owned subsidiary of Allmerica Financial, 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.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND. Fidelity Variable Insurance Products
Fund ("Fidelity VIP") managed by Fidelity Management & Research Company ("FMR"),
is an open-end, diversified management investment company 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.
FMR is one of America's largest investment management organizations and has its
principal business address at 82 Devonshire Street, Boston, Massachusetts. It
provides a number of mutual funds and other clients with investment research and
portfolio management services.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II. Fidelity Variable Insurance
Products Fund II ("Fidelity VIP II"), managed by FMR (see discussion above) is
an open-end, diversified management investment company 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"), is an open-end, diversified management
investment company 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. One of its affiliates, T. Rowe Price
Associates, Inc., serves as the Sub-Adviser to the Select Capital Appreciation
Fund.
DELAWARE GROUP PREMIUM FUND. Delaware Group Premium Fund ("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 is available under the Contract, the International
Equity Series. The investment adviser for the International Equity Series is
Delaware International Advisers Ltd. ("Delaware International").
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 ("SAI") of
the Underlying Funds are available upon request. There can be no assurance that
the investment objectives of the Underlying Funds can be achieved.
SELECT EMERGING MARKETS FUND -- The Select Emerging Markets Fund seeks long-term
growth of capital by investing in the world's emerging markets.
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<PAGE>
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund 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 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 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 seeks
long-term growth of capital. Realization of income is not a significant
investment consideration and any income realized on the Fund's investments will
be incidental to its primary objective. The Fund 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 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 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.
SELECT STRATEGIC GROWTH FUND -- The Select Strategic Growth Fund seeks long-term
growth of capital by investing primarily in common stocks of established
companies.
CORE EQUITY FUND -- The Core Equity Fund 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 Core Equity Fund is to achieve long-term growth of capital. Realization
of current investment income, if any, is incidental to this objective. This Fund
was formerly known as the Growth Fund.
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.
EQUITY INDEX FUND -- The Equity Index Fund 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.
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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.
SELECT INVESTMENT GRADE INCOME FUND -- The Select Investment Grade Income Fund
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. This
fund was formerly known as the Investment Grade Income Fund.
GOVERNMENT BOND FUND -- The Government Bond Fund 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 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 MEET YOUR 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. THE INVESTMENT ADVISER OR SUB-ADVISER
OF AN UNDERLYING FUND MAY MANAGE OTHER MUTUAL FUNDS THAT HAVE SIMILAR NAMES,
GOALS, AND/OR STRATEGIES AS THOSE OF AN UNDERLYING FUND. DESPITE THESE
SIMILARITIES, THERE MAY BE DIFFERENCES BETWEEN THE UNDERLYING FUND AND THE OTHER
FUND MANAGED BY THE SAME ADVISER, WHICH COULD RESULT IN DIFFERENCES IN THE RISKS
AND RETURNS OF THE TWO FUNDS. NO REPRESENTATION IS MADE THAT ANY UNDERLYING FUND
IS SIMILAR TO OR DIFFERENT FROM OTHER FUNDS MANAGED BY THE SAME ADVISER. FOR
INFORMATION ON AN UNDERLYING FUND, CONSULT ITS PROSPECTUS.
If there is a material change in the investment objective of a Fund, you will be
notified of the change. If a portion of your Variable Income Option is allocated
to that Fund, you may transfer this amount without charge to another Fund. We
must receive your written request within 60 days of the latest of the:
- effective date of the change in the investment objective or
- receipt of the notice of your right to transfer.
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PERFORMANCE INFORMATION
In order to help people understand how investment performance can affect money
invested in the Sub-Accounts, the Company may advertise "total return" and
average annual total return performance information based on (1) the periods
that the Sub-Accounts have been in existence and (2) the periods that the
Underlying Funds have been in existence. Performance results in Tables 1 and 2
are calculated with all charges assumed to be those applicable to the Contract,
the Sub-Accounts and the Underlying Funds. Both the total return and yield
figures are based on historical earnings and are not intended to indicate future
performance. All performance tables referenced in this section may be found in
the SAI. (Because Table 1 presents performance of a Sub-Account from its
inception through December 31, 1999 and the Sub-Accounts were not created until
after December 31, 1999, no performance numbers are currently shown in this
Table. The discussion below reflects the manner in which performance will be
calculated in the future for Table 1.)
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage. The "average annual total return" represents the average annual
percentage change in the value of an investment in the Sub-Account over a given
period of time. It represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Quotations of average annual total return as shown in Tables 1 and 2 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% and the Underlying Fund charges which would be assessed if the investment
were completely withdrawn at the end of the specified period.
The performance shown in Table 2 is calculated in exactly the same manner as
that in Table 1; however, the period of time is based on the Underlying Fund's
lifetime, which predates 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.
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
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as representative of the securities markets in general; (2) other groups of
variable annuity separate accounts or other investment products tracked by
Lipper, Inc., a widely used independent research firm which ranks mutual funds
and other investment products by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons, who
rank such investment products on overall performance or other criteria; or
(3) the Consumer Price Index (a measure for inflation) to assess the real rate
of return from an investment in the Sub-Account. Unmanaged indices may assume
the reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses. In addition, relevant
broad-based indices and performance from independent sources may be used to
illustrate the performance of certain contract features.
At times, we 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 our 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.
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DESCRIPTION OF THE CONTRACT
Subject to certain restrictions discussed below, you have the right:
- to select the annuity benefit option under which annuity payments are to
be made;
- to determine whether those payments are to be made on a fixed basis (the
Fixed Income Option), a variable basis (the Variable Income Option), or a
combination fixed and variable basis;
- to allocate any portion of the Net Payment to the Variable Income Option.
If so, you must choose:
- how to allocate the Net Payment;
- a Change Frequency (you may select the first date your annuity payment
will change);
- one of the available Assumed Investment Returns ("AIR") for a Variable
Income Option (see "F. Variable Annuity Payments" below for details);
- to elect how the Beneficiary should receive annuity payments, if any;
and
- to receive annuity payments (or designate someone else to receive
annuity payments).
A. SINGLE PURCHASE PAYMENT
You may make a single purchase payment to buy the Contract. This payment is
subject to a $75,000 minimum. The maximum single purchase payment is $5,000,000
without our prior approval. No additional payments may be made.
The Company issues the Contract when its underwriting requirements are met.
These requirements include receipt of the payment and allocation instructions by
the Company at its Principal Office. 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 Contracts.
Payments are to be made payable to the Company. The Net Payment is credited to
the Contract and allocated as requested as of the date that all issue
requirements are properly met. If all issue requirements are not completed
within five business days of the Company's receipt of the single purchase
payment, the payment will be returned immediately unless the Owner specifically
consents to the holding of it pending completion of the outstanding issue
requirements.
B. RIGHT TO CANCEL
If you return the Contract to the Company within 90 days of receipt, the
Contract will be cancelled.
If you purchase a Contract intended to qualify as an IRA or if you purchase the
Contract in a state that requires a full refund, you may cancel the Contract and
receive a refund as specified below.
REFUND WITHIN TEN DAYS OF RECEIPT. If you return the Contract within ten days
(or longer if required by law) after you have received it, we will refund the
Single Purchase Payment less the total amount of all annuity payments made or
withdrawals taken.
REFUND AFTER TEN DAYS BUT WITHIN NINETY DAYS. If you return the Contract after
ten days but within ninety days after the Issue Date, we will pay to you the
Contract Value as of the date the Contract is returned to us plus any premium
tax deducted on the Issue Date.
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If you purchase a Contract that is not intended to qualify as an IRA or if you
purchase the Contract in a state that does not require a full refund, you may
cancel the Contract at any time within 90 days after receipt of the Contract and
receive a refund. If you return the Contract, we will pay to you the Contract
Value as of the date the Contract is returned to us plus any premium tax
deducted on the Issue Date. This amount may be more or less than the Single
Purchase Payment.
At the time the Contract is issued, the "Right to Examine" provision on the
cover of the Contract will specifically indicate what the refund will be and the
time period allowed to exercise the right to cancel.
In order to cancel the contract, you must mail or deliver the Contract to the
agent through whom it was purchased, to our Principal Office at 440 Lincoln
Street, Worcester, MA 01653, or to any local agent of the Company. Mailing or
delivery must occur within ten or ninety days, as applicable, after receipt of
the Contract for cancellation to be effective. We ordinarily will send you a
refund within seven days.
C. ELECTING THE ANNUITY INCOME DATE
Annuity payments under the Contract will begin on the Annuity Income Date. You
select the Annuity Income Date at the time of issue. The Annuity Income Date
must be within twelve months of the Contract's Issue Date. You may not select
the 29th, 30th or 31st day of the month for the Annuity Income Date.
The Internal Revenue Code (the "Code") and/or the terms of qualified plans may
impose limitations on the age at which annuity payments may commence and the
type of annuity benefit option that may be elected. You should carefully review
the Annuity Income Date and the annuity benefit options with your tax advisor.
See also FEDERAL TAX CONSIDERATIONS for further information.
D. CHOOSING AN INCOME OPTION
You may choose a Fixed Income Option, a Variable Income Option or a combination
of Fixed and Variable.
If you select a Fixed Income Option, each monthly annuity payment will be equal
to the first (unless a withdrawal is made or as a result of the death of the
first Joint Annuitant). Any portion of the Net Payment allocated to the Fixed
Income Option will become part of our General Account.
If you select a Variable Income Option, you will receive monthly annuity
payments based on the value of the Annuity Units in the chosen Sub-Account(s).
Since the value of an Annuity Unit in a Sub-Account reflects the investment
performance of the Sub-Account, the amount of annuity payments will vary. Under
this Contract, you may choose the frequency with which you want annuity payments
to vary (the Change Frequency), which may be monthly, quarterly, semi-annually,
or annually. The Change Frequency is the frequency that changes due to the
Sub-Account's investment performance will be reflected in the dollar value of a
variable annuity payment. For example, if a monthly Change Frequency is in
effect, payments may vary on a monthly basis. If a quarterly Change Frequency is
selected, the amount of each monthly payment may change every three months and
will be level within each three month cycle.
The amount of your annuity payment will change for the first time one Change
Frequency Cycle after the Issue Date. (For example, if a quarterly Change
Frequency is chosen, your annuity payments will change for the first time three
months after the Annuity Income Date.) However, if you would like the amount of
the payment to change sooner, you can indicate the desired month.
The income option selected must result in an initial payment of at least $100 (a
lower amount may be required in certain jurisdictions.) We reserve the right to
increase this minimum amount. If the income option selected does not produce an
initial payment which meets this minimum, a single payment may be made.
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E. DESCRIPTION OF ANNUITY BENEFIT OPTIONS
The Company currently provides the following annuity benefit options:
LIFE ANNUITY OPTIONS
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Payments cease with the last annuity payment due prior to the Annuitant's
death.
- JOINT LIFE ANNUITY WITH SURVIVOR BENEFIT -- Monthly payments during the
Joint Annuitants' lifetimes. Upon the first death, payments will continue
to you or the Beneficiary (whichever is applicable) for the survivor's
remaining lifetime based on the previously elected level of 100%,
two-thirds (66.67%) or one-half (50%) of the total number of Annuity Units
for a Variable Income Option or the annuity payment for a Fixed Income
Option.
LIFE ANNUITY WITH PAYMENT FOR A CERTAIN NUMBER OF YEARS OPTIONS
- SINGLE LIFE ANNUITY -- Monthly payments guaranteed for a specified number
of years and continuing thereafter during the Annuitant's lifetime. If the
Annuitant dies before all guaranteed payments have been made, the
remaining payments continue to you or the Beneficiary (whichever is
applicable).
- JOINT LIFE ANNUITY WITH SURVIVOR BENEFIT -- Monthly payments guaranteed
for a specified number of years and continuing during the Joint
Annuitants' lifetimes. Upon the first death, payments continue for the
survivor's remaining lifetime based on the previously elected level of
100%, two-thirds (66.67%) or one-half (50%) of the total number of Annuity
Units for a Variable Income Option or the annuity payment for a Fixed
Income Option. If the surviving Annuitant dies before all guaranteed
payments have been made, the remaining payments continue to you or the
Beneficiary (whichever is applicable).
LIFE ANNUITY WITH CASH BACK OPTIONS
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life. At
the Annuitant's death, any excess of the Net Payment, over the total
amount of annuity payments made and withdrawals taken, will be paid to you
or the Beneficiary (whichever is applicable).
- JOINT LIFE ANNUITY WITH SURVIVOR BENEFIT -- Monthly payments during the
Joint Annuitants' lifetimes. Upon the first death, payments continue for
the survivor's remaining lifetime based on the previously elected level of
100%, two-thirds (66.67%) or one-half (50%) of the total number of Annuity
Units for a Variable Income Option or the annuity payment for a Fixed
Income Option. At the surviving Annuitant's death, any excess of the Net
Payment, over the total amount of annuity payments made and withdrawals
taken, will be paid to you or the Beneficiary (whichever is applicable).
PAYMENT FOR A CERTAIN NUMBER OF YEARS OPTION
Monthly annuity payments for a chosen number of years ranging from five to
thirty, or any other period certain option currently offered by the Company, are
available. The Payment for a Certain Number of Years option does not involve a
life contingency. In the computation of the annuity payments under this option,
the charge for annuity rate guarantees, which includes a factor for mortality
risks, is made.
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F. VARIABLE ANNUITY PAYMENTS
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 of 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 ANNUITY UNIT AND ANNUITY UNIT VALUE. The Annuity Unit is a measure used to
value the monthly annuity payments under a Variable Income Option. The value of
an Annuity Unit in each Sub-Account on its inception date was set at $1.00. The
value of an Annuity Unit under a Sub-Account on any Valuation Date thereafter is
equal to the value of the Annuity Unit on the immediately preceding Valuation
Date multiplied by the product of:
(1) a discount factor equivalent to the Assumed Investment Return ("AIR")
and
(2) the Net Investment Factor of the Sub-Account funding the annuity
payments for the applicable Valuation Period.
Subject to the chosen Change Frequency, annuity payments will increase if the
annualized Net Investment Factor during that period is greater than the AIR and
will decrease if it is less than the AIR. Where permitted by law, the Owner may
select an AIR of 3%, 5%, or 7%. A higher AIR will result in a higher initial
payment. However, subsequent payments will increase more slowly during periods
when actual investment performance exceeds the AIR and will decrease more
rapidly during periods when investment performance is less than the AIR.
DETERMINATION OF FIRST ANNUITY PAYMENT. The amount of the first periodic
variable annuity payment depends on the:
- annuity benefit option chosen;
- length of the annuity benefit option elected;
- age of the Annuitant;
- gender of the Annuitant (if applicable, see "M. NORRIS Decision"):
- value of the amount applied under the annuity benefit option;
- applicable annuity benefit option rates based on the Annuity 2000
Mortality Table; and
- AIR selected.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. We have Variable Income Option
Rates that determine the dollar amount of the first monthly payment under each
Variable Income Option for each $1,000 of Net Payment. We calculate this amount
assuming there is no change in the Annuity Unit Value. We then divide the
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amount of the first annuity payment attributable to a particular Sub-Account by
the Annuity Unit Value of that Sub-Account to determine the number of Annuity
Units credited to your Contract. This number of Annuity Units remains fixed
under all annuity benefit options, except Joint and Survivor annuity benefit
options that reduce the number of Annuity Units upon the first death. However,
the number of variable annuity units under any annuity benefit option could
change if transfers or withdrawals are made.
DOLLAR AMOUNT OF FIRST VARIABLE ANNUITY PAYMENT. The dollar amount of the first
variable annuity payment will equal the number of Annuity Units of each
Sub-Account multiplied by the value of an Annuity Unit of that Sub-Account on
the applicable Valuation Date.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS. The dollar amount of
subsequent variable annuity payments will vary with the Annuity Unit Value of
the selected Sub-Account(s) on certain dates. The dollar amount of variable
annuity payments remains level until the Date of First Change and within each
Change Frequency cycle. On the Date of First Change and as of the start of each
Change Frequency cycle, the dollar amount of the variable annuity payment is
determined by multiplying the number of Annuity Units of each Sub-Account by the
Annuity Unit Value of that Sub-Account on the applicable Valuation Date.
For an illustration of the calculation of a variable annuity payment using a
hypothetical example, see "Annuity Payments" in the SAI.
PAYMENT OF ANNUITY PAYMENTS. You will receive the annuity payments unless you
request in writing that payments be made to another person, persons, or entity.
If you (or, if there are Joint Owners, the surviving Joint Owner) die on or
after the Annuity Income Date, the Beneficiary will become the Owner of the
Contract. Any remaining guaranteed annuity payments will continue to the
Beneficiary in accordance with the terms of the annuity benefit option selected.
If there are Joint Owners on or after the Annuity Income Date, upon the first
Owner's death, any remaining guaranteed annuity payments will continue to the
surviving Joint Owner in accordance with the terms of the annuity benefit option
selected.
If the Annuitant dies on or after the Annuity Income Date, but before all
guaranteed annuity payments have been made, any remaining guaranteed payments
will continue to be paid to you or the payee you have designated. Upon the death
of the Owner, the Beneficiary will become the Owner. The Beneficiary may elect
to receive in a single sum the Present Value of any remaining guaranteed annuity
payments. For discussion of Present Value calculation, see "Calculation of
Present Value" below.
G. TRANSFERS OF ANNUITY UNITS
You may transfer among the available Sub-Accounts upon written or telephone
request to us. Transfers may be made (a) before the Annuity Income Date and
before the death of an Owner or an Annuitant; or (b) after the Annuity Income
Date and as long as annuity payments are payable under the annuity benefit
option selected. A properly completed authorization form must be on file before
telephone requests will be honored. See "K. Telephone Authorization" under
DESCRIPTION OF THE CONTRACT for more information. A designated number of Annuity
Units equal to the dollar amount of the transfer requested will be exchanged for
an equivalent dollar amount of Annuity Units of another Sub-Account. Transfer
values will be based on the Annuity Unit Value next computed after receipt of
the transfer request.
Currently, we do not charge for transfers. The first 12 transfers in a Contract
year are guaranteed to be free of any transfer charge. For each subsequent
transfer in a Contract year, we reserve the right to assess a charge, guaranteed
never to exceed $25, to reimburse us for the expense of processing transfers.
The automatic rebalancing under an Automatic Account Rebalancing program counts
as one transfer for purposes of the 12 transfers guaranteed to be free of
transfer charge in each Contract year. Each subsequent automatic rebalancing is
without charge and does not reduce the remaining number of transfers which may
be made free of charge in that Contract year.
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Any transfer made because of a material change in the investment objective of a
Sub-Account will not count towards the 12 free transfers, nor will we charge you
a transfer fee. As of the date of this Prospectus, transfers may be made to all
of the Sub-Accounts. However, we reserve the right to establish and impose
reasonable rules restricting transfers. All transfers are subject to our
consent.
AUTOMATIC ACCOUNT REBALANCING. You may request automatic rebalancing of
Sub-Account allocations on a monthly, bi-monthly, quarterly, semi-annual or
annual basis in accordance with your specified percentage allocations. Each
rebalancing will result in a change in the number of Annuity Units. As
frequently as you elect, we 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 we receive and record your
request to terminate.
H. WITHDRAWALS
WITHDRAWALS AFTER THE ANNUITY INCOME DATE FROM QUALIFIED AND NON-QUALIFIED
CONTRACTS MAY HAVE ADVERSE TAX CONSEQUENCES. BEFORE MAKING A WITHDRAWAL, PLEASE
CONSULT WITH YOUR TAX ADVISOR AND SEE FEDERAL TAX CONSIDERATION, "C. TAX ON
WITHDRAWALS."
You have the right, based on the annuity benefit option selected, to make
withdrawals. Withdrawals may be made (a) before the Annuity Income Date and
before the death of an Owner or an Annuitant, or (b) after the Annuity Income
Date and as long as annuity payments are payable under the annuity benefit
option selected. Two withdrawal options may be available to you: a Payment
Withdrawal Amount option or a Present Value Withdrawal option.
The Owner must submit to the Principal Office a signed, written request
indicating the desired dollar amount of the withdrawal. If the amount requested
is greater than the maximum amount that may be withdrawn at that time, the
Company will allow the withdrawal only up to the maximum amount. The minimum
amount of a withdrawal is $100. Any withdrawal is normally payable within seven
days following our receipt of the withdrawal request.
The type of withdrawal and the number of withdrawals that may be made each
calendar year depends upon whether the annuity benefit option is based upon the
life of one or more Annuitants with no guaranteed payments (a "Life Annuity
option"), under a life annuity benefit option that in part provides for a
guaranteed number of payments (a "Life Annuity with Payment for a Certain Number
of Years" or "Life Annuity with Cash Back" option), or an annuity benefit option
based on a guaranteed number of payments (a "Payment for a Certain Number of
Years" option).
- - WITHDRAWALS UNDER LIFE ANNUITY OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity payment multiplied by
ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity payments.
- - WITHDRAWALS UNDER LIFE ANNUITY WITH PAYMENT FOR A CERTAIN NUMBER OF YEARS OR
LIFE ANNUITY WITH CASH BACK OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity payment multiplied by
ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity payments.
The Owner may make one Present Value Withdrawal in each calendar year, if
there are remaining guaranteed annuity payments. The amount of each Present
Value Withdrawal represents a percentage of
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the present value of the REMAINING GUARANTEED annuity payments. Each year a
Present Value Withdrawal is taken, the Company records the percentage of the
present value of the then remaining guaranteed annuity payments that was
withdrawn. The total percentage withdrawn over the life of the Contract
cannot exceed 75%. This means that each Present Value Withdrawal is limited
by the REMAINING AVAILABLE PERCENTAGE. (For example, assume that in year
three the Owner withdraws 15% of the then current present value of the
remaining guaranteed annuity payments. In year seven, the Owner withdraws
20% of the then present value of the remaining guaranteed annuity payments.
After year seven, the Owner may make Present Value Withdrawal(s) of up to
40% (75%-35%) of the present value of any remaining guaranteed annuity
payments.)
Under a Life Annuity with Payment for a Certain Number of Years or Life
Annuity with Cash Back option, if the Annuitant is still living after the
guaranteed annuity payments have been made, the number of Annuity Units or
dollar amount applied to future annuity payments will be restored as if no
Present Value Withdrawal(s) had taken place. See "Calculation of
Proportionate Reduction -- Present Value Withdrawals," below.
- - WITHDRAWALS UNDER PAYMENT FOR CERTAIN NUMBER OF YEARS OPTIONS
The Owner may make multiple Present Value Withdrawals in each calendar year,
up to 100% of the present value of the guaranteed annuity payments.
Withdrawal of 100% of the present value of the guaranteed annuity payments
will result in termination of the Contract.
The amount of each Payment Withdrawal or Present Value Withdrawal represents a
portion of the present value of the remaining annuity payments or remaining
guaranteed annuity payments, respectively, and proportionately reduces the
number of Annuity Units (under a variable income option) or dollar amount (under
a fixed income option) applied to future annuity payments. Because each variable
annuity payment is determined by multiplying the number of Annuity Units by the
value of an Annuity Unit, the reduction in the number of Annuity Units will
result in lower future variable annuity payments. See "Calculation of
Proportionate Reduction," below. The present value is calculated with a discount
rate that will include an additional charge if a withdrawal is taken within 5
years of the Issue Date. See "Calculation of Present Value," below.
CALCULATION OF PROPORTIONATE REDUCTION. Each Payment Withdrawal proportionately
reduces the number of Annuity Units applied to each future variable annuity
payment or the dollar amount applied to each future fixed annuity payment. Each
Present Value Withdrawal proportionately reduces the number of Annuity Units
applied to each future guaranteed variable annuity payment or the dollar amount
applied to each future guaranteed fixed annuity payment. Because each variable
annuity payment is determined by multiplying the number of Annuity Units by the
value of an Annuity Unit, the reduction in the number of Annuity Units will
result in lower future variable annuity payments.
- - PAYMENT WITHDRAWALS. Payment Withdrawals are available under Life Annuity,
Life Annuity with Payment for a Certain Number of Years, or Life Annuity with
Cash Back options. The Owner may make one Payment Withdrawal in each calendar
year.
Under a variable income option, the proportionate reduction in Annuity Units
is calculated by multiplying the number of Annuity Units in each future
variable annuity payment (determined immediately prior to the withdrawal) by
the following fraction:
Amount of the variable withdrawal
------------------------------------------
Present value of all remaining variable annuity
payments immediately prior to the withdrawal
Because each variable annuity payment is determined by multiplying the number
of Annuity Units by the value of an Annuity Unit, the reduction in the number
of Annuity Units will result in lower future variable annuity payments.
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Under a fixed income option, the proportionate reduction is calculated by
multiplying the dollar amount of each future fixed annuity payment by a
similar fraction, which is based on the amount of the fixed withdrawal and
present value of remaining fixed annuity payments.
If a withdrawal is taken within 5 years of the Issue Date, the discount rate
used to calculate the present value will include an additional charge. See
"Calculation of Present Value," below.
- - PRESENT VALUE WITHDRAWALS. Present Value Withdrawals are available under Life
Annuity with Payment for a Certain Number of Years or Life Annuity with Cash
Back options (the Owner may make one Present Value Withdrawal in each calendar
year, if there are remaining guaranteed annuity payments) and under Payment
for a Certain Number of Years options (the Owner may make multiple Present
Value Withdrawals in each calendar year).
Under a variable income option, the proportionate reduction in Annuity Units
is calculated by multiplying the number of Annuity Units in each future
variable guaranteed annuity payment (determined immediately prior to the
withdrawal) by the following fraction:
Amount of the variable withdrawal
-------------------------------------------------
Present value of remaining guaranteed variable annuity
payments immediately prior to the withdrawal
Under a fixed income option, the proportionate reduction is calculated by
multiplying the dollar amount of each future fixed annuity payment by a
similar fraction, which is based on the amount of the fixed withdrawal and
present value of remaining guaranteed fixed annuity payments.
Because each variable annuity payment is determined by multiplying the number
of Annuity Units by the value of an Annuity Unit, the reduction in the number
of Annuity Units will result in lower variable annuity payments with respect
to the guaranteed payments. Under a fixed income option, the proportionate
reduction will result in lower fixed annuity payments with respect to the
guaranteed payments. However, under a Life Annuity with Payments for a Certain
Number of Years option or Life Annuity with Cash Back option, if the Annuitant
is still living after the guaranteed number of annuity payments has been made,
the number of Annuity Units or dollar amount of future annuity payments will
be restored as if no Present Value Withdrawal(s) had taken place.
If a withdrawal is taken within 5 years of the Issue Date, the discount rate
used to calculate the present value will include an additional charge. See
"Calculation of Present Value," below.
CALCULATION OF PRESENT VALUE. When a withdrawal is taken, the present value of
future annuity payments is calculated based an assumed mortality table and a
discount rate. The mortality table that is used will be equal to the mortality
table used at the time of annuitization to determine the annuity payments
(currently the Annuity 2000 Mortality Table with male, female, or unisex rates,
as appropriate). The discount rate is the AIR (for a variable income option) or
the interest rate (for a fixed income option) that was used at the time of
annuitization to determine the annuity payments. If a withdrawal is made within
5 years of the Issue Date, the discount rate is increased by one of the
following charges ("Withdrawal Adjustment Charge"):
- 15 or more years of annuity payments being valued -- 1.00%
- 10-14 years of annuity payments being valued -- 1.50%
- Less than 10 years of annuity payments being valued -- 2.00%
The Withdrawal Adjustment Charge does not apply if a withdrawal is made in
connection with the death of an Annuitant or if a withdrawal is made 5 or more
years after the Issue Date.
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For each Payment Withdrawal, the number of years of annuity payments being
valued depends upon the life expectancy of the Annuitant at the time of the
withdrawal. The life expectancy will be determined by a mortality table that
will be equal to the mortality table used at the time of annuitization to
determine the annuity payments (currently the Annuity 2000 Mortality Table).
Because the impact of the Withdrawal Adjustment Charge will depend on the type
of the withdrawal taken, you should carefully consider the following before
making a withdrawal (especially if you are making the withdrawal under a Life
with Payment for a Certain Number of Years or Life Annuity with Cash Back
option):
- For a Payment Withdrawal, the present value calculation (including any
applicable adjustments to the discount rate) affects the proportionate
reduction of the remaining number of Annuity Units (under a variable
income option) or dollar amount (under a fixed income option), applied to
each future annuity payment, as explained in "Calculation of Proportionate
Reduction -- Payment Withdrawals," above. If a Withdrawal Adjustment
Charge applies, there will be a larger proportionate reduction in the
number of Annuity Units or the dollar amount applied to each future
annuity payment. This will result in lower future annuity payments, all
other things being equal.
- For a Present Value Withdrawal, the discount factor is used in determining
the maximum amount that can be withdrawn under the present value
calculation. If a Withdrawal Adjustment Charge applies, the discount
factor will be higher, and the maximum amount that can be withdrawn will
be lower. In addition, there will be a larger proportionate reduction in
the number of Annuity Units or the dollar amount applied to each future
guaranteed annuity payment. This will result in lower future annuity
payments with respect to the guaranteed payments, all other things being
equal. See "Calculation of Proportionate Reduction -- Present Value
Withdrawals," above.
For examples comparing a Payment Withdrawal and a Present Value Withdrawal, see
APPENDIX B -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS.
I. DEATH BENEFIT
DEATH OF AN OWNER OR AN ANNUITANT BEFORE THE ANNUITY INCOME DATE. If an Owner
or an Annuitant dies before the Annuity Income Date, we will pay a death benefit
equal to the Contract Value determined as of the Valuation Date on which we
receive due proof of death. The death benefit will be paid to the Owner of the
Contract. If there is no Owner or Joint Owner, we will pay the death benefit to
the Beneficiary.
PAYMENT OF THE DEATH BENEFIT. Unless you have specified otherwise, the death
benefit generally will be paid in one lump sum after receipt at the Principal
Office of due proof of death. Instead of payment in one lump sum, the person
entitled to the death benefit may, by written request, elect to receive a life
annuity or an annuity for a certain number of years not extending beyond such
person's life expectancy with annuity payments beginning no later than one year
from the date of death.
THE SPOUSE OF THE DECEASED OWNER AS BENEFICIARY. The deceased Owner's spouse,
if named as the sole Beneficiary, may by written request continue the Contract
in lieu of receiving the death benefit upon the death of the Owner. Upon such
election, the spouse becomes the Owner and Annuitant. As of the date of such
election, annuity payments will be adjusted to reflect any change of Annuitant
and Annuity Income Date. The new Annuity Income Date must be within twelve
months of the Issue Date. Any subsequent spouse of the new Owner, if named as
the Beneficiary, may not continue this Contract.
DEATH OF THE OWNER OR THE ANNUITANT AFTER THE ANNUITY INCOME DATE. If the Owner
or the Annuitant dies after the Annuity Income Date, we will pay the remaining
annuity payments, if any, in accordance with the terms of the annuity benefit
option selected. Any remaining annuity payments will be paid to the Owner of the
Contract. If there is no Owner or Joint Owner, then the Beneficiary will receive
the payments and become
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the Owner of the Contract. The Beneficiary may elect to receive the Present
Value of any remaining payments in one lump sum.
J. GENERAL RESTRICTIONS ON PAYMENTS
For purposes of making annuity payments or payment of other benefits based on
the value of a Sub-Account, the value of an Annuity Unit is determined as of the
end of a Valuation Date, which is currently 4:00 p.m., Eastern time.
Withdrawals, transfers, or payment of a death benefit from amounts under a
Variable Income Option are usually paid within seven days of a request in proper
form or, in the case of a death benefit, after we have received all necessary
documentation. We reserve the right to defer withdrawals or transfers of amounts
allocated to the Company's General Account for a period not to exceed six
months. Deferred amounts will receive interest during the deferral period at a
rate of at least 3%.
We reserve the right to defer payment on withdrawals, transfers, or payment of a
death benefit from amounts in each Sub-Account in any period during which:
- trading on the New York Stock Exchange is restricted as determined by the
SEC or such Exchange is closed for other than weekends and holidays;
- the SEC has by order permitted such suspension; or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a Sub-Account is not
reasonably practicable.
K. TELEPHONE AUTHORIZATION
In order for the Owner to be able to initiate transactions over the telephone, a
properly completed authorization must be on file before telephone requests will
be honored. The policy of the Company and its agents and affiliates is that we
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. Such procedures may include, among other things, requiring some
form of personal identification prior to acting upon instructions received by
telephone. All telephone instructions are tape-recorded.
L. ASSIGNMENT
The Contract may not be assigned.
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 the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on unisex rates.
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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.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. We assess a charge against the assets of
each Sub-Account to compensate for certain mortality and expense risks we have
assumed. The mortality risk arises from our guarantee that we will make annuity
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 benefit option selected), no matter how long the Annuitant lives and no
matter how long all Annuitants as a class live. The mortality charge is deducted
for any annuity benefit option selected on all Contracts, including those that
do not involve a life contingency, even though we do not bear direct mortality
risk with respect to variable annuity settlement options that do not involve
life contingencies. The expense risk arises from our guarantee that the charges
we make 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, we will absorb the losses. To the extent this
charge results in a profit to us, such profit will be available for use by us
for, among other things, the payment of distribution, sales and other expenses.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's assets. This charge may not be increased.
ADMINISTRATIVE EXPENSE CHARGE. We assess each Sub-Account with a daily charge
at an annual rate of 0.20% of the average daily net assets of the Sub-Account.
This charge may not be increased. The daily Administrative Expense Charge is
assessed to help defray administrative expenses incurred in the administration
of the Sub-Account.
Deductions for the Administrative Expense Charge are designed to reimburse us
for the cost of administration and related expenses. The administrative
functions and expense assumed by us 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.
EXPENSES OF THE UNDERLYING FUNDS. 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. These fees and expenses may vary each year. They are not fixed
or specified under the terms of the Contract, and they are not the
responsibility of the Company. The prospectuses and SAI's of the Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price and DGPF contain additional information
concerning expenses of the Underlying Funds.
B. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. We assess a charge
for state and municipal premium taxes, when applicable, and deduct the amount
paid as a premium tax charge. Our current practice is to deduct the premium tax
charge when the Single Purchase Payment is received.
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C. TRANSFER CHARGE
We currently do not charge for processing transfers. We guarantee that the first
12 transfers in a Contract year will be free of transfer charge, but reserve the
right to assess a charge, guaranteed never to exceed $25, for each subsequent
transfer in a Contract year to reimburse us for the expense of processing
transfers. For more information, see "G. Transfers of Annuity Units" under
DESCRIPTION OF THE CONTRACT.
D. WITHDRAWAL ADJUSTMENT CHARGE
After the Issue Date, each calendar year the Owner may withdraw a portion of the
present value of either all future annuity payments or future guaranteed annuity
payments. If a withdrawal is made within 5 years of the Issue Date, the AIR or
interest rate used to determine the annuity payments is increased by one of the
following adjustments:
15 or more years of annuity payments being valued -- 1.00%
10-14 years of annuity payments being valued -- 1.50%
Less than 10 years of annuity payments being valued -- 2.00%
The adjustment to the AIR or interest rate used to determine the present value
results in lower future annuity payments, and may be viewed as a charge under
the Contract. The Withdrawal Adjustment Charge does not apply if a withdrawal is
made in connection with the death of an Annuitant or if a withdrawal is made 5
or more years after the Issue Date.
For each Payment Withdrawal, the number of years of annuity payments being
valued depends upon the life expectancy of the Annuitant at the time of the
withdrawal. The life expectancy will be determined by a mortality table that
will be equal to the mortality table used at the time of annuitization to
determine the annuity payments (currently the Annuity 2000 Mortality Table with
male, female, or unisex rates, as appropriate).
For more information see "H. Withdrawals," under DESCRIPTION OF THE CONTRACT.
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FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the federal income tax consequences of
investing in this Contract. It is based upon the Company's understanding of
current U.S. federal tax laws and does not address any state or local tax
issues. THE DISCUSSION IS NOT INTENDED TO BE COMPLETE, NOR IS IT INTENDED AS TAX
ADVICE TO ANY INDIVIDUAL. YOU SHOULD CONSULT YOUR TAX ADVISOR ABOUT YOUR OWN
CIRCUMSTANCES, INCLUDING ANY POSSIBLE APPLICATION OF SPECIAL RULES NOT DISCUSSED
HERE.
The Company intends to assess 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.
A. ANNUITY CONTRACTS IN GENERAL
Annuity contracts are a means of setting aside money for future needs and for
providing a series of periodic payments for life or a fixed number of years.
Congress has provided special rules in the Internal Revenue Code ("Code") for
how you will be taxed on these periodic payments. There are also special
rules for withdrawals from an annuity that are not in the form of periodic
payments. The rules may apply differently to Qualified Contracts (a retirement
plan which meets the requirements of Code Sections 401, 403, 408 or 408A) and to
Non-Qualified Contracts.
As the Contract Owner, you may be taxed when a distribution occurs, either as an
annuity payment or as a withdrawal.
B. TAX ON ANNUITY PAYMENTS
When amounts are received as annuity payments, a portion of each annuity payment
is treated as a partial return of your single purchase payment and will not be
taxed. The remaining portion of the annuity payment will be treated as ordinary
income. How the annuity payment is divided between taxable and non-taxable
portions depends upon the period over which the annuity payments are expected to
be made. Annuity payments received after you have received all of your single
purchase payment are fully includible in income.
The Code imposes a penalty tax of 10% of the amount includible in income upon
certain distributions from annuity contracts occurring before the owner reaches
age 59 1/2. One of the exceptions from this penalty applies to amounts received
as annuity payments under an immediate annuity. To qualify as an immediate
annuity, a contract must, among other things, provide for a series of
substantially equal periodic payments during the annuity period, and must have
an annuity starting date (that is, the Annuity Income Date) that is no later
than one year from the contract's issue date. We believe that the Contract
should be treated as an immediate annuity, so there should be no penalty
applicable to amounts paid as annuity payments, regardless of the age of the
Contract Owner.
C. TAX ON WITHDRAWALS
WITHDRAWALS BEFORE THE ANNUITY INCOME DATE. When you make a withdrawal, the
amount you receive will not be divided into taxable and non-taxable portions in
the same way as an annuity payment. Withdrawals will be includible to the extent
of the earnings in your Contract. These distributions may also be subject to a
penalty tax equal to 10% of the amount that is includible in income. Some
distributions are exempt from the 10% penalty tax, including: (1) distributions
paid on or after you reach age 59 1/2; (2) distributions paid on or after your
death; and (3) distributions paid if you become disabled (as defined in the
Code). All Non-
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Qualified contracts issued by the Company to you during the same calendar year
will be aggregated to determine the taxable amount of any withdrawal.
WITHDRAWALS AFTER THE ANNUITY INCOME DATE. The Code does not specifically
address refunds or withdrawals from immediate annuity contracts. The Internal
Revenue Service ("IRS") has issued one private letter ruling concluding that the
right to make these withdrawals does not prevent an annuity contract from
qualifying as an immediate annuity. However, the ruling does not clearly state
the effect of an actual withdrawal on the tax treatment of annuity payments made
before and after the withdrawal. If, as a result of a withdrawal, distributions
from a Contract after the annuity starting date were not substantially equal,
there is a risk that the Contract could fail to qualify as an immediate annuity.
In that case, the portion includible in income of each annuity payment received
prior to your attaining age 59 1/2 would be subject to a 10% penalty tax (unless
another exception to the penalty tax is applied). While we currently believe
that a withdrawal will not adversely affect the favorable tax treatment of
annuity payments received before or after the withdrawal and we intend to
perform our tax reporting functions accordingly, there can be no assurance that
the IRS will not take a contrary position. You should obtain competent tax
advice prior to making a withdrawal from your Contract.
It is possible that the IRS will take the view that when withdrawals are taken
after the Annuity Income Date, all amounts received by the taxpayer are taxable
at ordinary income rates as amounts not received as an annuity. In addition,
such amounts may be taxable to the recipient without regard to the Owner's
investment in the Contract or any investment gain that might be present in the
current annuity value.
For example, assume that a Contract Owner with a Contract Value of $100,000 of
which $90,000 is comprised of investment in the Contract and $10,000 is
investment gain, makes a withdrawal of $20,000 after the Annuity Income Date.
Under this view, the Contract Owner would pay income taxes on the entire $20,000
amount in that tax year. For some taxpayers, additional tax penalties may also
apply.
These distributions may also be subject to a penalty tax equal to 10% of the
amount that is includible in income. Some distributions are exempt from the 10%
penalty tax, including: (1) distributions paid on or after you reach age 59 1/2;
(2) distributions paid on or after your death; and (3) distributions paid if you
become disabled (as defined in the Code).
OWNERS OF QUALIFIED AND NON-QUALIFIED CONTRACTS SHOULD CONSIDER CAREFULLY THE
TAX IMPLICATIONS OF ANY WITHDRAWAL REQUESTS AND THEIR NEED FOR CONTRACT FUNDS
PRIOR TO THE EXERCISE OF THE WITHDRAWAL RIGHT. CONTRACT OWNERS SHOULD ALSO
CONTACT THEIR TAX ADVISORS PRIOR TO MAKING ANY WITHDRAWALS.
D. EXCHANGES
You may exchange another annuity contract to acquire a Contract. For tax
purposes, the contract Issue Date will be the purchase date of the annuity
contract you exchange. Accordingly, in order for your Contract to qualify as an
immediate annuity, your Annuity Income Date must be no later than one year after
the purchase date of the contract you are exchanging.
If you exchange your Contract in exchange for another annuity contract with the
same Annuitant and Owner, the exchange will generally be treated as a tax-free
exchange. An exchange for a contract with a different Annuitant or Owner would
generally be treated as a taxable exchange.
E. TAX WITHHOLDING
The Company is required to withhold taxes from any payment made from
Non-Qualified and Qualified Contracts, including IRAs, unless you direct
otherwise. You may not direct the Company to refrain from withholding taxes on
certain distributions from a Qualified Contract that is part of a retirement
plan under
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Code Section 401 or 403. In addition, the Company is required to report
distributions from both Qualified and Non-Qualified Contracts to the IRS.
F. DIVERSIFICATION AND CONTROL OF UNDERLYING ASSETS
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order for the contract to be
treated as an annuity contract. The Underlying Funds have committed to us that
they will comply with these requirements.
In addition, Treasury regulations provide that a contract may not be treated as
an annuity contract for tax purposes if the contract owner has control over the
assets underlying the contract. The IRS has not yet issued guidance on whether
the degree of control you exercise over the underlying investments could cause
you to be considered the owner of the Fund shares. If you, rather than the
Company, were considered the owner of the Fund shares, your Contract would not
be treated as an annuity. We believe that we will be the owner of the Fund
shares for tax purposes; however, future IRS guidance may affect this conclusion
and may have retroactive effect. This may affect whether the Underlying Funds
will be able to continue to operate as described in the Funds' prospectus.
Moreover, we reserve the right, but have no obligation, to modify the Contracts
as we deem necessary or appropriate to ensure that the Contracts continue to
qualify as annuities for tax purposes.
STATEMENTS AND REPORTS
You are sent a report semi-annually which provides certain financial information
about the Underlying Funds. At least annually, but possibly as frequent as
quarterly, we will furnish a statement to you containing information about your
Contract, including information as required by applicable law, rules and
regulations. We will also send a confirmation statement to you each time a
transaction is made. (Certain transactions made under recurring payment plans
such as Automatic Account Rebalancing may in the future be confirmed quarterly
rather than by immediate confirmations.) You should review the information in
all statements carefully. All errors or corrections must be reported to us
immediately to assure proper crediting to the Contract. We will assume that all
transactions are accurately reported on confirmation statements and
quarterly/annual statements unless you notify the Principal Office in writing
within 30 days after receipt of the statement.
LOANS
Loans will not be permitted under this contract.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve 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 our 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 or other investment medium for the Underlying Fund
shares held by a Sub-Account, in the event that Underlying Fund shares are
unavailable for investment, or if we determine 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 you in accordance with the 1940 Act.
We also reserve 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
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specified investment objective. Subject to applicable law and any required SEC
approval, we may, in our 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 which we will determine.
Shares of the Underlying Funds also are issued to the separate accounts of the
Company and our 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 we nor any of the underlying
investment companies currently foresee any such disadvantages to either variable
life owners or variable annuity owners, we 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, we will bear the attendant
expenses.
If any of these substitutions or changes is made, we may endorse the Contracts
to reflect the substitution or change, and will notify you of all such changes.
If we deem 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 our other separate accounts.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
We reserve 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 you the benefit of, 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. Any such changes will apply uniformly to all
Contracts that are affected. You will be given written notice of such changes.
VOTING RIGHTS
We will vote Underlying Fund shares held by each Sub-Account in accordance with
instructions received from you. 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 us. Shares for
which no timely instructions are received will be voted in proportion to the
instructions that are received. We also will vote shares in a Sub-Account that
we own and which are not attributable to the 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 we
determine that we are permitted to vote shares in our own right, whether or not
such shares are attributable to the Contract, we reserve the right to do so.
The number of votes that you may cast will be determined by us as of the record
date established by the Underlying Fund. The number of Underlying Fund shares
will be determined by dividing the reserve held in each Sub-Account for the
Variable Annuity by the net asset value of one Underlying Fund share.
Ordinarily, 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
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
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subsidiary of First Allmerica. The Contract also may be purchased from certain
independent broker-dealers that are NASD members.
We pay commissions, not to exceed 5.0% of payments, to registered
representatives of Allmerica Investments, Inc. Alternative commission schedules
are available with varying initial commission amounts based on the Single
Purchase Payment, plus ongoing annual compensation of up to 4% of annuity
payments.
We intend to recoup commissions and other sales expenses through anticipated
profits from our General Account, which may include amounts derived from
mortality and expense risk charges. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to you
or to the Variable Account. You may direct any inquiries to your financial
representative or to Annuity Client Services, Allmerica Financial Life Insurance
and Annuity Company, 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-723-6550.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
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.
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APPENDIX A
EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS
Assume in the examples below that a 64 year old male purchases a contract and
selects a variable annuity payout option of Single Life Annuity with Payments
Guaranteed for 10 Years, annuity payments begin in 12 months, an Assumed
Investment Return ("AIR") of 3%, and an annual Change Frequency. Assume that the
net single payment purchases 1,370 Annuity Units. The following examples assume
the Annuity Unit Value is 1.000000 on the date payments begin and a net return
of 8% (gross return of 9.45%).
PRESENT VALUE WITHDRAWALS
EXAMPLE 1. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the fourth contract year (the third year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment prior to withdrawal = $1,506.24
Rate used in Calculation of Present Value = 5% (3% AIR plus 2% Withdrawal
Adjustment Charge)
Present Value of Future Guaranteed Annuity Payments = $119,961.92
Maximum Present Value Withdrawal Amount = $89,971.44 ($119,961.92 X 75%)
Annuity Units after withdrawal = 342.50 (1,370 X (1 -
(89,971.44/119,961.92)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment after withdrawal = $376.56
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Calculation of Present Value is increased by a Withdrawal Adjustment
Charge. Since less than 10 years of guaranteed annuity payments are being
valued, the Withdrawal Adjustment Charge is 2%. Because this is a Present Value
Withdrawal, the number of Annuity Units will increase to 1,370 after the end of
the 10-year period during which the Company guaranteed to make payments.
EXAMPLE 2. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the ninth contract year (eighth year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Payment prior to withdrawal = $1,909.09
Rate used in Calculation of Present Value = 3% (3% AIR)
Present Value of Future Guaranteed Annuity Payments = $65,849.08
Maximum Present Value Withdrawal Amount = $49,386.81 ($65,849.08 X 75%)
Annuity Units after withdrawal = 342.50 (1,370 X (1 -
(49,386.81/65,849.08)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Payment after withdrawal = $477.27
Because the withdrawal is being made more than 5 years after the Issue Date, the
rate used in the Calculation of Present Value is not increased by a Withdrawal
Adjustment Charge. Because this is a Present Value Withdrawal, the number of
Annuity Units will increase to 1,370 after the end of the 10-year period during
which the Company guaranteed to make payments.
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PAYMENT WITHDRAWALS
EXAMPLE 3. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the fourth contract year (the third year of the
Annuity Payout phase). At that time, the Annuitant's life expectancy is greater
than 15 years.
Last Monthly Annuity Payment = $1,436.50
Withdrawal Amount = $14,365.00 (10 X 1,436.50)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment prior to withdrawal = $1,506.24
Rate used in Calculation of Present Value = 4% (3% AIR plus 1% Withdrawal
Adjustment Charge)
Present Value of Future Annuity Benefit Payments = $234,482.77
Annuity Units after withdrawal = 1,286.07 (1,370 X (1 -
(14,365.00/234,482.77)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment after withdrawal = $1,413.96
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Calculation of Present Value is increased by a Withdrawal Adjustment
Charge. Since there are more than 15 years of annuity payments being valued (the
Annuitant's life expectancy is more than 15 years), the Withdrawal Adjustment
Charge is 1%. Because this is a Payment Withdrawal, the number of Annuity Units
will not increase after the end of the 10-year period during which the Company
guaranteed to make payments.
EXAMPLE 4. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the ninth contract year (eighth year of the Annuity
Payout phase).
Last Monthly Annuity Payment = $1,820.71
Withdrawal Amount = $18,207.10 (10 X 1,820.71)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Payment prior to withdrawal = $1,909.09
Rate used in Calculation of Present Value = 3% (3% AIR)
Present Value of Future Annuity Payments = $268,826.18
Annuity Units after withdrawal = 1,272.71 (1,370 X (1 -
(18,207.10/268,826.18)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Payment after withdrawal = $1,779.80
Because the withdrawal is being made more than 5 years after the Issue Date, the
rate used in the Calculation of Present Value is not increased by a Withdrawal
Adjustment Charge. Because this is a Payment Withdrawal, the number of Annuity
Units will not increase after the end of the 10-year period during which the
Company guaranteed to make payments.
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PRESENT VALUE WITHDRAWAL VERSUS PAYMENT WITHDRAWAL
EXAMPLE 5. Assume that the Owner has taken no previous withdrawals and would
like to take a $10,000 withdrawal at the beginning of the fourth contract year
(the third year of the Annuity Payout phase). At that time, the Annuitant's life
expectancy is greater than 15 years. The following examples show the impact of
taking the withdrawal under the Present Value Withdrawal Option and the Payment
Withdrawal Option.
PRESENT VALUE WITHDRAWAL
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment prior to withdrawal = $1,506.24
Rate used in Calculation of Present Value = 5% (3% AIR plus 2% Withdrawal
Adjustment Charge)
Present Value of future Guaranteed Annuity Payments = $119,961.92
Withdrawal = $10,000
Annuity Units after withdrawal = 1,255.80 (1,370 X (1 -
(10,000/119,961.92)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment after withdrawal = $1,380.67
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Calculation of Present Value is increased by a Withdrawal Adjustment
Charge. Since less than 10 years of guaranteed annuity payments are being
valued, the Withdrawal Adjustment Charge is 2%. Because this is a Present Value
Withdrawal, the number of Annuity Units will increase to 1,370 at the end of the
10-year period during which the Company guaranteed to make payments.
PAYMENT WITHDRAWAL
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment prior to withdrawal = $1,506.24
Rate used in Calculation of Present Value = 4% (3% AIR plus 1% Withdrawal
Adjustment Charge)
Present Value of future Annuity Payments = $234,482.77
Withdrawal = $10,000
Annuity Units after withdrawal = 1,311.57 (1,370 X (1 -
(10,000/$234,482.77)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment after withdrawal = $1,442.00
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Calculation of Present Value is increased by a Withdrawal Adjustment
Charge. Since there are more than 15 years of annuity payments being valued (the
Annuitant's life expectancy is more than 15 years), the Withdrawal Adjustment
Charge is 1%. Because this is a Payment Withdrawal, the number of Annuity Units
will not increase at the end of the 10-year period during which the Company
guaranteed to make payments.
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
SEPARATE ACCOUNT VA-K
This Prospectus provides important information about the ValuPlus Assurance
Variable Immediate Annuity contracts issued by Allmerica Financial Life
Insurance and Annuity Company (in all jurisdictions except New York) or by First
Allmerica Financial Life Insurance Company (in New York). The Contract is a
single payment immediate combination variable and fixed annuity offered on both
a group and individual basis. PLEASE READ THIS PROSPECTUS CAREFULLY BEFORE
INVESTING AND KEEP IT FOR FUTURE REFERENCE. ANNUITIES INVOLVE RISKS INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information dated May 4, 2000 containing more
information about this annuity is on file with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. A copy may be
obtained free of charge by calling Allmerica Investments, Inc. at
1-800-723-6550. The Table of Contents of the Statement of Additional Information
is listed on page 3 of this Prospectus. This Prospectus and the Statement of
Additional Information can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
The Contract offers a Variable Income Option and a Fixed Income Option. The
Variable Income Option is supported by a legally segregated separate account of
the Company called the Variable Account. The Variable Account is subdivided into
Sub-Accounts. Each Sub-Account invests exclusively in shares of the following
funds:
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS FEDERATED INSURANCE SERIES
AIM V.I. Capital Appreciation Fund Federated American Leaders Fund II
AIM V.I. Value Fund Federated High Income Bond Fund II
THE ALGER AMERICAN FUND Federated Prime Money Fund II
Alger American Growth Portfolio
Alger American Leveraged AllCap FRANKLIN TEMPLETON VARIABLE
Portfolio INSURANCE PRODUCTS
Alger American Small Capitalization TRUST (CLASS 2)
Portfolio Templeton Asset Strategy Fund
Templeton International Securities
ALLMERICA INVESTMENT TRUST Fund
AIT Money Market Fund MFS-REGISTERED TRADEMARK- VARIABLE
DREYFUS VARIABLE INVESTMENT FUND INSURANCE TRUST-SM-
Dreyfus VIF Appreciation Portfolio MFS-Registered Trademark- Growth
Dreyfus VIF Quality Bond Portfolio With Income Series
MFS-Registered Trademark- Utilities
THE DREYFUS SOCIALLY RESPONSIBLE Series
GROWTH FUND, INC.
Dreyfus Socially Responsible Growth OPPENHEIMER VARIABLE ACCOUNT FUNDS
Fund Oppenheimer Main Street Growth &
Income Fund/VA
EVERGREEN VARIABLE ANNUITY TRUST Oppenheimer Small Cap Growth
Evergreen VA Equity Index Fund Fund/VA
Evergreen VA Foundation Fund Oppenheimer Strategic Bond Fund/VA
Evergreen VA Global Leaders Fund
Evergreen VA Small Cap Value Fund
</TABLE>
The Company's General Account will support the Fixed Income Option.
THIS ANNUITY IS NOT A BANK DEPOSIT OR OBLIGATION; FEDERALLY INSURED; OR ENDORSED
BY ANY BANK OR GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IN THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED MAY 4, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND EXPENSES................................ 6
SUMMARY OF CONTRACT FEATURES................................ 12
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS AND THE
UNDERLYING INVESTMENT COMPANIES............................ 16
INVESTMENT OBJECTIVES AND POLICIES.......................... 18
PERFORMANCE INFORMATION..................................... 21
DESCRIPTION OF THE CONTRACT................................. 23
A. Single Purchase Payment.............................. 23
B. Right to Cancel...................................... 23
C. Electing the Annuity Income Date..................... 24
D. Choosing an Income Option............................ 24
E. Description of Annuity Benefit Options............... 25
F. Variable Annuity Payments............................ 26
Net Investment Factor............................... 26
The Annuity Unit and Annuity Unit Value............. 26
Determination of First Annuity Payment.............. 26
Determination of the Number of Annuity Units........ 26
Dollar Amount of First Variable Annuity Payment..... 27
Dollar Amount of Subsequent Variable Annuity
Payments............................................ 27
Payment of Annuity Payments......................... 27
G. Transfers of Annuity Units........................... 27
Automatic Account Rebalancing....................... 28
H. Withdrawals.......................................... 28
Calculation of Proportionate Reduction.............. 29
Calculation of Present Value........................ 30
I. Death Benefit........................................ 31
Death of an Owner or an Annuitant Before the Annuity
Income Date......................................... 31
Payment of the Death Benefit........................ 31
The Spouse of the Deceased Owner as Beneficiary..... 31
Death of the Owner or the Annuitant After the
Annuity Income Date................................. 31
J. General Restrictions on Payments..................... 32
K. Telephone Authorization.............................. 32
L. Assignment........................................... 32
M. NORRIS Decision....................................... 32
CHARGES AND DEDUCTIONS...................................... 33
A. Variable Account Deductions.......................... 33
Mortality and Expense Risk Charge................... 33
Administrative Expense Charge....................... 33
Expenses of the Underlying Funds.................... 33
B. Premium Taxes........................................ 33
C. Transfer Charge...................................... 34
D. Withdrawal Adjustment Charge......................... 34
FEDERAL TAX CONSIDERATIONS.................................. 35
A. Annuity Contracts in General......................... 35
B. Tax on Annuity Payments.............................. 35
C. Tax on Withdrawals................................... 35
Withdrawals Before the Annuity Income Date.......... 35
Withdrawals After the Annuity Income Date........... 36
D. Exchanges............................................ 36
E. Tax Withholding...................................... 36
F. Diversification and Control of Underlying Assets..... 37
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
STATEMENTS AND REPORTS...................................... 37
LOANS....................................................... 37
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 37
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 38
VOTING RIGHTS............................................... 38
DISTRIBUTION................................................ 38
LEGAL MATTERS............................................... 39
FURTHER INFORMATION......................................... 39
APPENDIX A -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND
PAYMENT WITHDRAWALS........................................ A-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY............................. 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY.................................................... 4
SERVICES.................................................... 4
UNDERWRITERS................................................ 4
ANNUITY PAYMENTS............................................ 5
PERFORMANCE INFORMATION..................................... 6
FINANCIAL STATEMENTS........................................ F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
ANNUITANT: the person who must be alive for annuity payments to be made (unless
payments are guaranteed). Joint Annuitants are permitted and, unless otherwise
indicated, any reference to Annuitant shall include Joint Annuitants. In
contrast, the person to whom annuity payments are made is the Owner (or a person
requested by the Owner). The Annuitant and the Owner may be the same individual.
ANNUITY INCOME DATE: the date annuity payments begin. The Annuity Income Date
must be within twelve months of the Contract's Issue Date.
ANNUITY UNIT: a measure used to calculate annuity payments under a Variable
Income Option.
ASSUMED INVESTMENT RETURN (AIR): used to calculate the initial variable annuity
payment and to determine how the payment will change over time in response to
the investment performance of the selected Sub-Accounts.
BENEFICIARY: the person, persons or entity entitled to the Death Benefit upon
the death of the Owner prior to the Annuity Income Date or remaining annuity
payments, if any, upon the death of the Owner on or after the Annuity Income
Date.
CHANGE FREQUENCY: the frequency (monthly, quarterly, semi-annually or annually)
that the dollar value of an annuity payment under a Variable Income Option will
change due to investment performance.
COMPANY (WE, US OR OUR): Allmerica Financial Life Insurance and Annuity Company
(in all jurisdictions except New York) or First Allmerica Financial Life
Insurance Company (in New York).
CONTRACT VALUE: the Present Value of all future and/or remaining annuity
payments. (See the section entitled "Present Value Determination.")
CONTRACT YEAR: a period of twelve consecutive months starting on the Contract's
Issue Date or on any anniversary of the Issue Date.
DATE OF FIRST CHANGE: the date on which your variable annuity payment will
change in value for the first time.
FIXED INCOME OPTION: an income option with annuity payments that are fixed in
amount (unless a withdrawal is taken or as a result of the death of the first
Joint Annuitant).
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
ISSUE DATE: the date the Contract is issued and the date that is used to
determine Contract days, Contract months, Contract years and anniversaries.
NET PAYMENT: the Single Purchase Payment less any premium tax.
OWNER (YOU OR YOUR): the person, persons (Joint Owners) or entity entitled to
exercise the rights and privileges under this Contract. Unless otherwise
indicated, any reference to You and Your shall include Joint Owners.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding
investment portfolio of AIM Variable Insurance Funds, The Alger American Fund,
Allmerica Investment Trust, Dreyfus Variable Investment Fund, The Dreyfus
Socially Responsible Growth Fund, Inc., Evergreen Variable Annuity Trust,
Federated Insurance Series, Franklin
4
<PAGE>
Templeton Variable Insurance Products Trust, MFS-Registered Trademark- Variable
Insurance Trust-SM-, or the Oppenheimer Variable Account Funds.
UNDERLYING FUND (FUNDS): an investment portfolio of AIM Variable Insurance
Funds, The Alger American Fund, Allmerica Investment Trust, Dreyfus Variable
Investment Fund, The Dreyfus Socially Responsible Growth Fund, Inc., Evergreen
Variable Annuity Trust, Federated Insurance Series, Franklin Templeton Variable
Insurance Products Trust, MFS-Registered Trademark- Variable Insurance
Trust-SM-, or the Oppenheimer Variable Account Funds.
VALUATION DATE: a day on which the net asset value of the unit values of the
Sub-Accounts are determined. Valuation Dates currently occur on each day on
which the New York Stock Exchange is open for trading.
VALUATION PERIOD: a period used in measuring the investment experience of a
Sub-Account. The Valuation Period begins at the close of one Valuation Date and
ends at the close of the next succeeding Valuation Date.
VARIABLE ACCOUNT: one of our separate accounts, which we call Separate Account
VA-K, consisting of assets segregated from our other assets. The investment
performance of the assets of each of our separate accounts (and, under the
Contract, each Sub-Account) is determined separately from our other assets and
the assets are not chargeable with liabilities arising out of any other business
which we may conduct.
VARIABLE INCOME OPTION: an income option providing for annuity payments varying
in amount in accordance with the investment experience of the Underlying Funds
selected.
VARIABLE INCOME OPTION RATE: the factor applied to the portion of the Net
Payment allocated to the Variable Income Option and used to determine the number
of Annuity Units in each annuity payment. The factor takes into account the
Issue Date, the Annuity Income Date, annuity benefit option, the Assumed
Investment Return, the Change Frequency and Date of First Change.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the ValuPlus
Assurance Variable Immediate Annuity Contract. The purpose of the following
tables is to assist you in understanding these fees and expenses. The tables
show (1) charges under the Contract, including (2) annual expenses of the
Sub-Accounts, and (3) annual expenses of the Funds. Contract charges including
the annual Sub-Account expenses are specified under the terms of the Contract.
Annual Fund expenses are not fixed or specified under the terms of the Contract
and will vary from year to year. In addition to the charges and expenses
described below, premium taxes are applicable in some states and deducted as
described under "B. Premium Taxes" under CHARGES AND DEDUCTIONS.
<TABLE>
<CAPTION>
CHARGE
(1) CONTRACT CHARGES: ------
<S> <C>
TRANSFER CHARGE: None
We currently do not charge for processing transfers and
guarantee that the first 12 transfers in a Contract year
will not be subject to a transfer charge. For each
subsequent transfer, we reserve the right to assess a
charge, guaranteed never to exceed $25, to reimburse us
for the costs of processing the transfer.
WITHDRAWAL ADJUSTMENT CHARGE:
After the Issue Date, you may request withdrawals, which
will result in a calculation by the Company of the Present
Value of future annuity payments. For withdrawals taken
within 5 years from the Issue Date, the Assumed Investment
Return ("AIR") you have chosen (in the case of a Variable
Income Option) or the interest rate (in the case of a
Fixed Income Option) used to determine the Present Value
is increased by a Withdrawal Adjustment Charge in the
following manner:
ADJUSTMENT TO AIR OR INTEREST RATE:
If 15 or more years of annuity payments are being 1.00%
valued, the increase is 1.50%
If 10-14 years of annuity payments are being valued, the 2.00%
increase is
If less than 10 years of annuity payments are being
valued, the increase is
The increase to the AIR or interest rate used to determine
the Present Value results in a greater proportionate
reduction in the number of Annuity Units (under a variable
income option) or dollar amount (under a fixed income
option), than if the increase had not been made. Because
each variable annuity payment is determined by multiplying
the number of Annuity Units by the value of an Annuity
Unit, the reduction in the number of Annuity Units will
result in lower future variable annuity payments. See "H.
Withdrawals" under DESCRIPTION OF THE CONTRACT for
additional information.
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
------
Total Annual Expenses: 1.45%
</TABLE>
6
<PAGE>
(3) ANNUAL UNDERLYING FUND EXPENSES: In addition to the charges described
above, certain fees and expenses are deducted from the assets of the Underlying
Funds. The levels of fees and expenses vary among the Underlying Funds. The
following table shows the expenses of the Underlying Funds as a percentage of
average daily net assets for the year ended December 31, 1999, as adjusted for
material changes. For more information concerning fees and expenses, see the
prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND EXPENSES
(AFTER ANY 12-B-1 (AFTER APPLICABLE (AFTER WAIVERS/
UNDERLYING FUND VOLUNTARY WAIVERS) FEES REIMBURSEMENTS) REIMBURSEMENTS)
- --------------- ------------------ -------- ----------------- -------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation
Fund.............................. 0.62% 0.00% 0.11% 0.73%
AIM V.I. Value Fund................ 0.61% 0.00% 0.15% 0.76%
Alger American Growth Portfolio.... 0.75% 0.00% 0.04% 0.79%
Alger American Leveraged AllCap
Portfolio (4)..................... 0.85% 0.00% 0.08%(4) 0.93%
Alger American Small Capitalization
Portfolio......................... 0.85% 0.00% 0.05% 0.90%
AIT Money Market Fund (6) 0.24% 0.00% 0.05% 0.29%(6)
Dreyfus VIF Appreciation
Portfolio......................... 0.75% 0.00% 0.03% 0.78%
Dreyfus VIF Quality Bond
Portfolio......................... 0.65% 0.00% 0.09% 0.74%
Dreyfus Socially Responsible Growth
Fund.............................. 0.75% 0.00% 0.04% 0.79%
Evergreen VA Equity Index Fund
(1)(2)............................ 0.00% 0.00% 0.30% 0.30%
Evergreen VA Foundation Fund (1)... 0.83% 0.00% 0.12% 0.95%
Evergreen VA Global Leaders Fund
(1)............................... 0.68% 0.00% 0.32% 1.00%
Evergreen VA Small Cap Value Fund
(1)............................... 0.51% 0.00% 0.49% 1.00%
Federated American Leaders Fund
II................................ 0.75% 0.00% 0.13% 0.88%
Federated High Income Bond Fund
II................................ 0.60% 0.00% 0.19% 0.79%
Federated Prime Money Fund II...... 0.50% 0.00% 0.23% 0.73%
Templeton Asset Strategy Fund -
Class 2........................... 0.60% 0.25%(7) 0.18% 1.03%
Templeton International Securities
Fund - Class 2.................... 0.69% 0.25%(7) 0.19% 1.13%
MFS-Registered Trademark- Growth
With Income Series(3)............. 0.75% 0.00% 0.13%(3) 0.88%(3)
MFS-Registered Trademark- Utilities
Series(3)......................... 0.75% 0.00% 0.16%(3) 0.91%(3)
Oppenheimer Main Street Growth &
Income Fund/VA.................... 0.73% 0.00% 0.05% 0.78%
Oppenheimer Small Cap Growth
Fund/VA(5)........................ 0.75% 0.00% 0.59%(5) 1.34%
Oppenheimer Strategic Bond
Fund/VA........................... 0.74% 0.00% 0.04% 0.78%
</TABLE>
(1)Evergreen Investment Management has voluntarily agreed to limit aggregate
operating expenses (including investment advisory fees, but excluding interest,
brokerage commissions and extraordinary expenses) of the Evergreen VA Equity
Index Fund to 0.30% of average daily net assets. Without the voluntarily limit,
total expenses of the Evergreen VA Equity Index Fund for 1999 are estimated to
be 0.62% of average daily assets. Evergreen Asset Management Corp. has
voluntarily agreed to limit aggregate operating expenses (including investment
advisory fees, but excluding interest, brokerage commissions and extraordinary
expenses) of the Evergreen VA Foundation Fund, Evergreen Global Leaders Fund,
and Evergreen VA Small Cap Value Fund to 1.00% of average daily net assets.
Without these voluntary limitations, total expenses of the Funds during 1999, as
a percentage of average daily net assets, would have been 1.20% for Evergreen
Global Leaders Fund, and 1.37% for Evergreen VA Small Cap Value Fund. The total
operating expenses of the Evergreen VA Foundation Fund did not exceed the
expense limitation throughout 1999.
(2)The inception date of the Evergreen VA Equity Index Portfolio is 9/29/99.
Expenses have been estimated based upon current fund contracts.
7
<PAGE>
(3)MFS-Registered Trademark- Growth With Income Series and
MFS-Registered Trademark- Utilities Series have an expense offset arrangement
which reduces the series' custodian fee based on the amount of cash maintained
by the series with its custodian and dividend disbursing agent. Each series may
enter into other such arrangements and directed brokerage arrangements, which
would also have the effect of reducing the series' expenses. "Other Expenses" do
not take into account these expense reductions, and are therefore higher than
the actual expenses of the series. Had these fee reductions been taken account,
"Net Expenses" would be lower for certain series and would equal: 0.87% for
Growth With Income Series, and 0.90% for Utilities Series.
(4)Included in "Other Expenses" of the Alger American Leveraged AllCap Portfolio
is 0.01% of interest expense.
(5)Reflects an agreement by the investment advisor to voluntarily limit
aggregate other expenses to 0.49% of average daily net assets of the Oppenheimer
Small Cap Growth Fund/VA.
(6)Until further notice Allmerica Financial Investment Management
Services, Inc. has declared a voluntary expense cap of 0.60% of average net
assets for the AIT Money Market Fund. The total operating expenses of the AIT
Money Market Fund did not exceed the expense limitation throughout 1999.
(7)The fund's Class 2 distribution plan or "rule 12b-1 plan" is described in the
fund's prospectus.
Absent the voluntary limit on aggregate operating expenses, the actual
Management Fees, Other Expenses and Total Operating Expenses were as follows:
<TABLE>
<CAPTION>
MANAGEMENT 12-B-1 OTHER TOTAL OPERATING
UNDERLYING FUND FEES FEES EXPENSES EXPENSES
- --------------- ---------- -------- -------- ---------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund............. 0.62% 0.00% 0.11% 0.73%
AIM V.I. Value Fund............................ 0.61% 0.00% 0.15% 0.76%
Alger American Growth Portfolio................ 0.75% 0.00% 0.04% 0.79%
Alger American Leveraged AllCap Portfolio(2)... 0.85% 0.00% 0.08%(2) 0.93%
Alger American Small Capitalization
Portfolio..................................... 0.85% 0.00% 0.05% 0.90%
AIT Money Market Fund.......................... 0.24% 0.00% 0.05% 0.29%
Dreyfus VIF Appreciation Portfolio............. 0.75% 0.00% 0.03% 0.78%
Dreyfus VIF Quality Bond Portfolio............. 0.65% 0.00% 0.09% 0.74%
Dreyfus Socially Responsible Growth Fund....... 0.75% 0.00% 0.04% 0.79%
Evergreen VA Equity Index Fund(1).............. 0.32% 0.00% 0.30% 0.62%(1)
Evergreen VA Foundation Fund................... 0.75% 0.00% 0.20% 0.95%
Evergreen VA Global Leaders Fund............... 0.87% 0.00% 0.33% 1.20%
Evergreen VA Small Cap Value Fund.............. 0.87% 0.00% 0.50% 1.37%
Federated American Leaders Fund II............. 0.75% 0.00% 0.13% 0.88%
Federated High Income Bond Fund II............. 0.60% 0.00% 0.19% 0.79%
Federated Prime Money Fund II.................. 0.50% 0.00% 0.23% 0.73%
Templeton Asset Strategy Fund - Class 2........ 0.60% 0.25%(4) 0.18% 1.03%(6)
Templeton International Securities Fund -
Class 2....................................... 0.69% 0.25%(4) 0.19% 1.13%(5)
MFS-Registered Trademark- Growth With Income
Series(3)..................................... 0.75% 0.00% 0.13%(3) 0.88%(3)
MFS-Registered Trademark- Utilities
Series(3)..................................... 0.75% 0.00% 0.16%(3) 0.91%(3)
Oppenheimer Main Street Growth & Income
Fund/VA....................................... 0.73% 0.00% 0.05% 0.78%
Oppenheimer Small Cap Growth Fund/VA........... 0.75% 0.00% 1.08% 1.83%
Oppenheimer Strategic Bond Fund/VA............. 0.74% 0.00% 0.04% 0.78%
</TABLE>
(1)The inception date of the Evergreen VA Equity Index Portfolio is 9/29/99.
Expenses have been estimated based upon current fund contracts.
8
<PAGE>
(2)Included in "Other Expenses" of the Alger American Leveraged AllCap Portfolio
is 0.01% of interest expense.
(3)Each series has an expense offset arrangement which reduces the series'
custodian fee based on the amount of cash maintained by the series with its
custodian and dividend disbursing agent. Each series may enter into other such
arrangements and directed brokerage arrangements, which would also have the
effect of reducing the series' expenses. "Other Expenses" do not take into
account these expense reductions, and are therefore higher than the actual
expenses of the series. Had these fee reductions been taken account, "Net
Expenses" would be lower for certain series and would equal: 0.87% for Growth
With Income Series, and 0.90% for Utilities Series.
(4)The fund's Class 2 distribution plan or "rule 12b-1 plan" is described in the
fund's prospectus.
(5)On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton International Equity Fund, effective 5/1/00. The
shareholders of that fund had approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses based on
the new fees and the assets of the fund as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.65%, 12b-1 Fees 0.25%, Other Expenses 0.20%, and Total Fund
Expenses 1.10%.
(6)On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton Global Asset Allocation Fund, effective 5/1/00. The
shareholders of that fund had approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses based on
the new fees and the assets of the fund as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management Fees 0.60%, 12b-1 Fees 0.25%, Other Expenses 0.14%, and Total Fund
Expenses 0.99%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
Expense limitations described above may not include extraordinary expenses, such
as litigation.
9
<PAGE>
EXPENSE EXAMPLES: The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets and assumes that the Underlying Fund expenses
listed above remain the same in each of the 1, 3, 5 and 10-year intervals.
Because the expenses of the Underlying Funds differ, separate examples are used
to illustrate the expenses incurred by an Owner on an investment in the various
Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE ASSUMED
5% ANNUAL RETURN IS HYPOTHETICAL AND IS NOT A REPRESENTATION OF PAST OR FUTURE
RETURNS.
Table (1) If you do not surrender your Contract at the end of the applicable
time period, you would pay the following expenses on a $1,000 investment,
assuming the election of a 10-year period certain option, a 3% AIR and a 5%
annual return on assets:
<TABLE>
<CAPTION>
FUNDS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund......................... $22 $61 $ 93 $133
AIM V.I. Value Fund........................................ $22 $62 $ 94 $135
Alger American Growth Portfolio............................ $22 $62 $ 95 $137
Alger American Leveraged AllCap Portfolio.................. $24 $66 $101 $145
Alger American Small Capitalization Portfolio.............. $23 $65 $100 $143
AIT Money Market Fund...................................... $17 $48 $ 74 $106
Dreyfus VIF Appreciation Portfolio......................... $22 $62 $ 95 $136
Dreyfus VIF Quality Bond Portfolio......................... $22 $61 $ 93 $134
Dreyfus Socially Responsible Growth Fund................... $22 $62 $ 95 $137
Evergreen VA Equity Index Fund............................. $17 $49 $ 74 $107
Evergreen VA Foundation Fund............................... $24 $67 $102 $146
Evergreen VA Global Leaders Fund........................... $24 $68 $104 $149
Evergreen VA Small Cap Value Fund.......................... $24 $68 $104 $149
Federated American Leaders Fund II......................... $23 $65 $ 99 $142
Federated High Income Bond Fund II......................... $22 $62 $ 95 $137
Federated Prime Money Fund II.............................. $22 $61 $ 93 $133
Templeton Asset Strategy Fund.............................. $25 $69 $105 $151
Templeton International Securities Fund.................... $26 $72 $109 $157
MFS-Registered Trademark- Growth With Income Series........ $23 $65 $ 99 $142
MFS-Registered Trademark- Utilities Series................. $24 $66 $100 $144
Oppenheimer Main Street Growth & Income Fund/VA............ $22 $62 $ 95 $136
Oppenheimer Small Cap Growth Fund/VA....................... $28 $78 $118 $170
Oppenheimer Strategic Bond Fund/VA......................... $22 $62 $ 95 $136
</TABLE>
10
<PAGE>
Table (2) If you surrender* your Contract at the end of the applicable time
period, you would pay the following expenses on a $1,000 investment, assuming
the election of a 10 year period certain option, a 3% AIR, and a 5% net annual
return on assets:
<TABLE>
<CAPTION>
FUNDS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----- -------- -------- -------- --------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund......................... $ 94 $108 $119 $133
AIM V.I. Value Fund........................................ $ 94 $109 $120 $135
Alger American Growth Portfolio............................ $ 94 $110 $121 $137
Alger American Leveraged AllCap Portfolio.................. $ 96 $114 $127 $145
Alger American Small Capitalization Portfolio.............. $ 96 $113 $126 $143
AIT Money Market Fund...................................... $ 89 $ 96 $100 $106
Dreyfus VIF Appreciation Portfolio $ 94 $110 $121 $136
Dreyfus VIF Quality Bond Portfolio......................... $ 94 $109 $119 $134
Dreyfus Socially Responsible Growth Fund................... $ 94 $110 $121 $137
Evergreen VA Equity Index Fund............................. $ 90 $ 96 $101 $107
Evergreen VA Foundation Fund............................... $ 96 $114 $128 $146
Evergreen VA Global Leaders Fund........................... $ 97 $116 $130 $149
Evergreen VA Small Cap Value Fund.......................... $ 97 $116 $130 $149
Federated American Leaders Fund II......................... $ 95 $112 $125 $142
Federated High Income Bond Fund II......................... $ 94 $110 $121 $137
Federated Prime Money Fund II.............................. $ 94 $108 $119 $133
Templeton Asset Strategy Fund.............................. $ 97 $117 $132 $151
Templeton International Securities Fund.................... $ 98 $119 $136 $157
MFS-Registered Trademark- Growth With Income Series........ $ 95 $113 $125 $142
MFS-Registered Trademark- Utilities Series................. $ 96 $113 $127 $144
Oppenheimer Main Street Growth & Income Fund/VA............ $ 94 $110 $121 $136
Oppenheimer Small Cap Growth Fund/VA....................... $100 $125 $145 $170
Oppenheimer Strategic Bond Fund/VA......................... $ 94 $110 $121 $136
</TABLE>
*A surrender is only available if the Payment for a Certain Number of Years
option is elected.
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SUMMARY OF CONTRACT FEATURES
WHAT IS THE VALUPLUS ASSURANCE VARIABLE IMMEDIATE ANNUITY?
The ValuPlus Assurance Variable Immediate Annuity contract ("Contract") is an
insurance contract designed to provide you, the Owner, with monthly annuity
income during the lifetime of the Annuitant or Joint Annuitants, or for a period
of years. The Contract combines the concept of professional money management
with the attributes of an annuity contract. Features available through the
Contract include:
- A menu of investment options that you can customize to support your
annuity payments;
- Underlying Funds managed by experienced professional investment advisers;
- Income that you can receive for life;
- Access to your money through withdrawals; and
- The ability to tailor your income stream by choosing from multiple annuity
benefit options and selecting the first date the amount of your payments
will change.
You may allocate your Net Payment to the Fixed Income Option or the Variable
Income Option, or a combination of both. If you select the Variable Income
Option, you may allocate your money to the Sub-Accounts investing in the
Underlying Funds. You select the investment allocation most appropriate for your
income needs. As those needs change, you may also change your allocation without
incurring any tax consequences.
WHAT CHOICES DO I MAKE WHEN I PURCHASE THE CONTRACT?
At the time you apply for the Contract, you choose:
- the Annuitant(s) and the Beneficiary(ies);
- the date annuity payments begin, which must be within twelve months of the
Contract's Issue Date;
- the annuity benefit option;
- whether you want variable annuity payments based on the investment
performance of the Underlying Funds (the Variable Income Option), fixed
annuity payments with payment amounts guaranteed by the Company (the Fixed
Income Option), or a combination of fixed and variable annuity payments;
- a Change Frequency, if you allocate any portion of the Net Payment to the
Variable Income Option (and you may select the first date your annuity
payment will change); and
- one of the available Assumed Investment Returns ("AIR") if you allocate
any portion of the Net Payment to the Variable Income Option.
On the Annuity Income Date, you, or the payee you designate, will begin to
receive income based on one of the several annuity benefit options available
under the Contract.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner"), and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
New York) or First Allmerica Financial Life
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Insurance Company (for contracts issued in New York). Each Contract has an Owner
(or Joint Owners), an Annuitant (or Joint Annuitants) and one or more
Beneficiaries.
The Annuitant is the person whose life is used to determine the duration of
annuity payments involving a life contingency, unless payments are guaranteed
for a certain number of years. The Beneficiary is the person, persons or entity
entitled to the Death Benefit upon the death of the Owner prior to the Annuity
Income Date or remaining annuity payments, if any, upon the death of the Owner
on or after the Annuity Income Date. If the contract has Joint Owners and one
Owner dies, the surviving Joint Owner is the primary Beneficiary.
HOW MUCH CAN I INVEST?
You may make a single purchase payment to the Contract. This payment is subject
to a $75,000 minimum. The maximum single purchase payment is $5,000,000 without
our prior approval. No additional payments may be made.
WHAT ARE MY INVESTMENT CHOICES?
You may allocate the Net Payment to the Fixed Income Option, the Variable Income
Option, or a combination of both. Once selected, the Income Option may not be
changed. If you select the Variable Income Option, you can allocate the Net
Payment among the Sub-Accounts investing in the Underlying Funds.
VARIABLE INCOME OPTION: You have a choice of Sub-Accounts investing in the
following Underlying Funds:
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS FEDERATED INSURANCE SERIES
AIM V.I. Capital Appreciation Fund Federated American Leaders Fund II
AIM V.I. Value Fund Federated High Income Bond Fund II
THE ALGER AMERICAN FUND Federated Prime Money Fund II
Alger American Growth Portfolio FRANKLIN TEMPLETON VARIABLE
Alger American Leveraged AllCap INSURANCE PRODUCTS
Portfolio TRUST (CLASS 2)
Alger American Small Capitalization Templeton Asset Strategy Fund
Portfolio Templeton International Securities
ALLMERICA INVESTMENT TRUST Fund
AIT Money Market Fund MFS-REGISTERED TRADEMARK- VARIABLE
INSURANCE TRUST-SM-
DREYFUS VARIABLE INVESTMENT FUND MFS-Registered Trademark- Growth
Dreyfus VIF Appreciation Portfolio With Income Series
Dreyfus VIF Quality Bond Portfolio MFS-Registered Trademark- Utilities
THE DREYFUS SOCIALLY RESPONSIBLE Series
GROWTH OPPENHEIMER VARIABLE ACCOUNT FUNDS
FUND, INC. Oppenheimer Main Street Growth &
Dreyfus Socially Responsible Growth Income Fund/VA
Fund Oppenheimer Small Cap Growth
Fund/VA
EVERGREEN VARIABLE ANNUITY TRUST Oppenheimer Strategic Bond Fund/VA
Evergreen VA Equity Index Fund
Evergreen VA Foundation Fund
Evergreen VA Global Leaders Fund
Evergreen VA Small Cap Value Fund
</TABLE>
FOR A MORE DETAILED DESCRIPTION OF THE UNDERLYING FUNDS, SEE INVESTMENT
OBJECTIVES AND POLICIES.
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<PAGE>
FIXED INCOME OPTION: If you select the Fixed Income Option, your money will be
supported by the General Account, which consists of all the Company's assets
other than those allocated to the Variable Account and any other separate
account.
CAN I MAKE TRANSFERS AMONG THE VARIABLE SUB-ACCOUNTS?
If you select the Variable Income Option, you may transfer among the
Sub-Accounts investing in the Underlying Funds. You will incur no current taxes
on transfers while your money remains in the Contract. See "G. Transfers of
Annuity Units" under DESCRIPTION OF THE CONTRACT.
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. The automatic rebalancing under an Automatic
Account Rebalancing program counts as one transfer for purposes of the 12
transfers guaranteed to be free of transfer charge in each Contract year. Each
subsequent automatic rebalancing is without charge and does not reduce the
remaining number of transfers which may be made free of charge in that Contract
year.
WHAT IF I NEED TO MAKE A WITHDRAWAL?
You have the right to make withdrawals after the Annuity Income Date. The type
of withdrawal and the number of withdrawals that may be made each calendar year
depends upon whether the annuity benefit option is based upon the life of one or
more Annuitants with no guaranteed payments (a "Life Annuity" option), under a
life annuity benefit option that in part provides for a guaranteed number of
payments (a "Life Annuity with Payment for a Certain Number of Years" or "Life
Annuity with Cash Back" option), or an annuity benefit option based on a
guaranteed number of payments (a "Payment for a Certain Number of Years"
option). Under a Life Annuity option, the Owner may make one Payment Withdrawal
each calendar year. Under a Life Annuity with Payment for a Certain Number of
Years or a Life Annuity with Cash Back option, the Owner may make one Payment
Withdrawal and one Present Value Withdrawal in each calendar year. Under a
Payment for a Certain Number of Years option, the Owner may make multiple
Present Value Withdrawals each calendar year. For more information, see "H.
Withdrawals" under DESCRIPTION OF THE CONTRACT.
WHAT HAPPENS UPON DEATH OF THE OWNER OR THE ANNUITANT?
Before the Annuity Income Date, if an Owner or an Annuitant dies, a death
benefit will be paid.
After the Annuity Income Date, if an Owner or an Annuitant dies, we will
continue to pay remaining annuity payments, if any, in accordance with the terms
of the annuity benefit option selected. See "I. Death Benefit" under DESCRIPTION
OF THE CONTRACT.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
We 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 Fund. The Funds will incur certain
management fees and expenses that are described in "Expenses of the Underlying
Funds" under "A. Variable Account Deductions" and in the Fund prospectuses
accompanying this Prospectus. These charges vary among the Underlying Funds and
may change from year to year. In addition, management fee waivers and/or
reimbursements may be in effect for certain or all of the Underlying Funds. For
specific information regarding the existence and effect of any
waivers/reimbursements see "Annual Underlying Fund Expenses" under SUMMARY OF
FEES AND EXPENSES.
Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "B. Premium Taxes" under
CHARGES AND DEDUCTIONS.
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<PAGE>
You may request a withdrawal after the Annuity Income Date. Any withdrawals will
result in a calculation by the Company of the present value of future annuity
payments. For withdrawals taken within 5 years from the Issue date, an
adjustment is made to the Assumed Investment Return ("AIR") you have chosen (in
the case of a Variable Income Option) and/or the interest rate (in the case of a
Fixed Income Option) used to calculate the present value of the future annuity
payments.
The adjustment to the AIR or the interest rate used to determine the Present
Value results in lower future annuity payments than if the adjustment had not
been made. See "H. Withdrawals" under DESCRIPTION OF THE CONTRACT for additional
information.
For more information regarding the charges applied to your Contract, see CHARGES
AND DEDUCTIONS.
CAN I EXAMINE THE CONTRACT?
Your Contract will be delivered to you after your purchase. If you return the
Contract to the Company within ninety days of receipt, the Contract will be
canceled. See the "Right to Examine" provision on the cover of your Contract. If
you cancel the Contract within ninety days after you received it, you will
receive a refund of the Contract Value on the date the Contract is returned to
us, plus any premium tax deducted on the Issue Date. However, if state law
requires or if the Contract was issued as an Individual Retirement Annuity
("IRA"), and if you return the Contract within ten days after you have received
it, you will receive a refund of the Single Purchase Payment less any annuity
payments made and/or withdrawals taken. See "B. Right to Cancel" under
DESCRIPTION OF THE CONTRACT.
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- You may change the Beneficiary, unless you have designated a Beneficiary
irrevocably;
- You may change the person(s) you have designated to receive your annuity
payments;
- If you selected the Variable Income Option, you may make transfers among
your current investments without any tax consequences;
- You may make withdrawals; and
- You may cancel the Contract within ninety days of delivery.
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<PAGE>
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS
AND THE UNDERLYING INVESTMENT COMPANIES
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1999,
Allmerica Financial had over $17 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a wholly owned subsidiary of First Allmerica Financial
Life Insurance Company that, in turn, is a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica"), organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1999, First Allmerica and its
subsidiaries had over $25 billion in combined assets and over $43 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its present
name. First Allmerica is a wholly owned subsidiary of AFC. First Allmerica's
principal office ("Principal Office") is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both Allmerica Financial and First Allmerica are charter members of the
Insurance Marketplace Standards Association ("IMSA"). Companies that belong to
IMSA subscribe to a rigorous set of standards that cover the various aspects of
sales and service for individually sold life insurance and annuities. IMSA
members have adopted policies and procedures that demonstrate a commitment to
honesty, fairness and integrity in all customer contacts involving sales and
service of individual life insurance and annuity products.
THE VARIABLE ACCOUNTS. Each Company maintains a separate account called
Separate Account VA-K (the "Variable Account"). The Variable Account of
Allmerica Financial was authorized by vote of our Board of Directors on
November 1, 1990. The Variable Account of First Allmerica was authorized by vote
of our Board of Directors on November 1, 1990. Each Variable Account is
registered with the SEC as a unit investment trust under the 1940 Act. This
registration does not involve the supervision or management of investment
practices or policies of the Variable Accounts or the Company by the SEC.
Separate Account VA-K is a separate investment account of the Company. 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. Each Sub-Account is administered and accounted
for as part of our general business, 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. Obligations under
the Contracts are our obligations. Under Delaware and Massachusetts law, the
assets of the Variable Account may not be charged with any liabilities arising
out of any other business of the Company.
We reserve the right, subject to compliance with applicable law, to change the
names of the Variable Account and the Sub-Accounts. We also offer other variable
annuity contracts investing in the Variable Account which
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<PAGE>
are not discussed in this Prospectus. In addition the Variable Account may
invest in other underlying funds which are not available to the Contracts
described in this Prospectus.
THE UNDERLYING INVESTMENT COMPANIES
Each Underlying Fund pays a management fee to an investment manager or adviser
for managing and providing services to the Underlying Fund. However, management
fee waivers and/or reimbursements may be in effect for certain or all of the
Underlying Funds. For specific information regarding the existence and effect of
any waiver/reimbursements see SUMMARY OF FEES AND EXPENSES section. The
prospectuses of the Underlying Funds also contain information regarding fees for
advisory services and should be read in conjunction with this prospectus.
AIM VARIABLE INSURANCE FUNDS. AIM Variable Insurance Funds ("AVIF") was
organized as a Maryland corporation on January 22, 1993 and changed to a
Delaware business trust on May 1, 2000. The investment adviser for the AIM V.I.
Value Fund and AIM V.I. Capital Appreciation Fund is A I M Advisors, Inc.
(AIM"). AIM was organized in 1976, and, together with its subsidiaries, manages
or advises over 120 investment company portfolios encompassing a broad range of
investment objectives. AIM is located at 11 Greenway Plaza, Suite 100, Houston,
TX 77046.
THE ALGER AMERICAN FUND. The Alger American Fund ("Alger") was established as a
Massachusetts business trust on April 6, 1988. Fred Alger Management, Inc. is
the investment manager of Alger. Fred Alger Management, Inc. is the investment
adviser for the Alger American Growth, Alger American Leveraged AllCap, and
Alger American Small Capitalization Portfolios. Fred Alger Management, Inc. is
located at 1 World Trade Center, Suite 9333, New York, NY 10048.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust ("AIT") was established
as a Massachusetts business trust on October 11, 1984. The investment adviser
for AIT is Allmerica Financial Investment Management Services, Inc., which is a
wholly-owned subsidiary of the Company. Allmerica Asset Management, Inc., an
affiliate of the Company, is the subadviser for the Money Market Fund. Both are
located at 440 Lincoln Street, Worcester, MA 01653.
DREYFUS VARIABLE INVESTMENT FUND. The Dreyfus Variable Investment Fund is a
Massachusetts business trust that commenced operations August 31, 1990. The
Dreyfus Corporation serves as the investment adviser to the Dreyfus investment
portfolios. Dreyfus is located at 200 Park Avenue, New York, NY 10166.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. The Dreyfus Socially
Responsible Growth Fund, Inc. (the "Dreyfus Socially Responsible Growth Fund")
was incorporated under Maryland law on July 20, 1992, commenced operations on
October 7, 1993 and is registered with the SEC as an open-end management
investment company. The Dreyfus Corporation serves as the investment adviser to
the Dreyfus Socially Responsible Growth Fund and NCM Capital Management
Group, Inc. provides sub-investment advisory services. Dreyfus is located at
200 Park Avenue, New York, NY 10166.
EVERGREEN VARIABLE ANNUITY TRUST. The Evergreen Variable Annuity Trust (the
"Evergreen Trust") is a Massachusetts business trust that is registered with the
SEC as an open-end management investment company. Four of the fifteen Series of
the Evergreen Trust are available under the Contracts. The investment adviser to
the Evergreen VA Equity Index Fund is Evergreen Investment Management ("EIM").
EIM, also known as First Capital Group, is a division of First Union National
Bank of North Carolina ("FUNB"), which in turn is a subsidiary of First Union
Corporation. The investment adviser to the Evergreen VA Global Leaders Fund and
Evergreen VA Small Cap Value Fund is Evergreen Asset Management Corp. ("EAMC"),
a wholly-owned subsidiary of FUNB. Lieber & Company acts as sub-advisor to these
and provides investment research, information, investment recommendation advice
and assistance to EAMC, and is reimbursed by EAMC for the costs of providing
such sub-advisory services. EAMC is also the investment adviser to the Evergreen
VA Foundation Fund. Evergreen is located at 200 Berkeley Street, Boston,
MA 02116.
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<PAGE>
FEDERATED INSURANCE SERIES. Federated Insurance Series ("FIS") was established
under the laws of the Commonwealth of Massachusetts on September 15, 1993. FIS
changed its name from Insurance Management Series to Federated Insurance
Series on November 14, 1995. The Fund's investment adviser is Federated
Investment Management Company ("Federated"). Federated, formerly known as
Federated Advisers, changed its name effective March 31, 1999. Federated is
located at Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
PA 15222.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST. Franklin Templeton
Variable Insurance Products Trust ("FT VIP") and the funds' investment managers
and their affiliates manage over $224 billion (as of December 31, 1999) in
assets. In 1992, Franklin joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers organization became part of the
Franklin Templeton organization four years later. Templeton Investment
Counsel, Inc. ("TICI") is adviser to both the Templeton Asset Strategy Fund and
Templeton International Securities Fund. Templeton is located at 100 Fountain
Parkway, St. Petersburg, Florida 33716.
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE
TRUST-SM-. MFS-Registered Trademark- Variable Insurance Trust (the "MFS Trust")
is a Massachusetts business trust organized on February 1, 1994. The investment
adviser for the MFS-Registered Trademark- Growth With Income Series and the
MFS-Registered Trademark- Utilities Series is Massachusetts Financial Services
Company ("MFS"), America's oldest mutual fund organization. MFS and its
predecessor organizations have a history of money management dating from 1924.
MFS is located at 500 Boylston Street, Boston, Massachusetts 02116.
OPPENHEIMER VARIABLE ACCOUNT FUNDS. Oppenheimer Variable Account Funds
("Oppenheimer") was organized as a Massachusetts business trust in 1984. The
investment adviser for the Oppenheimer Main Street Growth & Income Fund/VA,
Oppenheimer Small Cap Growth Fund/VA and Oppenheimer Strategic Bond Fund/VA is
OppenheimerFunds, Inc. ("OppenheimerFunds"). OppenheimerFunds has operated as an
investment adviser since 1959. Oppenheimer is located at 6803 S. Tucson Way,
Englewood, Colorado 80112.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the 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 ("SAI") of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
AIM VARIABLE INSURANCE FUNDS:
AIM V.I. CAPITAL APPRECIATION FUND -- seeks capital appreciation through
investments in common stocks, with emphasis on medium-sized and smaller emerging
growth companies.
AIM V.I. VALUE FUND -- seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by the fund's investment advisor to be
undervalued relative to the investment advisor's appraisal of the current or
projected earnings of the companies issuing the securities, or relative to
current market values of assets owned by the companies issuing the securities or
relative to the equity market generally. Income is a secondary objective.
THE ALGER AMERICAN FUND:
THE ALGER AMERICAN GROWTH PORTFOLIO -- seeks long-term capital appreciation. It
focuses on growing companies that generally have broad product lines, markets,
financial resources and depth of management.
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<PAGE>
Under normal circumstances, the portfolio invests primarily in the equity
securities of large companies. The portfolio considers a large company to have a
market capitalization of $1 billion or greater.
THE ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO -- seeks long-term capital
appreciation. Under normal circumstances, the Portfolio invests in the equity
securities of companies of any size which demonstrate promising growth
potential. The portfolio can leverage, that is, borrow money, up to one-third of
its total assets to buy additional securities. By borrowing money, the portfolio
has the potential to increase its returns if the increase in the value of the
securities purchased exceeds the cost of borrowing, including interest paid on
the money borrowed.
THE ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO -- seeks long-term
appreciation. It focuses on small, fast-growing companies that offer innovative
products, services or technologies to a rapidly expanding marketplace. Under
normal circumstances, the portfolio invests primarily in the equity securities
of small capitalization companies. A small capitalization company is one that
has a market capitalization within the range of the Russell 2000 Growth Index or
the S&P Small Cap 600 Index.
ALLMERICA INVESTMENT TRUST:
AIT MONEY MARKET FUND -- seeks to obtain maximum current income consistent with
the preservation of capital and liquidity.
DREYFUS VARIABLE INVESTMENT FUND:
DREYFUS VIF APPRECIATION PORTFOLIO -- seeks long-term capital growth consistent
with the preservation of capital; current income is a secondary goal. The
Portfolio invests in common stocks focusing on "blue chip" companies with total
market values of more than $5 billion at the time of purchase.
DREYFUS VIF QUALITY BOND PORTFOLIO -- seeks to maximize current income as is
consistent with the preservation of capital and the maintenance of liquidity.
The Portfolio invests at least 80% of net assets in fixed-income securities,
including mortgage-related securities, collateralized mortgage obligations
("CMOs") and asset-backed securities, that, when purchased, are rated A or
better or are the unrated equivalent as determined by Dreyfus, and in securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND -- seeks to provide capital growth,
with current income as a secondary goal. To pursue these goals, the fund invests
primarily in the common stock of companies that, in the opinion of the fund's
management, meet traditional investment standards and conduct their business in
a manner that contributes to the enhancement of the quality of life in America.
EVERGREEN VARIABLE ANNUITY TRUST:
EVERGREEN VA EQUITY INDEX FUND -- seeks investment results that achieve price
and yield performance similar to the Standard and Poor's 500 Composite Stock
Price Index. The Fund invests substantially all of its total assets in equity
securities that represent a composite of the S&P 500 Index.
EVERGREEN VA FOUNDATION FUND -- seeks, in order of priority, reasonable income,
conservation of capital and capital appreciation. The Fund invests in a
combination of equity and debt securities. Under normal circumstances, the Fund
will invest at least 25% of the assets in debt securities and the remainder in
equity securities.
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EVERGREEN VA GLOBAL LEADERS FUND -- seeks to achieve capital appreciation by
investing primarily in a diversified portfolio of U.S. and non-U.S. equity
securities of companies located in the world's major industrialized countries.
The Fund's investment adviser will attempt to screen the largest companies in
the world's major industrialized countries and cause the Fund to invest, in the
opinion of the Fund's investment adviser, in the 100 best based on certain
qualitative and quantitative criteria.
EVERGREEN VA SMALL CAP VALUE FUND -- seeks to achieve a return consisting of
current income and capital appreciation. The Fund invests in equity securities
of small U.S. companies (less than $1.5 billion in market capitalization at time
of purchase).
FEDERATED INSURANCE SERIES:
FEDERATED AMERICAN LEADERS FUND II -- seeks long-term growth of capital and its
secondary objective is to provide income. The Fund pursues its investment
objectives by investing primarily in equity securities of large capitalization
companies that are in the top 25% of their industry sectors in terms of
revenues, are characterized by sound management and have the ability to finance
expected growth.
FEDERATED HIGH INCOME BOND FUND II -- seeks high current income by investing
primarily in a professionally managed, diversified portfolio of fixed income
securities. The Fund pursues its investment objective by investing in a
diversified portfolio of high yield, lower-rated corporate bonds.
FEDERATED PRIME MONEY FUND II -- seeks to provide current income consistent with
stability of principal and liquidity.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST:
TEMPLETON ASSET STRATEGY FUND (CLASS 2) -- seeks high total return. Under normal
market conditions, the Fund invests in equity securities of companies in any
nation, debt securities of companies and governments of any nation, and in money
market instruments.
TEMPLETON INTERNATIONAL SECURITIES FUND (CLASS 2) -- seeks long-term capital
growth. The Fund invests primarily in stocks of companies located outside the
United States, including in emerging markets.
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST(SM):
MFS-REGISTERED TRADEMARK- GROWTH WITH INCOME SERIES -- seeks to provide
reasonable current income and long-term growth of capital and income by
investing primarily in common stocks and related securities (such as preferred
stocks, convertible securities and depositary receipts for those securities).
MFS-REGISTERED TRADEMARK- UTILITIES SERIES -- seeks capital growth and current
income (income above that available from a portfolio invested entirely in equity
securities) by investing primarily in equity and debt securities of domestic and
foreign companies in the utilities industry.
OPPENHEIMER VARIABLE ACCOUNT FUNDS:
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA -- seeks high total return,
which includes growth in the value of its shares as well as current income, from
equity and debt securities.
OPPENHEIMER SMALL CAP GROWTH FUND/VA -- seeks capital appreciation.
OPPENHEIMER STRATEGIC BOND FUND/VA -- seeks a high level of current income.
* * *
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CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST MEET YOUR INDIVIDUAL NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE UNDERLYING FUNDS, ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS. THE
INVESTMENT ADVISER OR SUB-ADVISER OF AN UNDERLYING FUND MAY MANAGE OTHER MUTUAL
FUNDS THAT HAVE SIMILAR NAMES, GOALS, AND/OR STRATEGIES AS THOSE OF AN
UNDERLYING FUND. DESPITE THESE SIMILARITIES, THERE MAY BE DIFFERENCES BETWEEN
THE UNDERLYING FUND AND THE OTHER FUND MANAGED BY THE SAME ADVISER, WHICH COULD
RESULT IN DIFFERENCES IN THE RISKS AND RETURNS OF THE TWO FUNDS. NO
REPRESENTATION IS MADE THAT ANY UNDERLYING FUND IS SIMILAR TO OR DIFFERENT FROM
OTHER FUNDS MANAGED BY THE SAME ADVISER. FOR INFORMATION ON AN UNDERLYING FUND,
CONSULT ITS PROSPECTUS.
If there is a material change in the investment objective of a Fund, you will be
notified of the change. If a portion of your Variable Income Option is allocated
to that Fund, you may transfer this amount without charge to another Fund. We
must receive your written request within 60 days of the latest of the:
- effective date of the change in the investment objective or
- receipt of the notice of your right to transfer.
PERFORMANCE INFORMATION
In order to help people understand how investment performance can affect money
invested in the Sub-Accounts, the Company may advertise "total return" and
"average annual total return" performance information based on (1) the periods
that the Sub-Accounts have been in existence and (2) the periods that the
Underlying Funds have been in existence. Performance results are calculated with
all charges assumed to be those applicable to the Contract, the Sub-Accounts and
the Underlying Funds. Both the total return and yield figures are based on
historical earnings and are not intended to indicate future performance.
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage. The "average annual total return" represents the average annual
percentage change in the value of an investment in the Sub-Account over a given
period of time. It represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Quotations of average annual total return 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% and the Underlying
Fund charges which would be assessed if the investment were completely withdrawn
at the end of the specified period.
The performance for the periods that the Underlying Funds have been in existence
is calculated in exactly the same manner as that for the periods that the
Sub-Accounts have been in existence; however, the period of time
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is based on the Underlying Fund's lifetime, which predates 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.
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, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain
contract features.
At times, we 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 our 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.
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DESCRIPTION OF THE CONTRACT
Subject to certain restrictions discussed below, you have the right:
- to select the annuity benefit option under which annuity payments are to
be made;
- to determine whether those payments are to be made on a fixed basis (the
Fixed Income Option), a variable basis (the Variable Income Option), or a
combination fixed and variable basis;
- to allocate any portion of the Net Payment to the Variable Income Option.
If so, you must choose:
- how to allocate the Net Payment;
- a Change Frequency (you may select the first date your annuity payment
will change);
- one of the available Assumed Investment Returns ("AIR") for a Variable
Income Option (see "F. Variable Annuity Payments" below for details);
- to elect how the Beneficiary should receive annuity payments, if any;
and
- to receive annuity payments (or designate someone else to receive
annuity payments).
A. SINGLE PURCHASE PAYMENT
You may make a single purchase payment to buy the Contract. This payment is
subject to a $75,000 minimum. The maximum single purchase payment is $5,000,000
without our prior approval. No additional payments may be made.
The Company issues the Contract when its underwriting requirements are met.
These requirements include receipt of the payment and allocation instructions by
the Company at its Principal Office. 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 Contracts.
Payments are to be made payable to the Company. The Net Payment is credited to
the Contract and allocated as requested as of the date that all issue
requirements are properly met. If all issue requirements are not completed
within five business days of the Company's receipt of the single purchase
payment, the payment will be returned immediately unless the Owner specifically
consents to the holding of it pending completion of the outstanding issue
requirements.
B. RIGHT TO CANCEL
If you return the Contract to the Company within 90 days of receipt, the
Contract will be cancelled.
If you purchase a Contract intended to qualify as an IRA or if you purchase the
Contract in a state that requires a full refund, you may cancel the Contract and
receive a refund as specified below.
Refund Within Ten Days of Receipt. If you return the Contract within ten days
(or longer if required by law) after you have received it, we will refund the
Single Purchase Payment less the total amount of all annuity payments made or
withdrawals taken.
Refund after Ten Days but Within Ninety Days. If you return the Contract after
ten days but within ninety days after the Issue Date, we will pay to you the
Contract Value as of the date the Contract is returned to us plus any premium
tax deducted on the Issue Date.
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If you purchase a Contract that is not intended to qualify as an IRA or if you
purchase the Contract in a state that does not require a full refund, you may
cancel the Contract at any time within 90 days after receipt of the Contract and
receive a refund. If you return the Contract, we will pay to you the Contract
Value as of the date the Contract is returned to us plus any premium tax
deducted on the Issue Date. This amount may be more or less than the Single
Purchase Payment.
At the time the Contract is issued, the "Right to Examine" provision on the
cover of the Contract will specifically indicate what the refund will be and the
time period allowed to exercise the right to cancel.
In order to cancel the contract, you must mail or deliver the Contract to the
agent through whom it was purchased, to our Principal Office at 440 Lincoln
Street, Worcester, MA 01653, or to any local agent of the Company. Mailing or
delivery must occur within ten or ninety days, as applicable, after receipt of
the Contract for cancellation to be effective. We ordinarily will send you a
refund within seven days.
C. ELECTING THE ANNUITY INCOME DATE
Annuity payments under the Contract will begin on the Annuity Income Date. You
select the Annuity Income Date at the time of issue. The Annuity Income Date
must be within twelve months of the Contract's Issue Date. You may not select
the 29th, 30th or 31st day of the month for the Annuity Income Date.
The Internal Revenue Code (the "Code") and/or the terms of qualified plans may
impose limitations on the age at which annuity payments may commence and the
type of annuity benefit option that may be elected. You should carefully review
the Annuity Income Date and the annuity benefit options with your tax advisor.
See also FEDERAL TAX CONSIDERATIONS for further information.
D. CHOOSING AN INCOME OPTION
You may choose a Fixed Income Option, a Variable Income Option or a combination
of Fixed and Variable.
If you select a Fixed Income Option, each monthly annuity payment will be equal
to the first (unless a withdrawal is made or as a result of the death of the
first Joint Annuitant). Any portion of the Net Payment allocated to the Fixed
Income Option will become part of our General Account.
If you select a Variable Income Option, you will receive monthly annuity
payments based on the value of the Annuity Units in the chosen Sub-Account(s).
Since the value of an Annuity Unit in a Sub-Account reflects the investment
performance of the Sub-Account, the amount of annuity payments will vary. Under
this Contract, you may choose the frequency with which you want annuity payments
to vary (the Change Frequency), which may be monthly, quarterly, semi-annually,
or annually. The Change Frequency is the frequency that changes due to the
Sub-Account's investment performance will be reflected in the dollar value of a
variable annuity payment. For example, if a monthly Change Frequency is in
effect, payments may vary on a monthly basis. If a quarterly Change Frequency is
selected, the amount of each monthly payment may change every three months and
will be level within each three month cycle.
The amount of your annuity payment will change for the first time one Change
Frequency Cycle after the Issue Date. (For example, if a quarterly Change
Frequency is chosen, your annuity payments will change for the first time three
months after the Annuity Income Date.) However, if you would like the amount of
the payment to change sooner, you can indicate the desired month.
The income option selected must result in an initial payment of at least $100 (a
lower amount may be required in certain jurisdictions.) We reserve the right to
increase this minimum amount. If the income option selected does not produce an
initial payment which meets this minimum, a single payment may be made.
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E. DESCRIPTION OF ANNUITY BENEFIT OPTIONS
The Company currently provides the following annuity benefit options:
LIFE ANNUITY OPTIONS
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life.
Payments cease with the last annuity payment due prior to the Annuitant's
death.
- JOINT LIFE ANNUITY WITH SURVIVOR BENEFIT -- Monthly payments during the
Joint Annuitants' lifetimes. Upon the first death, payments will continue
to you or the Beneficiary (whichever is applicable) for the survivor's
remaining lifetime based on the previously elected level of 100%,
two-thirds (66.67%) or one-half (50%) of the total number of Annuity Units
for a Variable Income Option or the annuity payment for a Fixed Income
Option.
LIFE ANNUITY WITH PAYMENT FOR A CERTAIN NUMBER OF YEARS OPTIONS
- SINGLE LIFE ANNUITY -- Monthly payments guaranteed for a specified number
of years and continuing thereafter during the Annuitant's lifetime. If the
Annuitant dies before all guaranteed payments have been made, the
remaining payments continue to you or the Beneficiary (whichever is
applicable).
- JOINT LIFE ANNUITY WITH SURVIVOR BENEFIT -- Monthly payments guaranteed
for a specified number of years and continuing during the Joint
Annuitants' lifetimes. Upon the first death, payments continue for the
survivor's remaining lifetime based on the previously elected level of
100%, two-thirds (66.67%) or one-half (50%) of the total number of Annuity
Units for a Variable Income Option or the annuity payment for a Fixed
Income Option. If the surviving Annuitant dies before all guaranteed
payments have been made, the remaining payments continue to you or the
Beneficiary (whichever is applicable).
LIFE ANNUITY WITH CASH BACK OPTIONS
- SINGLE LIFE ANNUITY -- Monthly payments during the Annuitant's life. At
the Annuitant's death, any excess of the Net Payment, over the total
amount of annuity payments made and withdrawals taken, will be paid to you
or the Beneficiary (whichever is applicable).
- JOINT LIFE ANNUITY WITH SURVIVOR BENEFIT -- Monthly payments during the
Joint Annuitants' lifetimes. Upon the first death, payments continue for
the survivor's remaining lifetime based on the previously elected level of
100%, two-thirds (66.67%) or one-half (50%) of the total number of Annuity
Units for a Variable Income Option or the annuity payment for a Fixed
Income Option. At the surviving Annuitant's death, any excess of the Net
Payment, over the total amount of annuity payments made and withdrawals
taken, will be paid to you or the Beneficiary (whichever is applicable).
PAYMENT FOR A CERTAIN NUMBER OF YEARS OPTION
Monthly annuity payments for a chosen number of years ranging from five to
thirty, or any other period certain option currently offered by the Company, are
available. The Payment for a Certain Number of Years option does not involve a
life contingency. In the computation of the annuity payments under this option,
the charge for annuity rate guarantees, which includes a factor for mortality
risks, is made.
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F. VARIABLE ANNUITY PAYMENTS
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 of 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 ANNUITY UNIT AND ANNUITY UNIT VALUE. The Annuity Unit is a measure used to
value the monthly annuity payments under a Variable Income Option. The value of
an Annuity Unit in each Sub-Account on its inception date was set at $1.00. The
value of an Annuity Unit under a Sub-Account on any Valuation Date thereafter is
equal to the value of the Annuity Unit on the immediately preceding Valuation
Date multiplied by the product of:
(1) a discount factor equivalent to the Assumed Investment Return ("AIR")
and
(2) the Net Investment Factor of the Sub-Account funding the annuity
payments for the applicable Valuation Period.
Subject to the chosen Change Frequency, annuity payments will increase if the
annualized Net Investment Factor during that period is greater than the AIR and
will decrease if it is less than the AIR. Where permitted by law, the Owner may
select an AIR of 3%, 5%, or 7%. A higher AIR will result in a higher initial
payment. However, subsequent payments will increase more slowly during periods
when actual investment performance exceeds the AIR and will decrease more
rapidly during periods when investment performance is less than the AIR.
DETERMINATION OF FIRST ANNUITY PAYMENT. The amount of the first periodic
variable annuity payment depends on the:
- annuity benefit option chosen;
- length of the annuity benefit option elected;
- age of the Annuitant;
- gender of the Annuitant (if applicable, see "M. NORRIS Decision):
- value of the amount applied under the annuity benefit option;
- applicable annuity benefit option rates based on the Annuity 2000
Mortality Table; and
- AIR selected.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. We have Variable Income Option
Rates that determine the dollar amount of the first monthly payment under each
Variable Income Option for each $1,000 of Net Payment. We calculate this amount
assuming there is no change in the Annuity Unit Value. We then divide the
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amount of the first annuity payment attributable to a particular Sub-Account by
the Annuity Unit Value of that Sub-Account to determine the number of Annuity
Units credited to your Contract. This number of Annuity Units remains fixed
under all annuity benefit options, except Joint and Survivor annuity benefit
options that reduce the number of Annuity Units upon the first death. However,
the number of variable annuity units under any annuity benefit option could
change if transfers or withdrawals are made.
DOLLAR AMOUNT OF FIRST VARIABLE ANNUITY PAYMENT. The dollar amount of the first
variable annuity payment will equal the number of Annuity Units of each
Sub-Account multiplied by the value of an Annuity Unit of that Sub-Account on
the applicable Valuation Date.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY PAYMENTS. The dollar amount of
subsequent variable annuity payments will vary with the Annuity Unit Value of
the selected Sub-Account(s) on certain dates. The dollar amount of variable
annuity payments remains level until the Date of First Change and within each
Change Frequency cycle. On the Date of First Change and as of the start of each
Change Frequency cycle, the dollar amount of the variable annuity payment is
determined by multiplying the number of Annuity Units of each Sub-Account by the
Annuity Unit Value of that Sub-Account on the applicable Valuation Date.
For an illustration of the calculation of a variable annuity payment using a
hypothetical example, see "Annuity Payments" in the SAI.
PAYMENT OF ANNUITY PAYMENTS. You will receive the annuity payments unless you
request in writing that payments be made to another person, persons, or entity.
If you (or, if there are Joint Owners, the surviving Joint Owner) die on or
after the Annuity Income Date, the Beneficiary will become the Owner of the
Contract. Any remaining guaranteed annuity payments will continue to the
Beneficiary in accordance with the terms of the annuity benefit option selected.
If there are Joint Owners on or after the Annuity Income Date, upon the first
Owner's death, any remaining guaranteed annuity payments will continue to the
surviving Joint Owner in accordance with the terms of the annuity benefit option
selected.
If the Annuitant dies on or after the Annuity Income Date, but before all
guaranteed annuity payments have been made, any remaining guaranteed payments
will continue to be paid to you or the payee you have designated. Upon the death
of the Owner, the Beneficiary will become the Owner. The Beneficiary may elect
to receive in a single sum the Present Value of any remaining guaranteed annuity
payments. For discussion of Present Value calculation, see "Calculation of
Present Value" below.
G. TRANSFERS OF ANNUITY UNITS
You may transfer among the available Sub-Accounts upon written or telephone
request to us. Transfers may be made (a) before the Annuity Income Date and
before the death of an Owner or an Annuitant; or (b) after the Annuity Income
Date and as long as annuity payments are payable under the annuity benefit
option selected. A properly completed authorization form must be on file before
telephone requests will be honored. See "K. Telephone Authorization" under
DESCRIPTION OF THE CONTRACT for more information. A designated number of Annuity
Units equal to the dollar amount of the transfer requested will be exchanged for
an equivalent dollar amount of Annuity Units of another Sub-Account. Transfer
values will be based on the Annuity Unit Value next computed after receipt of
the transfer request.
Currently, we do not charge for transfers. The first 12 transfers in a Contract
year are guaranteed to be free of any transfer charge. For each subsequent
transfer in a Contract year, we reserve the right to assess a charge, guaranteed
never to exceed $25, to reimburse us for the expense of processing transfers.
The automatic rebalancing under an Automatic Account Rebalancing program counts
as one transfer for purposes of the 12 transfers guaranteed to be free of
transfer charge in each Contract year. Each subsequent automatic rebalancing is
without charge and does not reduce the remaining number of transfers which may
be made free of charge in that Contract year.
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Any transfer made because of a material change in the investment objective of a
Sub-Account will not count towards the 12 free transfers, nor will we charge you
a transfer fee. As of the date of this Prospectus, transfers may be made to all
of the Sub-Accounts. However, we reserve the right to establish and impose
reasonable rules restricting transfers. All transfers are subject to our
consent.
AUTOMATIC ACCOUNT REBALANCING. You may request automatic rebalancing of
Sub-Account allocations on a monthly, bi-monthly, quarterly, semi-annual or
annual basis in accordance with your specified percentage allocations. Each
rebalancing will result in a change in the number of Annuity Units. As
frequently as you elect, we 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 we receive and record your
request to terminate.
H. WITHDRAWALS
WITHDRAWALS AFTER THE ANNUITY INCOME DATE FROM QUALIFIED AND NON-QUALIFIED
CONTRACTS MAY HAVE ADVERSE TAX CONSEQUENCES. BEFORE MAKING A WITHDRAWAL, PLEASE
CONSULT WITH YOUR TAX ADVISOR AND SEE FEDERAL TAX CONSIDERATION, "C. TAX ON
WITHDRAWALS."
You have the right, based on the annuity benefit option selected, to make
withdrawals. Withdrawals may be made (a) before the Annuity Income Date and
before the death of an Owner or an Annuitant, or (b) after the Annuity Income
Date and as long as annuity payments are payable under the annuity benefit
option selected. Two withdrawal options may be available to you: a Payment
Withdrawal Amount option or a Present Value Withdrawal option.
The Owner must submit to the Principal Office a signed, written request
indicating the desired dollar amount of the withdrawal. If the amount requested
is greater than the maximum amount that may be withdrawn at that time, the
Company will allow the withdrawal only up to the maximum amount. The minimum
amount of a withdrawal is $100. Any withdrawal is normally payable within seven
days following our receipt of the withdrawal request.
The type of withdrawal and the number of withdrawals that may be made each
calendar year depends upon whether the annuity benefit option is based upon the
life of one or more Annuitants with no guaranteed payments (a "Life Annuity"
option), under a life annuity benefit option that in part provides for a
guaranteed number of payments (a "Life Annuity with Payment for a Certain Number
of Years" or "Life Annuity with Cash Back" option), or an annuity benefit option
based on a guaranteed number of payments (a "Payment for a Certain Number of
Years" option).
- - WITHDRAWALS UNDER LIFE ANNUITY OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity payment multiplied by
ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity payments.
- - WITHDRAWALS UNDER LIFE ANNUITY WITH PAYMENT FOR A CERTAIN NUMBER OF YEARS OR
LIFE ANNUITY WITH CASH BACK OPTIONS
The Owner may make one Payment Withdrawal in each calendar year. A Payment
Withdrawal cannot exceed the previous monthly annuity payment multiplied by
ten (10). The amount of each Payment Withdrawal represents a percentage of
the present value of the remaining annuity payments.
The Owner may make one Present Value Withdrawal in each calendar year, if
there are remaining GUARANTEED annuity payments. The amount of each Present
Value Withdrawal represents a percentage of
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the present value of the remaining GUARANTEED annuity payments. Each year a
Present Value Withdrawal is taken, the Company records the percentage of the
present value of the then remaining guaranteed annuity payments that was
withdrawn. The total percentage withdrawn over the life of the Contract
cannot exceed 75%. This means that each Present Value Withdrawal is limited
by the REMAINING AVAILABLE PERCENTAGE. (For example, assume that in year
three the Owner withdraws 15% of the then current present value of the
remaining guaranteed annuity payments. In year seven, the Owner withdraws
20% of the then present value of the remaining guaranteed annuity payments.
After year seven, the Owner may make Present Value Withdrawal(s) of up to
40% (75%-35%) of the present value of any remaining guaranteed annuity
payments.)
Under a Life Annuity with Payment for a Certain Number of Years or Life
Annuity with Cash Back option, if the Annuitant is still living after the
guaranteed annuity payments have been made, the number of Annuity Units or
dollar amount applied to future annuity payments will be restored as if no
Present Value Withdrawal(s) had taken place. See "Calculation of
Proportionate Reduction -- Present Value Withdrawals," below.
- - WITHDRAWALS UNDER PAYMENT FOR CERTAIN NUMBER OF YEARS OPTIONS
The Owner may make multiple Present Value Withdrawals in each calendar year,
up to 100% of the present value of the guaranteed annuity payments.
Withdrawal of 100% of the present value of the guaranteed annuity payments
will result in termination of the Contract.
The amount of each Payment Withdrawal or Present Value Withdrawal represents a
portion of the present value of the remaining annuity payments or remaining
guaranteed annuity payments, respectively, and proportionately reduces the
number of Annuity Units (under a variable income option) or dollar amount (under
a fixed income option) applied to future annuity payments. Because each variable
annuity payment is determined by multiplying the number of Annuity Units by the
value of an Annuity Unit, the reduction in the number of Annuity Units will
result in lower future variable annuity payments. See "Calculation of
Proportionate Reduction," below. The present value is calculated with a discount
rate that will include an additional charge if a withdrawal is taken within 5
years of the Issue Date. See "Calculation of Present Value," below.
CALCULATION OF PROPORTIONATE REDUCTION. Each Payment Withdrawal proportionately
reduces the number of Annuity Units applied to each future variable annuity
payment or the dollar amount applied to each future fixed annuity payment. Each
Present Value Withdrawal proportionately reduces the number of Annuity Units
applied to each future guaranteed variable annuity payment or the dollar amount
applied to each future guaranteed fixed annuity payment. Because each variable
annuity payment is determined by multiplying the number of Annuity Units by the
value of an Annuity Unit, the reduction in the number of Annuity Units will
result in lower future variable annuity payments.
- PAYMENT WITHDRAWALS. Payment Withdrawals are available under Life
Annuity, Life Annuity with Payment for a Certain Number of Years, or Life
Annuity with Cash Back options. The Owner may make one Payment Withdrawal
in each calendar year.
Under a variable income option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each
future variable annuity payment (determined immediately prior to the
withdrawal) by the following fraction:
Amount of the variable withdrawal
---------------------------------------------
Present value of all remaining variable annuity
payments immediately prior to the withdrawal
Because each variable annuity payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in
the number of Annuity Units will result in lower future variable annuity
payments.
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Under a fixed income option, the proportionate reduction is calculated by
multiplying the dollar amount of each future fixed annuity payment by a
similar fraction, which is based on the amount of the fixed withdrawal and
present value of remaining fixed annuity payments.
If a withdrawal is taken within 5 years of the Issue Date, the discount
rate used to calculate the present value will include an additional
charge. See "Calculation of Present Value," below.
- PRESENT VALUE WITHDRAWALS. Present Value Withdrawals are available under
Life Annuity with Payment for a Certain Number of Years or Life Annuity
with Cash Back options (the Owner may make one Present Value Withdrawal in
each calendar year, if there are remaining guaranteed annuity payments)
and under Payment for a Certain Number of Years options (the Owner may
make multiple Present Value Withdrawals in each calendar year).
Under a variable income option, the proportionate reduction in Annuity
Units is calculated by multiplying the number of Annuity Units in each
future variable guaranteed annuity payment (determined immediately prior
to the withdrawal) by the following fraction:
Amount of the variable withdrawal
-------------------------------------------------------
Present value of remaining guaranteed variable annuity
payments immediately prior to the withdrawal
Under a fixed income option, the proportionate reduction is calculated by
multiplying the dollar amount of each future fixed annuity payment by a
similar fraction, which is based on the amount of the fixed withdrawal and
present value of remaining guaranteed fixed annuity payments.
Because each variable annuity payment is determined by multiplying the
number of Annuity Units by the value of an Annuity Unit, the reduction in
the number of Annuity Units will result in lower variable annuity payments
with respect to the guaranteed payments. Under a fixed income option, the
proportionate reduction will result in lower fixed annuity payments with
respect to the guaranteed payments. However, under a Life Annuity with
Payments for a Certain Number of Years option or Life Annuity with Cash
Back option, if the Annuitant is still living after the guaranteed number
of annuity payments has been made, the number of Annuity Units or dollar
amount of future annuity payments will be restored as if no Present Value
Withdrawal(s) had taken place.
If a withdrawal is taken within 5 years of the Issue Date, the discount
rate used to calculate the present value will include an additional
charge. See "Calculation of Present Value," below.
CALCULATION OF PRESENT VALUE. When a withdrawal is taken, the present value of
future annuity payments is calculated based an assumed mortality table and a
discount rate. The mortality table that is used will be equal to the mortality
table used at the time of annuitization to determine the annuity payments
(currently the Annuity 2000 Mortality Table with male, female, or unisex rates,
as appropriate). The discount rate is the AIR (for a variable income option) or
the interest rate (for a fixed income option) that was used at the time of
annuitization to determine the annuity payments. If a withdrawal is made within
5 years of the Issue Date, the discount rate is increased by one of the
following charges ("Withdrawal Adjustment Charge"):
- 15 or more years of annuity payments being valued -- 1.00%
- 10-14 years of annuity payments being valued -- 1.50%
- Less than 10 years of annuity payments being valued -- 2.00%
The Withdrawal Adjustment Charge does not apply if a withdrawal is made in
connection with the death of an Annuitant or if a withdrawal is made 5 or more
years after the Issue Date.
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For each Payment Withdrawal, the number of years of annuity payments being
valued depends upon the life expectancy of the Annuitant at the time of the
withdrawal. The life expectancy will be determined by a mortality table that
will be equal to the mortality table used at the time of annuitization to
determine the annuity payments (currently the Annuity 2000 Mortality Table).
Because the impact of the Withdrawal Adjustment Charge will depend on the type
of the withdrawal taken, you should carefully consider the following before
making a withdrawal (especially if you are making the withdrawal under a Life
with Payment for a Certain Number of Years or Life Annuity with Cash Back
option):
- For a Payment Withdrawal, the present value calculation (including any
applicable adjustments to the discount rate) affects the proportionate
reduction of the remaining number of Annuity Units (under a variable
income option) or dollar amount (under a fixed income option), applied to
each future annuity payment, as explained in "Calculation of Proportionate
Reduction -- Payment Withdrawals," above. If a Withdrawal Adjustment
Charge applies, there will be a larger proportionate reduction in the
number of Annuity Units or the dollar amount applied to each future
annuity payment. This will result in lower future annuity payments, all
other things being equal.
- For a Present Value Withdrawal, the discount factor is used in determining
the maximum amount that can be withdrawn under the present value
calculation. If a Withdrawal Adjustment Charge applies, the discount
factor will be higher, and the maximum amount that can be withdrawn will
be lower. In addition, there will be a larger proportionate reduction in
the number of Annuity Units or the dollar amount applied to each future
guaranteed annuity payment. This will result in lower future annuity
payments with respect to the guaranteed payments, all other things being
equal. See "Calculation of Proportionate Reduction -- Present Value
Withdrawals," above.
For examples comparing a Payment Withdrawal and a Present Value Withdrawal, see
APPENDIX A -- EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS.
I. DEATH BENEFIT
DEATH OF AN OWNER OR AN ANNUITANT BEFORE THE ANNUITY INCOME DATE. If an Owner
or an Annuitant dies before the Annuity Income Date, we will pay a death benefit
equal to the Contract Value determined as of the Valuation Date on which we
receive due proof of death. The death benefit will be paid to the Owner of the
Contract. If there is no Owner or Joint Owner, we will pay the death benefit to
the Beneficiary.
PAYMENT OF THE DEATH BENEFIT. Unless you have specified otherwise, the death
benefit generally will be paid in one lump sum after receipt at the Principal
Office of due proof of death. Instead of payment in one lump sum, the person
entitled to the death benefit may, by written request, elect to receive a life
annuity or an annuity for a certain number of years not extending beyond such
person's life expectancy with annuity payments beginning no later than one year
from the date of death.
THE SPOUSE OF THE DECEASED OWNER AS BENEFICIARY. The deceased Owner's spouse,
if named as the sole Beneficiary, may by written request continue the Contract
in lieu of receiving the death benefit upon the death of the Owner. Upon such
election, the spouse becomes the Owner and Annuitant. As of the date of such
election, annuity payments will be adjusted to reflect any change of Annuitant
and Annuity Income Date. The new Annuity Income Date must be within twelve
months of the Issue Date. Any subsequent spouse of the new Owner, if named as
the Beneficiary, may not continue this Contract.
DEATH OF THE OWNER OR THE ANNUITANT AFTER THE ANNUITY INCOME DATE. If the Owner
or the Annuitant dies after the Annuity Income Date, we will pay the remaining
annuity payments, if any, in accordance with the terms of the annuity benefit
option selected. Any remaining annuity payments will be paid to the Owner of the
Contract. If there is no Owner or Joint Owner, then the Beneficiary will receive
the payments and become
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the Owner of the Contract. The Beneficiary may elect to receive the Present
Value of any remaining payments in one lump sum.
J. GENERAL RESTRICTIONS ON PAYMENTS
For purposes of making annuity payments or payment of other benefits based on
the value of a Sub-Account, the value of an Annuity Unit is determined as of the
end of a Valuation Date, which is currently 4:00 p.m., Eastern time.
Withdrawals, transfers, or payment of a death benefit from amounts under a
Variable Income Option are usually paid within seven days of a request in proper
form or, in the case of a death benefit, after we have received all necessary
documentation. We reserve the right to defer withdrawals or transfers of amounts
allocated to the Company's General Account for a period not to exceed six
months. Deferred amounts will receive interest during the deferral period at a
rate of at least 3%.
We reserve the right to defer payment on withdrawals, transfers, or payment of a
death benefit from amounts in each Sub-Account in any period during which:
- trading on the New York Stock Exchange is restricted as determined by the
SEC or such Exchange is closed for other than weekends and holidays;
- the SEC has by order permitted such suspension; or
- an emergency, as determined by the SEC, exists such that disposal of
portfolio securities or valuation of assets of a Sub-Account is not
reasonably practicable.
K. TELEPHONE AUTHORIZATION
In order for the Owner to be able to initiate transactions over the telephone, a
properly completed authorization must be on file before telephone requests will
be honored. The policy of the Company and its agents and affiliates is that we
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. Such procedures may include, among other things, requiring some
form of personal identification prior to acting upon instructions received by
telephone. All telephone instructions are tape-recorded.
L. ASSIGNMENT
The Contract may not be assigned.
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 the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on unisex rates.
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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 Underlying
Funds.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. We assess a charge against the assets of
each Sub-Account to compensate for certain mortality and expense risks we have
assumed. The mortality risk arises from our guarantee that we will make annuity
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 benefit option selected), no matter how long the Annuitant lives and no
matter how long all Annuitants as a class live. The mortality charge is deducted
for any annuity benefit option selected on all Contracts, including those that
do not involve a life contingency, even though we do not bear direct mortality
risk with respect to variable annuity settlement options that do not involve
life contingencies. The expense risk arises from our guarantee that the charges
we make 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, we will absorb the losses. To the extent this
charge results in a profit to us, such profit will be available for use by us
for, among other things, the payment of distribution, sales and other expenses.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's assets. This charge may not be increased.
ADMINISTRATIVE EXPENSE CHARGE. We assess each Sub-Account with a daily charge
at an annual rate of 0.20% of the average daily net assets of the Sub-Account.
This charge may not be increased. The daily Administrative Expense Charge is
assessed to help defray administrative expenses incurred in the administration
of the Sub-Account.
Deductions for the Administrative Expense Charge are designed to reimburse us
for the cost of administration and related expenses. The administrative
functions and expense assumed by us 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.
EXPENSES OF THE UNDERLYING FUNDS. 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. These fees and expenses may vary each year. They are not fixed
or specified under the terms of the Contract, and they are not the
responsibility of the Company. The prospectuses and SAI's of the Underlying
Funds contain additional information concerning expenses of the Underlying
Funds.
B. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. We assess a charge
for state and municipal premium taxes, when applicable, and deduct the amount
paid as a premium tax charge. Our current practice is to deduct the premium tax
charge when the Single Purchase Payment is received.
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C. TRANSFER CHARGE
We currently do not charge for processing transfers. We guarantee that the first
12 transfers in a Contract year will be free of transfer charge, but reserve the
right to assess a charge, guaranteed never to exceed $25, for each subsequent
transfer in a Contract year to reimburse us for the expense of processing
transfers. For more information, see "G. Transfers of Annuity Units" under
DESCRIPTION OF THE CONTRACT.
D. WITHDRAWAL ADJUSTMENT CHARGE
After the Issue Date, each calendar year the Owner may withdraw a portion of the
present value of either all future annuity payments or future guaranteed annuity
payments. If a withdrawal is made within 5 years of the Issue Date, the AIR or
interest rate used to determine the annuity payments is increased by one of the
following adjustments:
15 or more years of annuity payments being valued -- 1.00%
10-14 years of annuity payments being valued -- 1.50%
Less than 10 years of annuity payments being valued -- 2.00%
The adjustment to the AIR or interest rate used to determine the present value
results in lower future annuity payments, and may be viewed as a charge under
the Contract. The Withdrawal Adjustment Charge does not apply if a withdrawal is
made in connection with the death of an Annuitant or if a withdrawal is made 5
or more years after the Issue Date.
For each Payment Withdrawal, the number of years of annuity payments being
valued depends upon the life expectancy of the Annuitant at the time of the
withdrawal. The life expectancy will be determined by a mortality table that
will be equal to the mortality table used at the time of annuitization to
determine the annuity payments (currently the Annuity 2000 Mortality Table with
male, female, or unisex rates, as appropriate).
For more information see "H. Withdrawals," under DESCRIPTION OF THE CONTRACT.
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FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the federal income tax consequences of
investing in this Contract. It is based upon the Company's understanding of
current U.S. federal tax laws and does not address any state or local tax
issues. THE DISCUSSION IS NOT INTENDED TO BE COMPLETE, NOR IS IT INTENDED AS TAX
ADVICE TO ANY INDIVIDUAL. YOU SHOULD CONSULT YOUR TAX ADVISOR ABOUT YOUR OWN
CIRCUMSTANCES, INCLUDING ANY POSSIBLE APPLICATION OF SPECIAL RULES NOT DISCUSSED
HERE.
The Company intends to assess 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.
A. ANNUITY CONTRACTS IN GENERAL
Annuity contracts are a means of setting aside money for future needs and for
providing a series of periodic payments for life or a fixed number of years.
Congress has provided special rules in the Internal Revenue Code ("Code") for
how you will be taxed on these periodic payments. There are also special
rules for withdrawals from an annuity that are not in the form of periodic
payments. The rules may apply differently to Qualified Contracts (a retirement
plan which meets the requirements of Code Sections 401, 403, 408 or 408A) and to
Non-Qualified Contracts.
As the Contract Owner, you may be taxed when a distribution occurs, either as an
annuity payment or as a withdrawal.
B. TAX ON ANNUITY PAYMENTS
When amounts are received as annuity payments, a portion of each annuity payment
is treated as a partial return of your single purchase payment and will not be
taxed. The remaining portion of the annuity payment will be treated as ordinary
income. How the annuity payment is divided between taxable and non-taxable
portions depends upon the period over which the annuity payments are expected to
be made. Annuity payments received after you have received all of your single
purchase payment are fully includible in income.
The Code imposes a penalty tax of 10% of the amount includible in income upon
certain distributions from annuity contracts occurring before the owner reaches
age 59 1/2. One of the exceptions from this penalty applies to amounts received
as annuity payments under an immediate annuity. To qualify as an immediate
annuity, a contract must, among other things, provide for a series of
substantially equal periodic payments during the annuity period, and must have
an annuity starting date (that is, the Annuity Income Date) that is no later
than one year from the contract's issue date. We believe that the Contract
should be treated as an immediate annuity, so there should be no penalty
applicable to amounts paid as annuity payments, regardless of the age of the
Contract Owner.
C. TAX ON WITHDRAWALS
WITHDRAWALS BEFORE THE ANNUITY INCOME DATE. When you make a withdrawal, the
amount you receive will not be divided into taxable and non-taxable portions in
the same way as an annuity payment. Withdrawals will be includible to the extent
of the earnings in your Contract. These distributions may also be subject to a
penalty tax equal to 10% of the amount that is includible in income. Some
distributions are exempt from the 10% penalty tax, including: (1) distributions
paid on or after you reach age 59 1/2; (2) distributions paid on or after your
death; and (3) distributions paid if you become disabled (as defined in the
Code). All Non-
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Qualified contracts issued by the Company to you during the same calendar year
will be aggregated to determine the taxable amount of any withdrawal.
WITHDRAWALS AFTER THE ANNUITY INCOME DATE. The Code does not specifically
address refunds or withdrawals from immediate annuity contracts. The Internal
Revenue Service ("IRS") has issued one private letter ruling concluding that the
right to make these withdrawals does not prevent an annuity contract from
qualifying as an immediate annuity. However, the ruling does not clearly state
the effect of an actual withdrawal on the tax treatment of annuity payments made
before and after the withdrawal. If, as a result of a withdrawal, distributions
from a Contract after the annuity starting date were not substantially equal,
there is a risk that the Contract could fail to qualify as an immediate annuity.
In that case, the portion includible in income of each annuity payment received
prior to your attaining age 59 1/2 would be subject to a 10% penalty tax (unless
another exception to the penalty tax is applied). While we currently believe
that a withdrawal will not adversely affect the favorable tax treatment of
annuity payments received before or after the withdrawal and we intend to
perform our tax reporting functions accordingly, there can be no assurance that
the IRS will not take a contrary position. You should obtain competent tax
advice prior to making a withdrawal from your Contract.
It is possible that the IRS will take the view that when withdrawals are taken
after the Annuity Income Date, all amounts received by the taxpayer are taxable
at ordinary income rates as amounts "not received as an annuity." In addition,
such amounts may be taxable to the recipient without regard to the Owner's
investment in the Contract or any investment gain that might be present in the
current annuity value.
For example, assume that a Contract Owner with a Contract Value of $100,000 of
which $90,000 is comprised of investment in the Contract and $10,000 is
investment gain, makes a withdrawal of $20,000 after the Annuity Income Date.
Under this view, the Contract Owner would pay income taxes on the entire $20,000
amount in that tax year. For some taxpayers, additional tax penalties may also
apply.
These distributions may also be subject to a penalty tax equal to 10% of the
amount that is includible in income. Some distributions are exempt from the 10%
penalty tax, including: (1) distributions paid on or after you reach age 59 1/2;
(2) distributions paid on or after your death; and (3) distributions paid if you
become disabled (as defined in the Code).
OWNERS OF QUALIFIED AND NON-QUALIFIED CONTRACTS SHOULD CONSIDER CAREFULLY THE
TAX IMPLICATIONS OF ANY WITHDRAWAL REQUESTS AND THEIR NEED FOR CONTRACT FUNDS
PRIOR TO THE EXERCISE OF THE WITHDRAWAL RIGHT. CONTRACT OWNERS SHOULD ALSO
CONTACT THEIR TAX ADVISORS PRIOR TO MAKING ANY WITHDRAWALS.
D. EXCHANGES
You may exchange another annuity contract to acquire a Contract. For tax
purposes, the contract Issue Date will be the purchase date of the annuity
contract you exchange. Accordingly, in order for your Contract to qualify as an
immediate annuity, your Annuity Income Date must be no later than one year after
the purchase date of the contract you are exchanging.
If you exchange your Contract in exchange for another annuity contract with the
same Annuitant and Owner, the exchange will generally be treated as a tax-free
exchange. An exchange for a contract with a different Annuitant or Owner would
generally be treated as a taxable exchange.
E. TAX WITHHOLDING
The Company is required to withhold taxes from any payment made from
Non-Qualified and Qualified Contracts, including IRAs, unless you direct
otherwise. You may not direct the Company to refrain from withholding taxes on
certain distributions from a Qualified Contract that is part of a retirement
plan under
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Code Section 401 or 403. In addition, the Company is required to report
distributions from both Qualified and Non-Qualified Contracts to the IRS.
F. DIVERSIFICATION AND CONTROL OF UNDERLYING ASSETS
The Code provides that the underlying investments for a variable annuity must
satisfy certain diversification requirements in order for the contract to be
treated as an annuity contract. The Underlying Funds have committed to us that
they will comply with these requirements.
In addition, Treasury regulations provide that a contract may not be treated as
an annuity contract for tax purposes if the contract owner has control over the
assets underlying the contract. The IRS has not yet issued guidance on whether
the degree of control you exercise over the underlying investments could cause
you to be considered the owner of the Fund shares. If you, rather than the
Company, were considered the owner of the Fund shares, your Contract would not
be treated as an annuity. We believe that we will be the owner of the Fund
shares for tax purposes; however, future IRS guidance may affect this conclusion
and may have retroactive effect. This may affect whether the Underlying Funds
will be able to continue to operate as described in the Funds' prospectus.
Moreover, we reserve the right, but have no obligation, to modify the Contracts
as we deem necessary or appropriate to ensure that the Contracts continue to
qualify as annuities for tax purposes.
STATEMENTS AND REPORTS
You are sent a report semi-annually which provides certain financial information
about the Underlying Funds. At least annually, but possibly as frequent as
quarterly, we will furnish a statement to you containing information about your
Contract, including information as required by applicable law, rules and
regulations. We will also send a confirmation statement to you each time a
transaction is made. (Certain transactions made under recurring payment plans
such as Automatic Account Rebalancing may in the future be confirmed quarterly
rather than by immediate confirmations.) You should review the information in
all statements carefully. All errors or corrections must be reported to us
immediately to assure proper crediting to the Contract. We will assume that all
transactions are accurately reported on confirmation statements and
quarterly/annual statements unless you notify the Principal Office in writing
within 30 days after receipt of the statement.
LOANS
Loans will not be permitted under this contract.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve 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 our 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 or other investment medium for the Underlying Fund
shares held by a Sub-Account, in the event that Underlying Fund shares are
unavailable for investment, or if we determine 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 you in accordance with the 1940 Act.
We also reserve 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
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specified investment objective. Subject to applicable law and any required SEC
approval, we may, in our 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 which we will determine.
Shares of the Underlying Funds also are issued to the separate accounts of the
Company and our 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 we nor any of the underlying
investment companies currently foresee any such disadvantages to either variable
life owners or variable annuity owners, we 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, we will bear the attendant
expenses.
If any of these substitutions or changes is made, we may endorse the Contracts
to reflect the substitution or change, and will notify you of all such changes.
If we deem 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 our other separate accounts.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
We reserve 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 you the benefit of, 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. Any such changes will apply uniformly to all
Contracts that are affected. You will be given written notice of such changes.
VOTING RIGHTS
We will vote Underlying Fund shares held by each Sub-Account in accordance with
instructions received from you. 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 us. Shares for
which no timely instructions are received will be voted in proportion to the
instructions that are received. We also will vote shares in a Sub-Account that
we own and which are not attributable to the 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 we
determine that we are permitted to vote shares in our own right, whether or not
such shares are attributable to the Contract, we reserve the right to do so.
The number of votes that you may cast will be determined by us as of the record
date established by the Underlying Fund. The number of Underlying Fund shares
will be determined by dividing the reserve held in each Sub-Account for the
Variable Annuity by the net asset value of one Underlying Fund share.
Ordinarily, voting interest in the Underlying Fund will decrease as the reserve
for the Variable Annuity is depleted.
DISTRIBUTION
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, an
indirect wholly owned subsidiary of First Allmerica, acts as the principal
underwriter and general distributor of the Contract. Allmerica
Investments, Inc. is a registered broker-dealer under the Securities Exchange
Act of 1934 and a member of the National Association of Securities
Dealers, Inc. ("NASD"). First Union Securities, Inc. acts as the distributor
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and wholesaler of the Contract. First Union Securities, Inc. is a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD").
We pay commissions, not to exceed 7.00% of payments, to broker-dealers who sell
the Contract. Additional compensation not to exceed 1.50% of the Single Purchase
Payment may be available when the Contract is sold in connection with certain
estate planning programs. To the extent permitted by NASD rules, overrides and
promotional incentives or payments also may be provided to such broker-dealers
based on sales volumes, the assumption of wholesaling functions, or other
sales-related criteria. Additional payments may be made for other services not
directly related to the sale of the Contract, including the recruitment and
training of personnel, production of promotional literature, and similar
services.
The Company, Allmerica Investments, Inc, and First Union Securities, Inc. have
sales agreements with various broker-dealers and banks under which the Contract
will be sold by registered representatives of the broker-dealers or employees of
the banks. These registered representatives and employees must also be licensed
by their respective state insurance authorities for the sale of variable annuity
contracts. The broker-dealers are ordinarily required to be registered with the
SEC and must be members of the NASD.
We intend to recoup commissions and other sales expenses through anticipated
profits from our General Account, which may include amounts derived from
mortality and expense risk charges. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to you
or to the Variable Account. You may direct any inquiries to your financial
representative or to Annuity Client Services, Allmerica Financial Life Insurance
and Annuity Company, 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-723-6550.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
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.
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APPENDIX A
EXAMPLES OF PRESENT VALUE WITHDRAWALS AND PAYMENT WITHDRAWALS
Assume in the examples below that a 64 year old male purchases a contract and
selects a variable annuity payout option of Single Life Annuity with Payments
Guaranteed for 10 Years, annuity payments begin in 12 months, an Assumed
Investment Return ("AIR") of 3%, and an annual Change Frequency. Assume that the
net single payment purchases 1,370 Annuity Units. The following examples assume
the Annuity Unit Value is 1.000000 on the date payments begin and a net return
of 8% (gross return of 9.45%).
PRESENT VALUE WITHDRAWALS
EXAMPLE 1. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the fourth contract year (the third year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment prior to withdrawal = $1,506.24
Rate used in Calculation of Present Value = 5% (3% AIR plus 2% Withdrawal
Adjustment Charge)
Present Value of Future Guaranteed Annuity Payments = $119,961.92
Maximum Present Value Withdrawal Amount = $89,971.44 ($119,961.92 X 75%)
Annuity Units after withdrawal = 342.50 (1,370 X (1 -
(89,971.44/119,961.92)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment after withdrawal = $376.56
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Calculation of Present Value is increased by a Withdrawal Adjustment
Charge. Since less than 10 years of guaranteed annuity payments are being
valued, the Withdrawal Adjustment Charge is 2%. Because this is a Present Value
Withdrawal, the number of Annuity Units will increase to 1,370 after the end of
the 10-year period during which the Company guaranteed to make payments.
EXAMPLE 2. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Present Value Withdrawal available at the beginning of
the ninth contract year (eighth year of the Annuity Payout phase).
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Payment prior to withdrawal = $1,909.09
Rate used in Calculation of Present Value = 3% (3% AIR)
Present Value of Future Guaranteed Annuity Payments = $65,849.08
Maximum Present Value Withdrawal Amount = $49,386.81 ($65,849.08 X 75%)
Annuity Units after withdrawal = 342.50 (1,370 X (1 -
(49,386.81/65,849.08)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Payment after withdrawal = $477.27
Because the withdrawal is being made more than 5 years after the Issue Date, the
rate used in the Calculation of Present Value is not increased by a Withdrawal
Adjustment Charge. Because this is a Present Value Withdrawal, the number of
Annuity Units will increase to 1,370 after the end of the 10-year period during
which the Company guaranteed to make payments.
A-1
<PAGE>
PAYMENT WITHDRAWALS
EXAMPLE 3. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the fourth contract year (the third year of the
Annuity Payout phase). At that time, the Annuitant's life expectancy is greater
than 15 years.
Last Monthly Annuity Payment = $1,436.50
Withdrawal Amount = $14,365.00 (10 X 1,436.50)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment prior to withdrawal = $1,506.24
Rate used in Calculation of Present Value = 4% (3% AIR plus 1% Withdrawal
Adjustment Charge)
Present Value of Future Annuity Payments = $234,482.77
Annuity Units after withdrawal = 1,286.07 (1,370 X (1 -
(14,365.00/234,482.77)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment after withdrawal = $1,413.96
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Calculation of Present Value is increased by a Withdrawal Adjustment
Charge. Since there are more than 15 years of annuity payments being valued (the
Annuitant's life expectancy is more than 15 years), the Withdrawal Adjustment
Charge is 1%. Because this is a Payment Withdrawal, the number of Annuity Units
will not increase after the end of the 10-year period during which the Company
guaranteed to make payments.
EXAMPLE 4. Assume that the Owner has taken no previous withdrawals and would
like to take the maximum Payment Withdrawal of 10 monthly annuity benefit
payments at the beginning of the ninth contract year (eighth year of the Annuity
Payout phase).
Last Monthly Annuity Payment = $1,820.71
Withdrawal Amount = $18,207.10 (10 X 1,820.71)
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Payment prior to withdrawal = $1,909.09
Rate used in Calculation of Present Value = 3% (3% AIR)
Present Value of Future Annuity Payments = $268,826.18
Annuity Units after withdrawal = 1,272.71 (1,370 X (1 -
(18,207.10/268,826.18)))
Annuity Unit Value on the date of withdrawal = 1.39350
Monthly Annuity Payment after withdrawal = $1,779.80
Because the withdrawal is being made more than 5 years after the Issue Date, the
rate used in the Calculation of Present Value is not increased by a Withdrawal
Adjustment Charge. Because this is a Payment Withdrawal, the number of Annuity
Units will not increase after the end of the 10-year period during which the
Company guaranteed to make payments.
PRESENT VALUE WITHDRAWAL VERSUS PAYMENT WITHDRAWAL
EXAMPLE 5. Assume that the Owner has taken no previous withdrawals and would
like to take a $10,000 withdrawal at the beginning of the fourth contract year
(the third year of the Annuity Payout phase). At that time, the Annuitant's life
expectancy is greater than 15 years. The following examples show the impact of
taking the withdrawal under the Present Value Withdrawal Option and the Payment
Withdrawal Option.
A-2
<PAGE>
PRESENT VALUE WITHDRAWAL
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment prior to withdrawal = $1,506.24
Rate used in Calculation of Present Value = 5% (3% AIR plus 2% Withdrawal
Adjustment Charge)
Present Value of future Guaranteed Annuity Payments = $119,961.92
Withdrawal = $10,000
Annuity Units after withdrawal = 1,255.80 (1,370 X (1 -
(10,000/119,961.92)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment after withdrawal = $1,380.67
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Calculation of Present Value is increased by a Withdrawal Adjustment
Charge. Since less than 10 years of guaranteed annuity payments are being
valued, the Withdrawal Adjustment Charge is 2%. Because this is a Present Value
Withdrawal, the number of Annuity Units will increase to 1,370 at the end of the
10-year period during which the Company guaranteed to make payments.
PAYMENT WITHDRAWAL
Annuity Units prior to withdrawal = 1,370
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment prior to withdrawal = $1,506.24
Rate used in Calculation of Present Value = 4% (3% AIR plus 1%
WithdrawalAdjustment Charge)
Present Value of future Annuity Payments = $234,482.77
Withdrawal = $10,000
Annuity Units after withdrawal = 1,311.57 (1,370 X (1 -
(10,000/$234,482.77)))
Annuity Unit Value on the date of withdrawal = 1.09944
Monthly Annuity Payment after withdrawal = $1,442.00
Because the withdrawal is being made within 5 years of the Issue Date, the rate
used in the Calculation of Present Value is increased by a Withdrawal Adjustment
Charge. Since there are more than 15 years of annuity payments being valued (the
Annuitant's life expectancy is more than 15 years), the Withdrawal Adjustment
Charge is 1%. Because this is a Payment Withdrawal, the number of Annuity Units
will not increase at the end of the 10-year period during which the Company
guaranteed to make payments.
A-3
<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, FIDELITY VARIABLE
INSURANCE PRODUCTS FUND, FIDELITY VARIABLE INSURANCE PRODUCTS FUND II,
T. ROWE PRICE INTERNATIONAL SERIES, INC., AND
DELAWARE GROUP PREMIUM FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE ALLMERICA IMMEDIATE ADVANTAGE VARIABLE ANNUITY
PROSPECTUS OF SEPARATE ACCOUNT VA-K DATED MAY 1, 2000 ("THE PROSPECTUS"). THE
PROSPECTUS MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES, FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS
01653, TELEPHONE 1-800-723-6550.
DATED MAY 1, 2000
FAFLIC Allmerica Immediate Advantage
1
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY...............................................2
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") authorized
by vote of its Board of Directors on August 20, 1991. The Company, organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1999, the Company and its subsidiaries
had over $25 billion in combined assets and over $43 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, 20 Sub-Accounts of the Variable Account are available under the
Allmerica Immediate Advantage Variable Annuity contract (the "Contract"). Each
Sub-Account invests in a corresponding investment portfolio of Allmerica
Investment Trust (the "Trust"), Fidelity Variable Insurance Products Fund
("Fidelity VIP"), Fidelity Variable Insurance Products Fund II ("Fidelity VIP
II"), T. Rowe Price International Series, Inc. ("T. Rowe Price") or Delaware
Group Premium Fund ("DGPF"). The Trust is managed by Allmerica Financial
Investment Management Services, Inc. Fidelity VIP and Fidelity VIP II are
managed by Fidelity Management & 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 investment companies. Thirteen different funds of the
Trust are available under the Contract: the Select Emerging Markets Fund, Core
Equity Fund (formerly the Growth Fund), Select Strategic Growth Fund, Select
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
2
<PAGE>
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, 1999
and 1998 and for each of the three years in the period ended December 31,
1999, and the financial statements of Separate Account VA-K of the Company as
of December 31, 1999 and for the periods indicated, included in this
Statement of Additional Information constituting part of this Registration
Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica Investments, the Company and the Variable Account. Allmerica
Investments distributes the Contract on a best-efforts basis. Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts 01653, was
organized in 1969 as a wholly owned subsidiary of 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.
3
<PAGE>
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 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.
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.
The aggregate amounts of commissions paid to Allmerica Investments for sales of
all contracts funded by Separate Account VA-K (including contracts not described
in the Prospectus) for the years 1997, 1998 and 1999 were $3,098,375.76,
$3,517,207.62 and $3,451,291.08.
No commissions were retained by Allmerica Investments for sales of all contracts
funded by Separate Account VA-K (including contracts not described in the
Prospectus) for the years 1997, 1998 and 1999.
ANNUITY PAYMENTS
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE.
The determination of the Annuity Unit Value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume an Owner has 40,000
Accumulation Units in a Variable Account, and that the value of an Accumulation
Unit on the Valuation Date used to determine the amount of the first variable
annuity benefit payment is $1.120000. Therefore, the Accumulated Value of the
Contract is $44,800 (40,000 x $1.120000). Assume also that the Owner elects an
option for which the first monthly payment is $6.57 per $1,000 of Accumulated
Value applied. Assuming no premium tax, the first monthly payment would be
$44.80 ($44,800 divided by $1,000) multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit Value for the Assumed Investment Return of
3.0% per annum for the Valuation Date as of which the first payment was
calculated was $1.100000. 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 1.000109. Multiplying this factor by .999919 (the
one-day adjustment factor for the Assumed Investment Return of 3.0% per annum)
produces a factor of 1.000109. This then is multiplied by the Annuity Unit Value
on the immediately preceding Valuation Date (assumed here to be $1.105000). The
result is an Annuity Unit Value of $1.105120 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 $1.105120,
which produces a current monthly payment of $295.71.
EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts, described
below, to exchange their contracts at net asset value for the variable annuity
contract described in the Prospectus, which is issued on Form No. A3029-99 or
state variations thereof ("new Contract"). The Company reserves the right to
suspend this exchange offer at any time.
4
<PAGE>
This offer applies to the exchange of the Company's Flexible Payment Deferred
Variable Annuity contract issued on Forms A3025-96, 3021-93 and 3018-91. These
contracts are referred to collectively as "Exchanged Contracts". To effect a
change, the Company should receive (1) a completed application for the new
Contract, (2) the contract being exchanged, and (3) a signed Letter of
Awareness.
There are inherent differences between a Flexible Payment Deferred Variable
Annuity and an Immediate Variable Annuity. You should consult your financial
planner to discuss these differences.
No surrender charge will be applicable to the Exchanged Contract as a result of
the Exchange.
Persons who, under the terms of this exchange offer, exchange their contract for
the new Contract and subsequently cancel the new Contract within the time
permitted, will have the Contract Value of the new Contract applied to reinstate
the Exchanged Contract. The refunded amount will be allocated initially among
the Fixed Account and Sub-Accounts of the reinstated contract in the same
proportion that the values of such allocation bore on the date the exchange of
the Contract for the new Contract took place. For purposes of calculating any
surrender charge under the reinstated Contract the reinstated Contract will be
deemed to have been issued as if there had been no exchange.
The Table below illustrates the differences between the new Contract and the
Exchanged Contract after the Annuity Income Date. There may be additional
differences important for a person to consider prior to making an exchange. The
Prospectuses for the new Contract and the Exchanged Contract should be reviewed
carefully before the exchange request is submitted to the Company.
5
<PAGE>
<TABLE>
<CAPTION>
ALLMERICA IMMEDIATE ALLMERICA ADVANTAGE EXECANNUITY PLUS '93 EXECANNUITY '91
ADVANTAGE (A3029-99) (A3025-96) (3021-93) (3018-91)
<S> <C> <C> <C> <C>
What are the Rates are currently The first payment is The first payment is The first payment is
Annuitization Rates only - no guarantee based on the greater based on the greater based on the greater
that apply to variable rates. of the rates of the rates of the rates
annuity payments? guaranteed in the guaranteed in the guaranteed in the
contract or the contract or the contract or the
current rates. current rates current rates.
What is the Assumed The owner has a The Assumed The Assumed The Assumed
Investment Return (AIR)? choice of 3%, 5% or Investment Return is Investment Return is Investment Return is
7% * 3.5% 3.5% 3.5%
If my contract has The surviving owner After the Annuity After the Annuity After the Annuity
joint owners, who is is always the Income Date, the Income Date, the Income Date, the
the primary beneficiary primary beneficiary. beneficiary is as beneficiary is as beneficiary is as
on the death of the selected by the selected by the selected by the
first owner? Annuity (who at that Annuitant (who at Annuitant (who at
point is also Owner). that point is also that point is also
the Owner). the Owner).
Can I take withdrawals? Yes No No No
Will a surrender charge No Yes, for any Yes, for any Yes, for any
be assessed when I commutable period commutable period commutable period
annuitize? certain options and certain options and certain options and
any period certain any period certain any period certain
option under 10 years. option under 10 option under 10
years. years.
Is a life with cash Yes No No No
back annuity benefit
option available?
Is a unit refund No Yes No No
annuity benefit option
available?
How many investment 20 4 4 4
choices (Sub-Accounts)
do I have?
Can I make transfers? Yes No No No
Is Automatic Account Yes No No No
Rebalancing (AAR)
available?
Are commutable annuity Yes. For the Commutable period Commutable period Commutable period
options available? Payment for a certain options are certain options are certain options are
Certain Number of available. available. available.
Years Option.
Limited Commutation
is also available
for certain other
options. (See "E.
Description of
Annuity Benefit
Options" under
DESCRIPTION OF THE
CONTRACT.)
6
<PAGE>
<CAPTION>
ALLMERICA IMMEDIATE ALLMERICA ADVANTAGE EXECANNUITY PLUS '93 EXECANNUITY '91
ADVANTAGE (A3029-99) (A3025-96) (3021-93) (3018-91)
<S> <C> <C> <C> <C>
Are liquidity options For all benefit Commutable period Commutable period Commutable period
available? options: 10 times certain options are certain options are certain options are
the previous annuity available. available. available.
payment. For Life
with Payment for A
Certain Number of
Years and Life with
Cash Back Options:
75% of the present
value of the
remaining guaranteed
annuity payments.
For Payments for
Certain Number of
Years Option, 100%
is available. For
either liquidity
option, withdrawals
during the first
five years there is
an adjustment to the
present value
calculation
Can I choose to have my Yes (see "D. No No No
variable annuity Choosing an Income
payments level for a Option" under
certain period of time? DESCRIPTION OF THE
CONTRACT.)
Can I choose when I Yes (see "D. No No No
would like the value of Choosing an Income
my variable annuity Option" under
payments to change for DESCRIPTION OF THE
the first time? CONTRACT.)
What period certain 5-30 years 1-30 years 1-30 years 1-30 years
annuity options are
available?
Can I reverse my Yes. For 90 days No No No
decision to annuitize? after you have
received your
contract you reverse
your decision to
annuitize. See "B.
Right to Cancel"
under DESCRIPTION OF
THE CONTRACT.)
Does the annuitant No Yes Yes Yes
become the owner of the
contract on the Annuity
Date?
What is the minimum $100 (see "D. $50 $50 $50
annuity payment? Choosing an Income
Option" under
DESCRIPTION OF THE
CONTRACT.)
Who will receive the The owner. The annuitant. The annuitant. The annuitant.
annuity payments?
How frequently will I Monthly Monthly, Quarterly, Monthly, Quarterly, Monthly, Quarterly,
receive annuity Semi-annually, Semi-annually, Semi-annually,
payments? Annually Annually Annually
</TABLE>
*These rates may not be available in all states.
7
<PAGE>
PERFORMANCE INFORMATION
In order to help people understand how investment performance can affect money
invested in the Sub-Accounts, the Company may advertise "total return" and
"average annual total return" performance information based on (1) the periods
that the Sub-Accounts have been in existence and (2) the periods that the
Underlying Funds have been in existence. Performance results in Tables 1 and 2
are calculated with all charges assumed to be those applicable to the Contract,
the Sub-Accounts and the Underlying Funds. Both the total return and yield
figures are based on historical earnings and are not intended to indicate future
performance. Because Table 1 presents performance of the Sub-Accounts from
inception through December 31, 1999 and the Sub-Accounts were not created until
after December 31, 1999, no performance numbers are currently shown in this
Table. The discussion below reflects the manner in which performance will be
calculated in the future for Table 1.
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage. The "average annual total return" represents the average annual
percentage change in the value of an investment in the Sub-Account over a given
period of time. It represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Quotations of average annual total return as shown in Tables 1 and 2 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% and the Underlying Fund charges which would be assessed if the investment
were completely withdrawn at the end of the specified period.
The performance shown in Table 2 is calculated in exactly the same manner as
that in Table 1; 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.
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, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other
8
<PAGE>
criteria; or (3) the Consumer Price Index (a measure for inflation) to assess
the real rate of return from an investment in the Sub-Account. Unmanaged indices
may assume the reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses. In addition, relevant
broad-based indices and performance from independent sources may be used to
illustrate the performance of certain contract features.
At times, we 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 our 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.
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.
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 specific 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.
9
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
10 YEARS OR
SINCE
SUB-ACCOUNT FOR YEAR INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE ENDED 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund N/A N/A N/A N/A
Select International Equity Fund N/A N/A N/A N/A
DGPF International Equity Series N/A N/A N/A N/A
Fidelity VIP Overseas Portfolio N/A N/A N/A N/A
T. Rowe Price International Stock Portfolio N/A N/A N/A N/A
Select Aggressive Growth Fund N/A N/A N/A N/A
Select Capital Appreciation Fund N/A N/A N/A N/A
Select Value Opportunity Fund N/A N/A N/A N/A
Select Growth Fund N/A N/A N/A N/A
Select Strategic Growth Fund N/A N/A N/A N/A
Core Equity Fund N/A N/A N/A N/A
Fidelity VIP Growth Portfolio N/A N/A N/A N/A
Equity Index Fund N/A N/A N/A N/A
Select Growth and Income Fund N/A N/A N/A N/A
Fidelity VIP Equity-Income Portfolio N/A N/A N/A N/A
Fidelity VIP II Asset Manager Portfolio N/A N/A N/A N/A
Fidelity VIP High Income Portfolio N/A N/A N/A N/A
Select Investment Grade Income Fund N/A N/A N/A N/A
Government Bond Fund N/A N/A N/A N/A
Money Market Fund N/A N/A N/A N/A
</TABLE>
10
<PAGE>
TABLE 2
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF UNDERLYING FUND
<TABLE>
<CAPTION>
10 YEARS OR
SINCE
UNDERLYING FUND FOR YEAR INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE ENDED 12/31/99 5 YEARS IF LESS
- ---------------------------------------- -------------- -------------- ------- -------
<S> <C> <C> <C> <C>
Select Emerging Markets Fund 2/20/98 63.68% N/A 13.80%
Select International Equity Fund 5/2/94 30.09% 17.09% 14.05%
DGPF International Equity Series 10/29/92 14.33% 11.85% 10.39%
Fidelity VIP Overseas Portfolio 1/28/87 40.87% 15.92% 10.05%
T. Rowe Price International Stock Portfolio 3/31/94 31.68% 13.80% 12.05%
Select Aggressive Growth Fund 8/21/92 36.95% 21.81% 19.20%
Select Capital Appreciation Fund 4/28/95 23.82% N/A 19.90%
Select Value Opportunity Fund 4/30/93 -5.88% 12.13% 10.20%
Select Growth Fund 8/21/92 28.20% 27.47% 19.06%
Select Strategic Growth Fund 2/20/98 14.62% N/A 5.57%
Core Equity Fund 4/29/85 27.73% 23.70% 15.87%
Fidelity VIP Growth Portfolio 10/9/86 35.74% 28.14% 18.46%
Equity Index Fund 9/28/90 18.92% 26.21% 19.17%
Select Growth and Income Fund 8/21/92 16.96% 20.19% 14.47%
Fidelity VIP Equity-Income Portfolio 10/9/86 5.02% 17.15% 13.17%
Fidelity VIP II Asset Manager Portfolio 9/6/89 9.72% 14.20% 11.75%
Fidelity VIP High Income Portfolio 9/19/85 6.82% 9.34% 10.96%
Select Investment Grade Income Fund 4/29/85 -2.30% 6.04% 6.35%
Government Bond Fund 8/26/91 -1.01% 4.91% 4.85%
Money Market Fund 4/29/85 3.89% 4.17% 3.94%
</TABLE>
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 even-day period ended December 31, 1999:
Yield N/A
Effective Yield N/A
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
11
<PAGE>
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company and for its Separate Account VA-K.
12
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of First Allmerica Financial Life Insurance Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<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) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 954.5 $1,969.5 $1,980.4
Universal life and investment product
policy fees.............................. 359.3 296.6 237.3
Net investment income...................... 503.1 593.9 619.5
Net realized investment gains.............. 100.3 60.9 76.3
Other income............................... 107.3 100.0 81.5
-------- -------- --------
Total revenues......................... 2,024.5 3,020.9 2,995.0
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 1,056.3 1,803.0 1,763.9
Policy acquisition expenses................ 240.9 449.6 421.8
Sales practice litigation.................. -- 31.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Restructuring costs........................ -- 9.0 --
Other operating expenses................... 346.3 419.7 404.0
-------- -------- --------
Total benefits, losses and expenses.... 1,643.5 2,712.3 2,643.6
-------- -------- --------
Income from continuing operations before
federal income taxes.......................... 381.0 308.6 351.4
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 88.7 74.6 74.4
Deferred................................... 4.3 (15.4) 14.2
-------- -------- --------
Total federal income tax expense....... 93.0 59.2 88.6
-------- -------- --------
Income from continuing operations before
minority interest............................. 288.0 249.4 262.8
Minority interest.......................... (39.9) (55.0) (79.4)
-------- -------- --------
Income from continuing operations.............. 248.1 194.4 183.4
(Loss) income from operations of discontinued
business (less applicable income taxes
(benefit) of $(10.1), $(7.0) and $8.9 for the
years ended December 31, 1999, 1998 and 1997,
respectively) (17.2) (13.5) 16.6
Loss on disposal of group life and health
business, including provision of $72.2 for
operating losses during phase-out period for
the year ended December 31, 1999 (less
applicable income tax benefit of $16.4) (30.5) -- --
-------- -------- --------
Net income..................................... $ 200.4 $ 180.9 $ 200.0
======== ======== ========
</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, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$3,721.6 and $7,520.8)............................ $ 3,660.7 $ 7,683.9
Equity securities at fair value (cost of $27.9 and
$253.1)........................................... 51.4 397.1
Mortgage loans...................................... 521.2 562.3
Policy loans........................................ 170.5 154.3
Real estate and other long-term investments......... 177.0 163.1
--------- ---------
Total investments............................... 4,580.8 8,960.7
--------- ---------
Cash and cash equivalents............................. 279.3 504.0
Accrued investment income............................. 73.3 141.0
Deferred policy acquisition costs..................... 1,219.5 1,161.2
Reinsurance receivable on unpaid losses, benefits and
unearned premiums................................... 480.3 1,136.4
Deferred federal income taxes......................... 18.1 19.4
Premiums, accounts and notes receivable............... 81.0 510.5
Other assets.......................................... 199.6 530.6
Closed Block assets................................... 772.3 803.1
Separate account assets............................... 17,629.6 13,697.7
--------- ---------
Total assets.................................... $25,333.8 $27,464.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,825.0 $ 2,802.2
Outstanding claims, losses and loss adjustment
expenses.......................................... 218.8 2,815.9
Unearned premiums................................... 6.6 843.2
Contractholder deposit funds and other policy
liabilities....................................... 2,025.5 2,637.0
--------- ---------
Total policy liabilities and accruals........... 5,075.9 9,098.3
--------- ---------
Expenses and taxes payable............................ 512.0 681.9
Reinsurance premiums payable.......................... 17.9 50.2
Trust instruments supported by funding obligations.... 50.6 --
Short-term debt....................................... -- 221.3
Closed Block liabilities.............................. 842.1 872.0
Separate account liabilities.......................... 17,628.9 13,691.5
--------- ---------
Total liabilities............................... 24,127.4 24,615.2
--------- ---------
Minority interest..................................... -- 532.9
Commitments and contingencies (Notes 16 and 21)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,001 shares issued and outstanding... 5.0 5.0
Additional paid-in capital............................ 569.0 444.0
Accumulated other comprehensive (loss) income......... (14.9) 169.2
Retained earnings..................................... 647.3 1,698.3
--------- ---------
Total shareholder's equity...................... 1,206.4 2,316.5
--------- ---------
Total liabilities and shareholder's equity...... $25,333.8 $27,464.6
========= =========
</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) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 444.0 453.7 392.4
Capital contribution from parent........... 125.0 -- 61.3
Loss on change of interest-Allmerica P&C... -- (9.7) --
-------- -------- --------
Balance at end of period................... 569.0 444.0 453.7
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 169.2 209.3 131.4
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities.......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes........................... 105.0 28.9 (59.8)
Minority interest........................ 31.8 13.4 (33.2)
-------- -------- --------
Distribution of subsidiaries (Note 3)...... (22.7) -- --
-------- -------- --------
(184.1) (40.1) 77.9
-------- -------- --------
Balance at end of period................... (14.9) 169.2 209.3
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,698.3 1,567.4 1,367.4
Net income................................. 200.4 180.9 200.0
Dividend to shareholder.................... -- (50.0) --
Distribution of subsidiaries (Note 3)...... (1,251.4) -- --
-------- -------- --------
Balance at end of period................... 647.3 1,698.3 1,567.4
-------- -------- --------
Total shareholder's equity............. $1,206.4 $2,316.5 $2,235.4
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- ------
<S> <C> <C> <C>
Net income.................................. $ 200.4 $ 180.9 $200.0
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes.......................... 105.0 28.9 (59.8)
Minority interest....................... 31.8 13.4 (33.2)
Distribution of subsidiaries (Note 3)... (22.7) -- --
------- ------- ------
Other comprehensive (loss) income... (184.1) (40.1) 77.9
------- ------- ------
Comprehensive (loss) income................. $ (16.3) $ 140.8 $277.9
======= ======= ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.4 $ 180.9 $ 200.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 39.9 55.0 79.4
Net realized gains.................. (100.9) (62.7) (77.8)
Net amortization and depreciation... 31.5 20.7 31.6
Deferred federal income taxes....... 20.7 (15.4) 14.2
Sales practice litigation expense... -- 31.0 --
Loss from exiting reinsurance
pools............................. -- 25.3 --
Payment related to exiting
reinsurance pools................. -- (30.3) --
Loss from cession of disability
income business................... -- -- 53.9
Payment related to cession of
disability income business........ -- -- (207.0)
Loss from disposal of group life and
health business................... 30.5 -- --
Change in deferred acquisition
costs............................. (181.6) (185.8) (189.7)
Change in premiums and notes
receivable, net of reinsurance
payable........................... (41.8) 56.7 (15.1)
Change in accrued investment
income............................ 8.3 0.8 7.1
Change in policy liabilities and
accruals, net..................... (15.6) 168.1 (134.9)
Change in reinsurance receivable.... (46.3) (115.4) 27.2
Change in expenses and taxes
payable........................... 79.4 (3.3) 49.4
Separate account activity, net...... 5.5 (48.5) --
Other, net.......................... 18.5 (63.8) 20.4
--------- --------- ---------
Net cash provided by (used in)
operating activities.......... 48.5 13.3 (141.3)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and
maturities of available-for-sale
fixed maturities.................. 2,801.0 1,715.2 2,892.9
Proceeds from disposals of equity
securities........................ 422.9 285.3 162.7
Proceeds from disposals of other
investments....................... 30.3 120.8 116.3
Proceeds from mortgages matured or
collected......................... 131.2 171.2 204.7
Purchase of available-for-sale fixed
maturities........................ (2,227.3) (2,374.5) (2,596.0)
Purchase of equity securities....... (78.9) (119.9) (67.0)
Purchase of other investments....... (140.6) (274.4) (175.0)
Capital expenditures................ (29.2) (22.3) (15.3)
Purchase of minority interest in
Citizens Corporation.............. -- (195.9) --
Distribution of subsidiaries........ (202.2) -- --
Other investing activities, net..... -- 26.7 1.3
--------- --------- ---------
Net cash provided by (used in)
investing activities.......... 707.2 (667.8) 524.6
--------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds...... 1,514.6 1,419.2 457.6
Withdrawals from contractholder
deposit funds..................... (2,037.5) (625.0) (647.1)
Change in trust agreements supported
by funding agreements............. 50.6 -- --
Change in short-term debt........... (180.9) 188.3 (5.4)
Change in long-term debt............ -- (2.6) (0.1)
Dividend paid to shareholder........ -- (50.0) (9.4)
Contribution from parent............ 36.0 -- 0.1
Subsidiary treasury stock purchased,
at cost........................... (350.0) (1.0) (140.0)
--------- --------- ---------
Net cash (used in) provided by
financing activities.......... (967.2) 928.9 (344.3)
--------- --------- ---------
Net change in cash and cash equivalents..... (211.5) 274.4 39.0
Net change in cash held in the Closed
Block...................................... (13.2) 15.7 (1.0)
Cash and cash equivalents, beginning of
period..................................... 504.0 213.9 175.9
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 279.3 $ 504.0 $ 213.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.1 $ 7.3 $ 3.6
Income taxes paid....................... $ 24.0 $ 135.3 $ 66.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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") is
organized as a stock life insurance company, and is a wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC").
Prior to July 1, 1999, the consolidated financial statements of FAFLIC included
the accounts of its wholly-owned life insurance subsidiary Allmerica Financial
Life Insurance and Annuity Company ("AFLIAC"), its non-insurance subsidiaries
(principally brokerage and investment advisory services), Allmerica Property and
Casualty Companies, Inc. ("Allmerica P&C") (an 85.0%-owned non-insurance holding
company), and various other non-insurance subsidiaries.
Effective July 1, 1999, AFC made certain changes to its corporate structure
(Note 3). These changes included the transfer of the Company's ownership of
Allmerica P&C and its subsidiaries, as well as several other non-insurance
subsidiaries from the Company to AFC. In exchange, AFC contributed capital to
the Company and agreed to maintain the Company's statutory surplus at specified
levels during the following 6 years. Comparability between current and prior
period financial statements and footnotes has been significantly impacted by the
Company's divestiture of these subsidiaries during 1999, as disclosed in Note 3.
The Closed Block (Note 1B) assets and liabilities at December 31, 1999 and 1998
are presented in the consolidated balance sheets as single line items. The
contribution from the Closed Block is included in the consolidated statements of
income in other income. Unless specifically stated, all disclosures contained
herein supporting the consolidated financial statements at December 31, 1999,
1998 and 1997, and the years then ended exclude the Closed Block related
amounts. All significant intercompany accounts and transactions have been
eliminated.
On or about December 3, 1998, the Company acquired all of the outstanding common
stock of Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary
of The Hanover Insurance Company ("Hanover"), a wholly-owned subsidiary of
Allmerica P&C) that it did not already own in exchange for cash of $195.9
million (Note 4). The acquisition has been recognized as a purchase. The
minority interest acquired totaled $158.5 million. A total of $40.8 million
representing the excess of the purchase price over the fair values of the net
assets acquired, net of deferred taxes, has been allocated to goodwill and is
being amortized over a 40-year period.
Prior to the July 1, 1999 changes in AFC's corporate structure, minority
interest relates to the Company's investment in Allmerica P&C and its only
significant subsidiary, Hanover. Hanover's wholly-owned subsidiary is Citizens
Corporation, the holding company for Citizens. Minority interest also includes
an amount related to the minority interest in Citizens Corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
The Company established and began operating a closed block ("the Closed Block")
for the benefit of the participating policies included therein, consisting of
certain individual life insurance participating policies,
F-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual deferred annuity contracts and supplementary contracts not involving
life contingencies which were in force as of FAFLIC's demutualization on
October 16, 1995; such policies constitute the "Closed Block Business". The
purpose of the Closed Block is to protect the policy dividend expectations of
such FAFLIC dividend paying policies and contracts. Unless the Commonwealth of
Massachusetts Insurance Commissioner ("the Insurance Commissioner") consents to
an earlier termination, the Closed Block will continue to be in effect until the
date none of the Closed Block policies are in force. FAFLIC allocated to the
Closed Block assets in an amount that is expected to produce cash flows which,
together with future revenues from the Closed Block Business, are reasonably
sufficient to support the Closed Block Business, including provision for payment
of policy benefits, certain future expenses and taxes and for continuation of
policyholder dividend scales payable in 1994 so long as the experience
underlying such dividend scales continues. The Company expects that the factors
underlying such experience will fluctuate in the future and policyholder
dividend scales for Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets as measured on a GAAP basis
represent the expected future post-tax income from the Closed Block which may be
recognized in income over the period the policies and contracts in the Closed
Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at the inception of the Closed
Block, the expected income would be recognized in income for that period.
Further, any excess of the actual income over the expected income would also be
recognized in income to the extent that the aggregate expected income for all
prior periods exceeded the aggregate actual income. Any remaining excess of
actual income over expected income would be accrued as a liability for
policyholder dividends in the Closed Block to be paid to the Closed Block
policyholders. This accrual for future dividends effectively limits the actual
Closed Block income recognized in income to the Closed Block income expected to
emerge from operation of the Closed Block as determined at inception.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), the Company is required to classify its investments into
one of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Debt securities and marketable equity 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 as 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.
F-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there were 2 properties remaining in the Company's real
estate portfolio, both of which are being actively marketed. These assets are
carried at the estimated fair value less costs of disposal. Depreciation is not
recorded on these assets while they are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other than temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, swap contracts and interest rate futures contracts. These
instruments involve credit risk and also may be subject to risk of loss due to
interest rate fluctuation. The Company evaluates and monitors each financial
instrument individually and, when appropriate, obtains collateral or other
security to minimize losses.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge the
foreign currency exchange risk associated with investment securities 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 associated with funding agreements
are accounted for using the fair value method, with changes in fair value
reported in other operating income consistent with the underlying hedged trust
obligation liability. Futures contracts used to hedge interest rate risk are
accounted for using the deferral method, with gains and losses deferred in
unrealized gains and losses in equity and recognized in earnings in conjunction
with the earnings recognition of the underlying hedged item. Default swap
contracts entered into for investment purposes are accounted for using the fair
value method, with changes in fair value, if any, reported in realized
investment gains and losses in earnings. Premium paid to the Company on default
swap contracts is reported in net investment income in earnings. Other swap
contracts entered into for investment purposes are accounted for using the fair
value method, with changes in fair value reported in realized investment gains
and
F-9
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses in earnings. Any ineffective swaps or futures hedges are recognized
currently in realized investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products, variable
annuities and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits from investment yields, mortality,
surrender charges and expense margins over the expected life of the contracts.
This amortization is reviewed annually and adjusted retrospectively when the
Company revises its estimate of current or future gross profits to be realized
from this group of products, including realized and unrealized gains and losses
from investments. Acquisition costs related to fixed annuities and other life
insurance products are deferred and amortized, generally in proportion to the
ratio of annual revenue to the estimated total revenues over the contract
periods based upon the same assumptions used in estimating the liability for
future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, the Company
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
F-10
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 6.0%
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, variable universal life and variable annuities 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 variable annuities include a reserve for
benefit claims in excess of a guaranteed minimum fund value.
Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE incurred
but not reported. These liabilities are determined using case basis evaluations
and statistical analyses and represent estimates of the ultimate cost of all
losses incurred but not paid. These estimates are continually reviewed and
adjusted as necessary; such adjustments are reflected in current operations.
Estimated amounts of salvage and subrogation on unpaid property and casualty
losses are deducted from the liability for unpaid claims.
Premiums for property and casualty 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 ("GICs"),
deposit administration funds and immediate participation guarantee funds and
consist of deposits received from customers and investment earnings on their
fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty 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 include annuity benefit claims in excess of a
guaranteed minimum fund value, and 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, with mortality, administration
and surrender charges assessed against the fund values. Related benefit expenses
include universal life benefit claims in excess of fund values and net
investment income credited to universal life fund values. Certain policy charges
that represent compensation for services
F-11
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to be provided in future periods are deferred and amortized over the period
benefited using the same assumptions used to amortize capitalized acquisition
costs.
K. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life company taxable income. Prior to
the merger on July 16, 1997, Allmerica P&C and its subsidiaries filed a separate
United States federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). These differences result primarily from loss and LAE
reserves, policy reserves, policy acquisition expenses, and unrealized
appreciation or depreciation on investments.
L. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 2000. The Company is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $12.4 million through December 31, 1998. The adoption of SOP 98-1 did
not have a material effect on the results of operations or financial position
for the three months ended March 31, 1998.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance on when a liability should be recognized for guaranty
fund and other assessments and how to measure the liability. This statement
allows for the discounting of the liability if the amount and timing of the cash
payments are fixed
F-12
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and determinable. In addition, it provides criteria for when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges. This
statement is effective for fiscal years beginning after December 15, 1998. The
adoption of this statement did not have a material effect on the results of
operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations (See Note 15).
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and other events and
circumstances from non-owner sources. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted Statement No. 130
for the first quarter of 1998, which resulted primarily in reporting unrealized
gains and losses on investments in debt and equity securities in comprehensive
income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation, resulting primarily from the reporting of Discontinued Operations
as disclosed in Note 2.
2. DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company approved a plan to exit its group
life and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of the discontinued segment, including its reinsurance pool business,
have been reported in the Consolidated Statements of Income as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB Opinion No. 30"). In the third quarter of 1999,
the operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior years. On
October 6, 1999, the Company entered into an agreement with Great-West Life and
Annuity Insurance Company of Denver,
F-13
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which provides for the sale of the Company's EBS business effective March 1,
2000. The Company has recorded a $30.5 million loss, net of taxes, on the
disposal of its group life and health business. Subsequent to the June 30, 1999
measurement date, operations from the discontinued business generated losses of
approximately $8.7 million, net of taxes.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At December 31,
1999, the discontinued segment had assets of approximately $531.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $482.5 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $361.1 million, $398.5 million, and $389.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
3. REORGANIZATION OF AFC CORPORATE STRUCTURE
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes included transfer of the Company's ownership of Allmerica P&C and
all of its subsidiaries, as well as certain other non-insurance subsidiaries,
from FAFLIC to AFC, referred to as the "distribution of subsidiaries". The
Company retained its ownership of its primary insurance subsidiary, AFLIAC and
certain broker dealer and investment management and advisory subsidiaries. AFC
contributed capital to FAFLIC in the amount of $125.0 million, consisting of
cash and securities of $36.0 million and $89.0 million, respectively, and agreed
to maintain the Company's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 requires the prior approval of the Commonwealth of Massachusetts
Insurance Commissioner. This transaction was approved by the Commissioner on
May 24, 1999.
The equity of the subsidiaries transferred from FAFLIC on July 1, 1999 was
$1,274.1 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million, including cash and cash equivalents of $202.2
million, and total revenue of $1,196.5 million.
The Company's consolidated results of operations in 1999 include $107.2 million
of net income associated with these subsidiaries through June 30, 1999. The
unaudited pro forma information below presents consolidated results of
operations as if the reorganization had occurred at the beginning of 1998.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the Company had the transfer occurred
at the beginning of 1998, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Revenue..................................................... $828.0 $750.2
====== ======
Net realized capital (losses) gains included in revenue..... (11.8) 19.6
====== ======
Income from continuing operations before taxes.............. 192.1 141.2
Income taxes................................................ 51.2 41.2
------ ------
Net income from continuing operations....................... $140.9 100.0
(Loss) from operations of discontinued business (less
applicable income taxes (benefit) of $(10.4), $(7.0) and
$8.9 for the years ended December 31, 1999, 1998 and 1997,
respectively............................................... (17.2) (13.5)
</TABLE>
F-14
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
(Loss) on disposal of group life and health business,
including provision of $72.2 for operating losses during
phase-out period for the tear ended December 31, 1999 (less
applicable income tax benefit of $16.4).................... (30.5) --
------ ------
Net income.................................................. $ 93.2 $ 86.5
====== ======
</TABLE>
4. ACQUISITION OF MINORITY INTEREST OF CITIZENS CORPORATION
On December 3, 1998 Citizens Acquisition Corporation, a wholly-owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly-owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 million representing the excess of the purchase price over the fair values
of the net assets acquired, net of deferred taxes, has been allocated to
goodwill and is being amortized over a 40-year period.
The Company's consolidated results of operations include minority interest in
Citizens Corporation prior to December 3, 1998. The unaudited pro forma
information below presents consolidated results of operation as if the
acquisition had occurred at the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,006.6 $2,977.1
======== ========
Net realized capital gains included in revenue.............. $ 58.1 $ 71.6
======== ========
Income before taxes and minority interest................... 293.4 332.5
Income taxes................................................ (54.2) (82.4)
Minority Interest:
Equity in earnings........................................ (42.6) (64.1)
-------- --------
Net income.................................................. $ 196.6 $ 186.0
======== ========
</TABLE>
5. OTHER SIGNIFICANT TRANSACTIONS
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated reinsurer. The
reinsurance agreement provides accident year coverage for the three years 1999
to 2001 for the Company's property and casualty business, and is subject to
cancellation or commutation annually at the Company's option. The program covers
losses and allocated loss adjustment
F-15
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual and aggregate
coverage limits for losses and allocated LAE are $150.0 million and $300.0
million, respectively. The effect of this agreement on results of operations in
each reporting period is based on losses and allocated LAE ceded, reduced by a
sliding scale premium of 50.0-67.0% depending on the size of the loss, and
increased by a ceding commission of 20.0% of ceded premium. In addition, net
investment income is reduced for amounts credited to the reinsurer. Prior to the
AFC corporate reorganization, the Company recognized a net benefit of $16.9
million as a result of this agreement, based on year-to-date and annual
estimates of losses and allocated loss adjustment expenses for accident year
1999.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the segment consolidated its property and casualty field support activities from
fourteen regional branches into three hub locations. As a result of the
Company's restructuring initiative, it recognized a pretax loss of $9.0 million,
in the fourth quarter of 1998.
Approximately $4.8 million of this loss relates to severance and other employee
related costs resulting from the elimination of 306 positions, of which 207 and
106 employees had been terminated as of December 31, 1999 and 1998,
respectively. In addition, lease cancellations and contract terminations
resulted in losses of approximately $2.5 million and $1.7 million, respectively.
The Company made payments of approximately $4.2 million and $0.1 million through
June 30, 1999 and in 1998, respectively, related to this restructuring
initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, relating to the Company's reinsurance pool business. These pools
consist primarily of the Company's assumed stop loss business, small group
managed care pools, long-term disability and long-term care pools, student
accident and special risk business. The agreement is consistent with
management's decision to exit this line of business, which the Company expects
to run-off over the next three years. As a result of this transaction, the
Company recognized a $25.3 million pre-tax loss in the third quarter of 1998.
This loss is reported in 1999 as part of the discontinued operations of the
Company.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on substantially all of the
universal life and variable universal life blocks of business. The agreement did
not have a material effect on its results of operations or financial position.
In 1999, 1998 and 1997, Allmerica P&C redeemed 8,662.7, 3,289.5 and 5,735.3
shares, respectively, of its issued and outstanding common stock owned by AFC
for $350.0 million, $125.0 million and $195.0 million, respectively, thereby
increasing the Company's total ownership to 84.5% as of June 30, 1999. The
increases in the Company's ownership of Allmerica P&C through June 30, 1999, and
for 1998 and 1997 were 14.5%, 4.3% and 6.3%, respectively. The 1999 transaction
consisted of cash and cash equivalents. The 1998 transaction consisted of $124.0
million of securities and $1.0 million of cash. The 1997 transaction consisted
of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C and a wholly-owned subsidiary of AFC was consummated
on July 16, 1997. Through the merger, AFC acquired all of the outstanding common
stock of Allmerica P&C that FAFLIC did not already own in exchange for cash of
$425.6 million and approximately 9.7 million shares of AFC stock valued at
$372.5 million. At consummation of this transaction AFC owned 59.5% through
FAFLIC and 40.5% directly. The merger has been recognized as a purchase. Total
consideration of approximately $798.1 million
F-16
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has been allocated to the minority interest in the assets and liabilities based
on estimates of their fair values. The minority interest acquired totaled $703.5
million. A total of $90.6 million representing the excess of the purchase price
over the fair values of the net assets acquired, net of deferred taxes, has been
allocated to goodwill and is being amortized over a 40-year period.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
6. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
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....... $ 62.6 $ 1.0 $ 0.5 $ 63.1
States and political subdivisions....... 13.5 0.1 0.1 13.5
Foreign governments..................... 80.0 2.1 0.1 82.0
Corporate fixed maturities.............. 3,206.5 63.2 116.9 3,152.8
Mortgage-backed securities.............. 359.0 1.3 11.0 349.3
-------- ------ ------ --------
Total fixed maturities.................. $3,721.6 $ 67.7 $128.6 $3,660.7
======== ====== ====== ========
Equity securities....................... $ 27.9 $ 24.7 $ 1.2 $ 51.4
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions....... 2,408.9 83.0 5.2 2,486.7
Foreign governments..................... 107.9 7.7 4.5 111.1
Corporate fixed maturities.............. 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities.............. 517.9 11.5 2.8 526.6
-------- ------ ------ --------
Total fixed maturities.................. $7,520.8 $282.0 $118.9 $7,683.9
======== ====== ====== ========
Equity securities....................... $ 253.1 $151.1 $ 7.1 $ 397.1
======== ====== ====== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-17
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
1999, the amortized cost and market value of these assets on deposit in New York
were $196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $18.3 million and
$105.4 million were on deposit with various state and governmental authorities
at December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
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>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 224.4 $ 225.7
Due after one year through five years....................... 1,324.0 1,328.4
Due after five years through ten years...................... 1,409.1 1,369.9
Due after ten years......................................... 764.1 736.7
-------- --------
Total....................................................... $3,721.6 $3,660.7
======== ========
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1999
Net appreciation, beginning of year......................... $ 79.0 $ 90.2 $169.2
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (254.4) (122.3) (376.7)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 78.5 -- 78.5
Provision for deferred federal income taxes and minority
interest................................................... 72.1 64.7 136.8
Distribution of subsidiaries (See Note 3)................... (5.6) (17.1) (22.7)
------ ------ ------
(109.4) (74.7) (184.1)
------ ------ ------
Net appreciation, end of year............................... $(30.4) $ 15.5 $(14.9)
====== ====== ======
</TABLE>
F-18
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $122.6 $ 86.7 $209.3
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens....................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest................................................... 38.7 (11.6) 27.1
------ ------ ------
(43.6) 3.5 (40.1)
------ ------ ------
Net appreciation, end of year............................... $ 79.0 $ 90.2 $169.2
====== ====== ======
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $131.4
------ ------ ------
Net appreciation (depreciation) on available-for-sale
securities................................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C.............................................. 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................... (65.9) (27.1) (93.0)
------ ------ ------
51.3 26.6 77.9
------ ------ ------
Net appreciation, end of year............................... $122.6 $ 86.7 $209.3
====== ====== ======
</TABLE>
(1) Includes net (depreciation) appreciation on other investments of $(1.1)
million, $0.8 million, and $1.8 million, in 1999, 1998, and 1997, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans are diversified by property type and location. Real
estate investments have been obtained primarily through foreclosure. Mortgage
loans are collateralized by the related properties and generally are no more
than 75% of the property's value at the time the original loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were $533.6 million and $582.7 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $5.8 million and $11.5
million at December 31, 1999 and 1998, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there were 2 properties remaining in the Company's
real estate portfolio which are being actively marketed. 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 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
F-19
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $301.5 $304.4
Residential............................................... 50.3 52.8
Retail.................................................... 92.2 108.5
Industrial/warehouse...................................... 83.6 110.0
Other..................................................... 11.8 18.5
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
Geographic region:
South Atlantic............................................ $132.2 $136.1
Pacific................................................... 133.6 155.1
East North Central........................................ 62.5 80.5
Middle Atlantic........................................... 50.3 61.2
West South Central........................................ 90.8 54.7
New England............................................... 40.7 60.7
Other..................................................... 29.3 45.9
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows: 2000
- -- $108.1 million; 2001 -- $33.9 million; 2002 -- $27.5 million; 2003 -- $40.6
million; 2004 -- $76.4 million; and $234.7 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 1999, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $11.5 $(2.4) $ 3.3 $ 5.8
===== ===== ===== =====
1998
Mortgage loans.............................................. $20.7 $(6.8) $ 2.4 $11.5
===== ===== ===== =====
1997
Mortgage loans.............................................. $19.6 $ 2.5 $ 1.4 $20.7
Real estate................................................. 14.9 6.0 20.9 --
----- ----- ----- -----
Total....................................................... $34.5 $ 8.5 $22.3 $20.7
===== ===== ===== =====
</TABLE>
F-20
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $20.9 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $18.0 million and $22.0 million, with
related reserves of $0.8 million and $6.0 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $21.0 million, $26.1 million
and $30.8 million, with related interest income while such loans were impaired
of $2.1 million, $3.2 million and $3.2 million as of December 31, 1999, 1998 and
1997, 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") and other funding agreements. 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 only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
The notional amount of futures contracts outstanding was $37.1 million and $92.7
million at December 31, 1999 and 1998, respectively. The notional amounts of the
contracts represent the extent of the Company's investment but not future cash
requirements, as the Company generally settles open positions prior to maturity.
The maturity of all futures contracts outstanding is less than one year. The
fair value of futures contracts outstanding was $36.8 million and $92.5 million
at December 31, 1999 and 1998, respectively.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. Deferred
hedging losses were $0.9 million and $1.8 million in 1999 and 1998,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
the Company are realized immediately. There was $0.1 million of gains realized
on ineffective hedges in 1998. There were no gains or losses in 1999 and 1997.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- --------- --------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 92.7 $ -- $(33.0)
New contracts............................................... 947.0 1,117.5 (0.2)
Contracts terminated........................................ (1,002.6) (1,024.8) 33.2
--------- --------- ------
Contracts outstanding, end of year.......................... $ 37.1 $ 92.7 $ --
========= ========= ======
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities.
Additionally, in 1999, the Company entered into a foreign
F-21
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
currency swap contract to hedge foreign currency exposure on specific fixed rate
funding agreements. Interest and principal related to foreign fixed income
securities and liabilities payable in foreign currencies, at current exchange
rates, are exchanged for the equivalent payment in U.S dollars translated at a
specific currency exchange rate. The primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by nationally recognized rating agencies. The Company's maximum
exposure to counterparty credit risk is the difference between the foreign
currency exchange rate, as agreed upon in the swap contract, and the foreign
currency spot rate on the date of the exchange, as indicated by the fair value
of the contract. The fair values of the foreign currency swap contracts
outstanding were $(4.7) million and $1.2 million at December 31, 1999 and 1998,
respectively. Changes in the fair value of contracts hedging fixed income
securities are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Changes in fair value of contracts hedging fixed
rate funding agreements are reported as other operating income, consistent with
the underlying hedged liability. The net decrease in other operating income
related to these contracts was $2.6 million in 1999. 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 1999, 1998 and 1997. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gain or loss on foreign
currency swap contracts in 1999 or 1998.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 42.6 $42.6 $ 47.6
New contracts............................................... 52.9 -- 5.0
Contracts expired........................................... (24.0) -- (10.0)
------ ----- ------
Contracts outstanding, end of year.......................... $ 71.5 $42.6 $ 42.6
====== ===== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at
December 31, 1999 are $8.3 million in 2000, $52.9 million in 2001 and $10.3
million thereafter. There are no expected maturities of such foreign currency
swap contracts in 2002, 2003 and 2004.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. Under these swap contracts,
the Company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated on an agreed-upon notional
principal amount. As with foreign currency swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1999 and 1998 were net payables of
$4.2 million and $3.9 million, respectively. The Company does not require
collateral or other security to support financial instruments with credit risk.
F-22
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The decrease in net
investment income related to interest rate swap contracts was $7.0 million, $2.8
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The fair value of interest rate swap contracts outstanding was
$33.1 million and $(28.3) million at December 31, 1999 and 1998, respectively.
Changes in the fair value of contracts are reported as an unrealized gain or
loss, consistent with the underlying hedged security. Any gain or loss on the
termination of interest rate swap contracts accounted for as hedges are deferred
and recognized with the gain or loss on the hedged transaction. The Company had
no deferred gain or loss on interest rate swap contracts in 1999 or 1998.
A reconciliation of the notional amount of interest rate swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $1,112.6 $ 244.1 $ 5.0
New contracts............................................... 905.4 873.5 244.7
Contracts terminated........................................ (888.5) -- --
Contracts expired........................................... (80.0) (5.0) (5.6)
Distribution of subsidiaries (Note 3)....................... (23.6) -- --
-------- -------- ------
Contracts outstanding, end of year.......................... $1,025.9 $1,112.6 $244.1
======== ======== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1999 are $44.0 million in 2000, $43.1 million in 2001, $83.5 million in 2002,
$536.0 million in 2003, and $319.3 million in 2004. There are no expected
maturities of such interest rate swap contracts thereafter.
G. OTHER SWAP CONTRACTS
The Company enters into insurance portfolio-linked and credit default swap
contracts for investment purposes. 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 insurance
portfolio-linked swap contracts is the inability of the counterparty to meet its
obligation. Under the terms of the credit default swap contracts, the Company
assumes the default risk of a specific high credit quality issuer in exchange
for a stated annual premium. In the case of default, the Company will pay the
counterparty par value for a pre-determined security of the issuer. The primary
risk associated with these transactions is the default risk of the underlying
companies. The Company regularly assesses the financial strength of its
counterparties and the underlying companies in default swap contracts, and
generally enters into forward or swap agreements with counterparties rated "A"
or better by nationally recognized rating agencies. Because the underlying
principal of swap contracts is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged, which at
December 31, 1999, was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.3) million and
$(0.1) million at December 31, 1999 and 1998, respectively. The net amount
receivable or payable under insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net (decrease) increase
in realized investment gains related to these contracts was $(0.2) million, $1.0
million and $(1.4) million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.4 million and $0.2 million for
the years ended December 31, 1999 and 1998, respectively. There was no net
investment income recognized in 1997.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------ -------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 255.0 $ 15.0 $ 58.6
New contracts............................................... 50.0 266.3 192.1
Contracts expired........................................... (115.0) (26.3) (211.6)
Contracts terminated........................................ -- -- (24.1)
------- ------ -------
Contracts outstanding, end of year.......................... $ 190.0 $255.0 $ 15.0
======= ====== =======
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1999 are
as follows: $140.0 million in 2000 and $50.0 million in 2001. There are no
expected maturities of such other swap contracts in 2002, 2003, 2004 and
thereafter.
H. OTHER
At December 31, 1999 and 1998, FAFLIC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
7. 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) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $415.7 $509.6 $523.3
Mortgage loans.............................................. 45.5 57.6 57.1
Equity securities........................................... 1.7 7.2 10.5
Policy loans................................................ 12.7 11.9 10.9
Real estate and other long-term investments................. 14.4 7.0 31.5
Short-term investments...................................... 26.6 15.6 9.9
------ ------ ------
Gross investment income..................................... 516.6 608.9 643.2
Less investment expenses.................................... (13.5) (15.0) (23.7)
------ ------ ------
Net investment income....................................... $503.1 $593.9 $619.5
====== ====== ======
</TABLE>
At December 31, 1999, the company had fixed maturities with a carrying value of
$1.0 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. At December 31, 1998, there was one mortgage loan
on non-accrual status which had an outstanding principal balance of $4.3
million. This loan was restructured and fully impaired. There were no fixed
maturities on non-accrual status at December 31, 1998. The effect of
non-accruals, compared with amounts that would have been recognized in
F-24
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with the original terms of the investments, was a reduction in net
income by $1.4 million in 1999, and had no impact in 1998 and 1997.
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 $18.8 million, $28.7 million and $40.3 million at
December 31, 1999, 1998 and 1997, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $2.5 million, $3.3 million and $3.9 million in
1999, 1998 and 1997, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $3.3 million and $4.2
million in 1999, 1998 and 1997, respectively.
There were no mortgage loans which were non-income producing for the year ended
December 31, 1999. There were, however, fixed maturities with a carrying value
of $0.3 million which were non-income producing for the year ended December 31,
1999.
Included in other long-term investments is income from limited partnerships of
$6.6 million in 1999, losses of $6.3 million in 1998, and income of $7.6 million
in 1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Fixed maturities............................................ $(52.0) $(11.6) $14.2
Mortgage loans.............................................. 2.5 8.8 (1.2)
Equity securities........................................... 141.3 63.7 53.5
Real estate and other....................................... 8.5 -- 9.8
------ ------ -----
Net realized investment gains............................... $100.3 $ 60.9 $76.3
====== ====== =====
</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>
1999
Fixed maturities............................................ $1,480.5 $ 9.2 $ 27.1
Equity securities........................................... 421.2 149.0 7.6
1998
Fixed maturities............................................ $ 979.2 $ 17.9 $ 11.3
Equity securities........................................... 258.7 72.8 9.0
1997
Fixed maturities............................................ $1,870.7 $ 27.0 $ 15.9
Equity securities........................................... 144.9 55.5 1.2
</TABLE>
F-25
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE (LOSS) INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the Consolidated Statements of Comprehensive (Loss)
Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period,
(includes $22.7 resulting from the distribution of
subsidiaries in 1999, net of taxes (benefit) and minority
interest of $(103.3) million, $(20.8) million and $123.7
million in 1999, 1998 and 1997, respectively).............. $ (121.9) $ (6.8) $115.5
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes and minority interest
of $33.5 million, $21.5 million and $30.7 million in 1999,
1998 and 1997, respectively)............................... (62.2) 33.3 37.6
-------- -------- ------
Other comprehensive (loss) income........................... $ (184.1) $ (40.1) $ 77.9
======== ======== ======
</TABLE>
8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $31.1 million and $(27.1) million
at December 31, 1999 and 1998, respectively. In addition, the Company held
futures contracts with a carrying value of $(0.9) million and $(1.8) million at
December 31, 1999 and 1998, respectively. The fair value of these contracts was
$36.8 million and $92.5 million at December 31, 1999 and 1998, respectively.
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-26
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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 is
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Liabilities under individual fixed
annuity contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
All other liabilities are based on surrender values.
TRUST INSTRUMENTS SUPPORTED BY FUNDING OBLIGATIONS
Fair values 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.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value.
F-27
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 279.3 $ 279.3 $ 504.0 $ 504.0
Fixed maturities.......................................... 3,660.7 3,660.7 7,683.9 7,683.9
Equity securities......................................... 51.4 51.4 397.1 397.1
Mortgage loans............................................ 521.2 521.9 562.3 587.1
Policy loans.............................................. 170.5 170.5 154.3 154.3
-------- -------- -------- --------
$4,683.1 $4,683.8 $9,301.6 $9,326.4
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,316.0 $1,341.4 $1,791.8 $1,830.8
Supplemental contracts without life contingencies......... 48.8 48.8 37.3 37.3
Dividend accumulations.................................... 88.1 88.1 88.4 88.4
Other individual contract deposit funds................... 48.4 48.2 61.6 61.1
Other group contract deposit funds........................ 602.9 583.5 700.4 704.0
Individual fixed annuity contracts........................ 1,092.5 1,057.1 1,110.6 1,073.6
Trust instruments supported by funding obligations........ 50.6 49.6 -- --
Short-term debt........................................... -- -- 221.3 221.3
-------- -------- -------- --------
$3,247.3 $3,216.7 $4,011.4 $4,016.5
======== ======== ======== ========
</TABLE>
F-28
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income in 1999, 1998
and 1997 is a net pre-tax contribution from the Closed Block of $13.8 million,
$10.4 million and $9.1 million, respectively. Summarized financial information
of the Closed Block as of December 31, 1999 and 1998 and for the periods ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $387.4
and $399.1
respectively)........................................... $372.9 $414.2
Mortgage loans............................................ 136.3 136.0
Policy loans.............................................. 201.1 210.9
Cash and cash equivalents................................. 22.6 9.4
Accrued investment income................................. 14.0 14.1
Deferred policy acquisition costs......................... 13.1 15.6
Other assets.............................................. 12.3 2.9
------ ------
Total assets................................................ $772.3 $803.1
====== ======
Liabilities
Policy liabilities and accruals........................... $835.2 $862.9
Other liabilities......................................... 6.9 9.1
------ ------
Total liabilities........................................... $842.1 $872.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Revenues
Premiums and other income................................. $ 52.1 $ 55.4 $ 58.3
Net investment income..................................... 53.8 53.3 53.4
Realized investment (loss) gain........................... (0.6) 0.1 1.3
------ ------ ------
Total revenues.............................................. 105.3 108.8 113.0
------ ------ ------
Benefits and expenses
Policy benefits........................................... 88.9 95.0 100.5
Policy acquisition expenses............................... 2.5 2.7 3.0
Other operating expenses.................................. 0.1 0.7 0.4
------ ------ ------
Total benefits and expenses................................. 91.5 98.4 103.9
------ ------ ------
Contribution from the Closed Block.......................... $ 13.8 $ 10.4 $ 9.1
====== ====== ======
</TABLE>
F-29
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------- -------
<S> <C> <C> <C>
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block........................ $ 13.8 $ 10.4 $ 9.1
Change in:
Deferred policy acquisition costs, net.................. 2.5 2.6 2.9
Premiums and other receivables.......................... -- 0.3 --
Policy liabilities and accruals......................... (13.1) (13.5) (11.6)
Accrued investment income............................... 0.1 - 0.2
Deferred taxes.......................................... -- 0.1 (5.1)
Other assets............................................ (8.3) 2.4 (2.9)
Expenses and taxes payable.............................. (2.9) (2.9) (2.0)
Other, net.............................................. 0.8 (0.1) (1.2)
------- ------- -------
Net cash used in operating activities..................... (7.1) (0.7) (10.6)
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 139.0 83.6 161.6
Purchases of investments................................ (128.5) (106.5) (161.4)
Other, net.............................................. 9.8 7.9 11.4
------- ------- -------
Net cash provided by (used in) investing activities....... 20.3 (15.0) 11.6
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 13.2 (15.7) 1.0
Cash and cash equivalents, beginning of year................ 9.4 25.1 24.1
------- ------- -------
Cash and cash equivalents, end of year...................... $ 22.6 $ 9.4 $ 25.1
======= ======= =======
</TABLE>
There were no valuation allowances on mortgage loans in the Closed Block at
December 31, 1999, 1998 or 1997, 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.
10. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Short-term
Commercial paper.......................................... $ -- $ 41.3
Borrowings under bank credit facility..................... -- 150.0
Repurchase agreements..................................... -- 30.0
------ ------
Total short-term debt....................................... $ -- $221.3
====== ======
</TABLE>
F-30
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1999, there was no commercial
paper outstanding.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at
December 31, 1998 were $150.0 million. These borrowings were repaid in February
1999.
The company utilizes repurchase agreements to finance certain transactions and
had approximately $30 million in such agreements outstanding at December
31,1998. There were no repurchase agreements outstanding at December 31, 1999.
In 1999, there was no interest expense related to borrowings under the credit
agreement. Interest expense related to borrowings under the credit agreement was
approximately $0.7 million and $2.8 million in 1998 and 1997, respectively. All
interest expense is recorded in other operating expenses.
In October, 1995, AFC issued Senior Debentures with a face value of $200.0
million, pay interest at a rate of 7 5/8%, and mature on October 16, 2025. The
primary source of cash for repayment of the debt by AFC is dividends from FAFLIC
and Allmerica P&C.
11. 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) on continuing operations in the consolidated statements of income is
shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $88.7 $ 74.6 $74.4
Deferred.................................................. 4.3 (15.4) 14.2
----- ------ -----
Total....................................................... $93.0 $ 59.2 $88.6
===== ====== =====
</TABLE>
The federal income taxes attributable to the consolidated results of continuing
operations are different from the amounts determined by multiplying income
before federal income taxes by the statutory 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) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Expected federal income tax expense on continuing
operations................................................ $133.9 $107.9 $122.9
Tax-exempt interest....................................... (24.2) (38.9) (37.9)
Dividend received deduction............................... -- (5.1) (3.2)
Changes in tax reserve estimates.......................... (8.7) 2.3 7.8
Tax credits............................................... (8.5) (8.5) (2.7)
Other, net................................................ 0.5 1.5 1.7
------ ------ ------
Federal income tax expense on continuing operations......... $ 93.0 $ 59.2 $ 88.6
====== ====== ======
</TABLE>
F-31
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred income tax (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards......................................... $ -- $ (16.8)
Loss reserve discounting.................................. (283.5) (406.6)
Deferred acquisition costs................................ 355.7 345.8
Employee benefit plans.................................... (52.0) (45.3)
Investments, net.......................................... (19.5) 121.7
Bad debt reserve.......................................... -- (1.8)
Litigation reserve........................................ (6.0) (10.9)
Discontinued operations................................... (11.7) --
Other, net................................................ (1.1) (5.5)
------- -------
Deferred tax asset, net..................................... $ (18.1) $ (19.4)
======= =======
</TABLE>
Gross deferred income tax assets totaled $515.8 million and $486.9 millions at
December 31, 1999 and 1998, respectively. Gross deferred income tax liabilities
totaled $497.7 million and $467.5 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1999 there are no available
alternative minimum tax credit carryforwards.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Services ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The IRS has also examined the former Allmerica P&C consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the federal income tax returns for 1992,
1993 and 1994 for the FAFLIC/AFLIAC consolidated group. Also, certain
adjustments proposed by the IRS with respect to FAFLIC/AFLIAC's federal income
tax returns for 1982 and 1983 remain unresolved. If upheld, these adjustments
would result in additional payments; however, the Company will vigorously defend
its position with respect to these adjustments. In the Company's opinion,
adequate tax liabilities have been established for all years. However, the
amount of these tax liabilities could be revised in the near term if estimates
of the Company's ultimate liability are revised.
12. PENSION PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple benefit plans to employees and agents of these affiliated
Companies, including retirement plans. The salaries of employees and agents
covered by these plans and the expenses of these plans are charged to the
affiliated Companies in accordance with an intercompany cost sharing agreement.
F-32
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAFLIC provides retirement benefits to substantially all of its employees under
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby the Company annually provides an allocation to each
eligible employee based on a percentage of that employee's salary, similar to a
defined contribution plan arrangement. The 1999, 1998 and 1997 allocations were
based on 7.0% of each eligible employee's salary. In addition to the cash
balance allocation, certain transition group employees, who have met specified
age and service requirements as of December 31, 1994, are eligible for a
grandfathered benefit based primarily on the employees' years of service and
compensation during their highest five consecutive plan years of employment. The
Company's policy for the plans is to fund at least the minimum amount required
by the Employee Retirement Income Security Act of 1974.
Components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.3 $ 19.0 $ 19.9
Interest cost............................................... 26.5 25.5 23.5
Expected return on plan assets.............................. (38.9) (34.9) (31.2)
Recognized net actuarial loss............................... 0.4 0.4 0.1
Amortization of transition asset............................ (1.4) (1.8) (1.9)
Amortization of prior service cost.......................... (2.2) (1.7) (2.0)
------- ------- -------
Net periodic pension cost................................. $ 3.7 $ 6.5 $ 8.4
======= ======= =======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.7
million of the net periodic pension cost was allocated to the distributed
subsidiaries.
The following table summarizes the status of the plan. At December 31, 1999 and
1998 the plans' assets exceeded their projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year......... $ 414.2 $ 370.4
Service cost -- benefits earned during the year........... 19.3 19.0
Interest cost............................................. 26.5 25.5
Actuarial (gains) losses.................................. (44.4) 20.4
Benefits paid............................................. (22.9) (21.1)
------- -------
Projected benefit obligation at end of year............. 392.7 414.2
------- -------
</TABLE>
F-33
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year............ 441.6 395.5
Actual return on plan assets.............................. 51.9 67.2
Benefits paid............................................. (22.9) (21.1)
Fair value of plan assets at end of year................ 470.6 441.6
Funded status of the plan................................. 77.9 27.4
Unrecognized transition obligation........................ (21.6) (23.9)
Unamortized prior service cost............................ (12.0) (11.0)
Unrecognized net actuarial gains.......................... (101.6) (54.9)
------- -------
Net pension liability................................... $ (57.3) $ (62.4)
======= =======
</TABLE>
As a result of AFC's merger with Allmerica P&C in 1997, certain pension
liabilities were reduced to reflect their fair value as of the merger date.
These pension liabilities were reduced by $8.9 million and $10.3 million in 1999
and 1998, respectively, which reflects fair value, net of applicable
amortization.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.75% and 6.5% in 1999 and 1998, respectively, and the
assumed long-term rate of return on plan assets was 9.0% in both 1999 and 1998.
The actuarial present value of the projected benefit obligations was determined
using assumed rates of increase in future compensation levels ranging from 5.0%
to 5.5%. Plan assets are invested primarily in various separate accounts and the
general account of FAFLIC. Plan assets also include 796,462 shares and 973,262
shares of AFC Common Stock at December 31, 1999 and 1998, respectively, with a
market value of $44.3 million and $56.3 million at December 31, 1999 and 1998,
respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1999, 1998 and
1997, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expense related to this plan was $5.9 million, $5.6
million and $3.3 million in 1999, 1998 and 1997, respectively. In 1999,
subsequent to the AFC corporate reorganization, approximately $1.4 million of
the 401(k) expense was allocated to the distributed subsidiaries. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The plan expense in 1999, 1998 and 1997 was $3.1 million, $3.0
million and $2.8 million, respectively.
On January 1, 1998, substantially all of the defined benefit and defined
contribution 401(k) plans previously provided by the affiliated Companies were
merged with the existing benefit plans of FAFLIC. The merger of benefit plans
resulted in a $5.9 million change of interest adjustment to additional paid-in
capital during 1998. The change of interest adjustment arose from FAFLIC's
forgiveness of certain Allmerica P&C benefit plan liabilities attributable to
Allmerica P&C's minority interest.
13. OTHER POSTRETIREMENT BENEFIT PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple postretirement medical and death benefit plans to employees,
agents and retirees of these affiliated Companies. The costs of these plans are
charged to the affiliated Companies in accordance with an intercompany cost
sharing agreement.
F-34
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective
January 1, 1996, the Company revised these benefits so as to establish limits on
future benefit payments and to restrict eligibility to current employees. The
medical plans have varying copayments and deductibles, depending on the plan.
These plans are unfunded.
The plans' funded status reconciled with amounts recognized in the Company's
Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 84.0 $ 71.8
Service cost................................................ 2.9 3.1
Interest cost............................................... 4.6 5.1
Actuarial (gains) losses.................................... (21.2) 7.6
Benefits paid............................................... (3.5) (3.6)
------- -------
Accumulated postretirement benefit obligation at end of
year.................................................... 66.8 84.0
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status of the plan................................... (66.8) (84.0)
Unamortized prior service cost.............................. (9.8) (12.9)
Unrecognized net actuarial (gains) losses................... (13.8) 7.5
------- -------
Accumulated postretirement benefit costs.................. $ (90.4) $ (89.4)
======= =======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 2.9 $ 3.1 $ 3.0
Interest cost............................................... 4.6 5.1 4.6
Recognized net actuarial loss (gain)........................ 0.1 0.1 (0.1)
Amortization of prior service cost.......................... (2.3) (2.4) (2.7)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.3 $ 5.9 $ 4.8
====== ====== ======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.1
million of the net periodic postretirement cost was allocated to the distributed
subsidiaries.
As a result of AFC's merger with Allmerica P&C in 1997, certain postretirement
liabilities were reduced to reflect their fair value as of the merger date.
These postretirement liabilities were reduced by $4.6 million and $5.4 million
in 1999 and 1998, respectively, which reflects fair value, net of applicable
amortization.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1999, health care costs were assumed to increase 6.0% in 2000,
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
F-35
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
one percentage point in each year would increase the accumulated postretirement
benefit obligation at December 31, 1999 by $4.1 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1999 by $0.6 million. Conversely, decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation at December 31, 1999 by $3.6
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 6.5% at December 31, 1999 and
1998, respectively. In addition, the actuarial present value of the accumulated
postretirement benefit obligation was determined using an assumed rate of
increase in future compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the postretirement medical and death
benefits plans previously provided by the affiliated Companies were merged with
the existing benefit plans of FAFLIC. The merger of benefit plans resulted in a
$3.8 million change of interest adjustment to additional paid-in capital during
1998. The change of interest adjustment arose from FAFLIC's forgiveness of
certain Allmerica P&C benefit plan liabilities attributable to Allmerica P&C's
minority interest.
14. DIVIDEND RESTRICTIONS
Massachusetts and Delaware have enacted laws governing the payment of dividends
to stockholders by insurers. These laws affect the dividend paying ability of
FAFLIC and AFLIAC, respectively.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. During 1999 and 1997, no dividends were
declared by FAFLIC to AFC. During 1998, FAFLIC paid dividends of $50.0 million
to AFC. As of July 1, 1999, FAFLIC's ownership of Allmerica P&C, as well as
several non-insurance subsidiaries, was transferred from FAFLIC to AFC. Under an
agreement with the Commissioner, any dividend from FAFLIC to AFC for years 2000
and 2001 would require the prior approval of the Commissioner and may require
AFC to make additional capital contributions to FAFLIC.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an insurer,
whether or not in excess of the aforementioned threshold, from a source other
than statutory earned surplus would also require the prior approval of the
Delaware Commissioner of Insurance. No dividends were declared by AFLIAC to
FAFLIC during 1999, 1998 or 1997. During 2000, AFLIAC could pay dividends of
$34.3 million to FAFLIC without prior approval.
F-36
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
The Company offers Asset Accumulation financial products and services. Prior to
the AFC corporate reorganization, the Company offered financial products and
services in two major areas: Risk Management and Asset Accumulation. Within
these broad areas, the Company conducted business principally in three operating
segments. These segments were Risk Management, Allmerica Financial Services and
Allmerica Asset Management. In accordance with Statement No. 131, the separate
financial information of each segment is presented consistent with the way
results are regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. A summary of
the Company's reportable segments is included below.
In 1999, the Company reorganized its Property and Casualty business and
Corporate Risk Management Services operations within the Risk Management
segment. Under the new structure, the Risk Management segment manages its
business through five distribution channels identified as Hanover North, Hanover
South, Citizens Midwest, Allmerica Voluntary Benefits and Allmerica Specialty.
During the second quarter of 1999, the Company approved a plan to exit its group
life and health business, consisting of its EBS business, its AGU business and
its reinsurance pool business. Results of operations from this business,
relating to both the current and the prior periods, have been segregated and
reported as a component of discontinued operations in the Consolidated
Statements of Income. Operating results from this business were previously
reported in the Allmerica Voluntary Benefits and Allmerica Specialty
distribution channels. Prior to 1999, results of the group life and health
business were included in the Corporate Risk Management Services segment, while
all other Risk Management business was reflected in the Property and Casualty
segment.
The Risk Management segment's property and casualty business is offered
primarily through the Hanover North, Hanover South and Citizens Midwest
distribution channels utilizing the Company's independent agent network
primarily in the Northeast, Midwest and Southeast United States, maintaining a
strong regional focus. Allmerica Voluntary Benefits focuses on worksite
distribution, which offers discounted property and casualty products through
employer sponsored programs, and affinity group property and casualty business.
Allmerica Specialty offers special niche property and casualty products in
selected markets. On July 1, 1999, AFC made certain changes to its corporate
structure as discussed in Note 3. As a result, FAFLIC distributed its interest
in the property and casualty business after that date.
The Asset Accumulation group includes two segments: Allmerica Financial Services
and Allmerica Asset Management. The Allmerica Financial Services segment
includes variable annuities, variable universal life and traditional life
insurance products distributed via retail channels as well as group retirement
products, such as defined benefit and 401(k) plans and tax-sheltered annuities
distributed to institutions. Through its Allmerica Asset Management segment, the
Company offers its customers the option of investing in GICs such as the
traditional GIC, synthetic GIC and other funding agreements. Funding agreements
are investment contracts issued to institutional buyers, such as money market
funds, corporate cash management programs and securities lending collateral
programs, which typically have short maturities and periodic interest rate
resets based on an index such as LIBOR. This segment is also a Registered
Investment Advisor providing investment advisory services, primarily to
affiliates, and to other institutions, such as insurance companies and pension
plans. As a result of the aforementioned change in the AFC corporate structure,
FAFLIC distributed its ownership of certain investment advisory business as of
July 1, 1999.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt, Capital
Securities and corporate overhead expenses. Corporate overhead
F-37
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses reflect costs not attributable to a particular segment, such as those
generated by certain officers and directors, Corporate Technology, Corporate
Finance, Human Resources and the Legal department.
Management evaluates the results of the aforementioned segments based on a
pre-tax and minority interest basis. Segment income is determined by adjusting
net income for net realized investment gains and losses, net gains and losses on
disposals of businesses, discontinued operations, extraordinary items, the
cumulative effect of accounting changes and certain other items which management
believes are not indicative of overall operating trends. While these items may
be significant components in understanding and assessing the Company's financial
performance, management believes that the presentation of segment income
enhances understanding of the Company's results of operations by highlighting
net income attributable to the normal, recurring operations of the business.
However, segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management........................................... $1,075.2 $2,220.8 $2,227.3
Asset Accumulation
Allmerica Financial Services............................ 797.0 721.2 713.9
Allmerica Asset Management.............................. 144.5 121.7 91.1
-------- -------- --------
Subtotal............................................ 941.5 842.9 805.0
-------- -------- --------
Corporate................................................. 0.4 2.3 4.7
Intersegment revenues..................................... (0.8) (7.6) (11.5)
-------- -------- --------
Total segment revenues including Closed Block........... 2,016.3 3,058.4 3,025.5
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block........................... (92.1) (98.4) (102.6)
Change in mortality................................... -- -- (4.2)
Net realized gains.................................... 100.3 60.9 76.3
-------- -------- --------
Total revenues............................................ $2,024.5 $3,020.9 $2,995.0
======== ======== ========
</TABLE>
F-38
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
Segment income (loss) before income taxes and minority interest:
<S> <C> <C> <C>
Risk Management............................................. $ 85.1 $ 149.7 $ 174.2
Asset Accumulation
Allmerica Financial Services.............................. 207.1 169.0 134.6
Allmerica Asset Management................................ 21.3 23.7 18.4
-------- -------- --------
Subtotal.............................................. 228.4 192.7 153.0
-------- -------- --------
Corporate................................................... (38.6) (45.2) (44.6)
Segment income before income taxes and minority interest... 274.9 297.2 282.6
Adjustments to segment income:
Net realized investment gains, net of amortization........ 106.1 52.2 78.5
Sales practice litigation expense......................... -- (31.0) --
Gain from change in mortality assumptions................. -- -- 47.0
Loss on cession of disability income business............. -- -- (53.9)
Restructuring costs....................................... -- (9.0) --
Other items............................................... -- (0.8) (2.8)
-------- -------- --------
Income before taxes and minority interest................... $ 381.0 $ 308.6 $ 351.4
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998 1999 1998
- ------------- --------- --------- ------------ ------------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
<S> <C> <C> <C> <C>
Risk Management............................... $ 542.0 $ 6,216.8 $ 6.0 $ 167.5
Asset Accumulation
Allmerica Financial Services................ 23,410.7 19,407.3 1,213.1 993.1
Allmerica Asset Management.................. 1,381.1 1,810.9 0.4 0.6
--------- --------- --------- ---------
Subtotal................................ 24,791.8 21,218.2 1,213.5 993.7
Corporate................................... -- 29.6 -- --
--------- --------- --------- ---------
Total..................................... $25,333.8 $27,464.6 $ 1,219.5 $ 1,161.2
========= ========= ========= =========
</TABLE>
16. LEASE COMMITMENTS
Rental expenses for operating leases, including those related to the
discontinued operations of the Company, amounted to $22.2 million, $34.9 million
and $33.6 million in 1999, 1998 and 1997, respectively. These expenses relate
primarily to building leases of the Company. At December 31, 1999, future
minimum rental payments under non-cancelable operating leases were approximately
$39.9 million, payable as follows: 2000 - $14.1 million; 2001 -- $12.7 million;
2002 -- $8.1 million; 2003 -- $3.6 million, and $1.4 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 2000.
F-39
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REINSURANCE
In the normal course of business, the Company seeks to reduce the losses 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 Statement of Financial
Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short
Duration and Long Duration Contracts.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated insurer (See Note 5).
Prior to the AFC corporate reorganization, the Company was subject to
concentration of risk with respect to this reinsurance agreement, which
represented 10% or more of the Company's reinsurance business. Net premiums
earned and losses and loss adjustment expenses ceded under this agreement in
1999 were $21.9 million and $35.0 million, respectively. In addition, 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"). Prior to the AFC corporate reorganization, both CAR and MCCA
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company ceded 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 1999, 1998 and 1997 were
$20.4 million and $21.4 million, $34.3 million and $38.1 million, and $32.3
million and $28.2 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1999, 1998 and 1997 of $1.8
million and $30.6 million, $3.7 million and $18.0 million, and $9.8 million and
$(0.8) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
F-40
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................... $ 53.5 $ 51.4 $ 55.9
Assumed................................................... 0.7 0.7 0.6
Ceded..................................................... (50.0) (47.8) (29.1)
-------- -------- --------
Net premiums................................................ $ 4.2 $ 4.3 $ 27.4
======== ======== ========
Property and casualty premiums written:
Direct.................................................... $1,089.0 $1,970.4 $2,068.5
Assumed................................................... 27.3 58.8 103.1
Ceded..................................................... (135.4) (74.1) (179.8)
-------- -------- --------
Net premiums................................................ $ 980.9 $1,955.1 $1,991.8
======== ======== ========
Property and casualty premiums earned:
Direct.................................................... $1,047.3 $1,966.8 $2,046.1
Assumed................................................... 30.3 64.5 102.0
Ceded..................................................... (127.3) (66.1) (195.1)
-------- -------- --------
Net premiums................................................ $ 950.3 $1,965.2 $1,953.0
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 391.9 $ 359.5 $ 397.4
Assumed................................................... 0.1 0.3 0.4
Ceded..................................................... (39.2) (49.5) (79.4)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses.................................................. $ 352.8 $ 310.3 $ 318.4
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................... $ 805.6 $1,588.2 $1,464.9
Assumed................................................... 25.9 62.7 101.2
Ceded..................................................... (128.0) (158.2) (120.6)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses.................................................. $ 703.5 $1,492.7 $1,445.5
======== ======== ========
</TABLE>
F-41
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $1,161.2 $ 965.5 $ 822.7
Acquisition expenses deferred............................... 419.2 638.2 614.3
Amortized to expense during the year........................ (240.9) (449.6) (472.6)
Adjustment for discontinued operations...................... 3.4 ( 0.2) --
Adjustment to equity during the year........................ 39.3 7.3 (11.1)
Adjustment due to distribution of subsidiaries.............. (162.7) -- --
Adjustment for cession of disability income insurance....... -- -- (38.6)
Adjustment for revision of universal and variable universal
life insurance mortality assumptions...................... -- -- 50.8
-------- -------- --------
Balance at end of year...................................... $1,219.5 $1,161.2 $ 965.5
======== ======== ========
</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.
19. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are recorded in results of operations in the year such
changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$601.3 million and $568.0 million at December 31, 1999 and 1998, respectively.
Accident and health claim liabilities were re-estimated for all prior years and
were increased by $51.2 million and $14.6 million in 1999 and 1998,
respectively. The increase in 1999 resulted from the Company's reserve
strengthening primarily in the EBS and reinsurance pool business. The 1998
increase also resulted from the Company's reserve strengthening, primarily in
the assumed reinsurance and stop loss only business.
F-42
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,597.3 $2,615.4 $2,744.1
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year.......... 795.6 1,609.0 1,564.1
Decrease in provision for insured events of prior years... (96.1) (127.2) (127.9)
-------- -------- --------
Total incurred losses and LAE............................... 699.5 1,481.8 1,436.2
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................... 342.1 871.9 775.1
Losses and LAE attributable to insured events of prior
years................................................... 424.2 643.0 732.1
-------- -------- --------
Total payments 766.3 1,514.9 1,507.2
Change in reinsurance recoverable on unpaid losses.......... 44.3 15.0 (50.2)
Distribution of subsidiaries................................ (2,574.8) -- --
Other (1)................................................... -- -- (7.5)
-------- -------- --------
Reserve for losses and LAE, end of year..................... $ -- $2,597.3 $2,615.4
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the reserves have been re-estimated for all prior
accident years and were decreased by $96.1 million, $127.2 million and $127.9
million in 1999, 1998 and 1997, respectively, reflecting increased favorable
development on reserves for both losses and loss adjustment expenses.
Favorable development on prior years' loss reserves was $52.0 million, $58.9
million, and $87.2 million prior to the AFC corporate reorganization in 1999 and
for the years ended December 31, 1998 and 1997, respectively. Favorable
development on prior year's loss adjustment expense reserves was $44.1 million,
$68.3 million, and $40.7 million prior to the AFC corporate reorganization in
1999 and for the years ended December 31, 1998 and 1997, respectively. The
increase in favorable development 1998 is primarily attributable to claims
process improvement initiatives taken by the Company. The Company has lowered
claim settlement costs through increased utilization of in-house attorneys and
consolidation of claim offices.
This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.
Due to the nature of the business written by the Risk Management segment, the
exposure to environmental liabilities is relatively small and therefore its
reserves are relatively small compared to other types of liabilities. Due to the
AFC corporate reorganization, the Company had no exposure for this item at
December 31, 1999. Loss and LAE reserves related to environmental damage and
toxic tort liability, included in the reserve for losses and LAE, were $49.9
million and $53.1 million, net of reinsurance of $14.2 million and $15.7 million
in 1998 and 1997, respectively. The Company does not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Company may be
required to defend such claims. The Company estimated its ultimate liability for
these claims based upon currently known facts, reasonable assumptions where the
facts are not known,
F-43
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current law and methodologies currently available. Although these claims are not
significant, their existence gives rise to uncertainty and is discussed because
of the possibility, however remote, that they may become significant. The
Company believes that, notwithstanding the evolution of case law expanding
liability in environmental claims, recorded reserves related to these claims are
adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
20. MINORITY INTEREST
As a result of the Company's divestiture of certain of its subsidiaries
including its 84.5% ownership of the outstanding shares of the common stock of
Allmerica P&C effective July 1, 1999, there is no minority interest reflected on
the Consolidated Balance Sheets as of December 31, 1999. In prior years, the
Company's interest in Allmerica P&C was represented by ownership of 70.0% and
65.8% of the outstanding shares of common stock at December 31, 1998 and 1997,
respectively. Earnings and shareholder's equity attributable to minority
shareholders are included in minority interest in the consolidated financial
statements through the period ended June 30, 1999 and for the years ended
December 31, 1998 and 1997.
21. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement. The court granted preliminary approval of
the settlement on December 4, 1998. On May 19, 1999, the court issued an order
certifying the class for settlement purposes and granting final approval of the
settlement agreement. FAFLIC recognized a $31.0 million pre-tax expense during
the third quarter of 1998 related to this litigation. Although the Company
believes that this expense reflects appropriate recognition of its obligation
under the settlement, this estimate assumes the availability of insurance
coverage for certain claims, and the estimate may be revised based on the amount
of reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
However,
F-44
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
22. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, 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. In 1999, 49 out of 50
states have adopted the National Association of Insurance Commissioners proposed
Codification, which provides for uniform statutory accounting principles. These
principles are effective January 1, 2001. The Company is currently assessing the
impact that the adoption of Codification will have on its statutory results of
operations and financial position.
Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies........................... $322.6 $ 180.7 $ 190.3
Life and Health Companies................................. 239.0 86.4 191.2
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies (See Note 3).............. $-- $1,269.3 $1,279.6
Life and Health Companies................................. 590.1 1,164.1 1,221.3
</TABLE>
F-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and the Contractowners of the Separate Account VA-K 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
constituting the Separate Account VA-K of First Allmerica Financial Life
Insurance Company at December 31, 1999, 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 accounting principles
generally accepted in the United States. These financial statements are the
responsibility of First Allmerica Financial Life Insurance Company; 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 auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999 by correspondence with the Funds, provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 9999
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 31,666,387 $ 7,482,662 $ 12,444,661
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 ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... 188,078 - -
--------------- --------------- ---------------
Total assets .......................................................... 31,854,465 7,482,662 12,444,661
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - 3,249
--------------- --------------- ---------------
Net assets ............................................................. $ 31,854,465 $ 7,482,662 $12,441,412
--------------- --------------- ---------------
--------------- --------------- ---------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 31,854,465 $ 7,482,662 $ 12,441,412
--------------- --------------- ---------------
--------------- --------------- ---------------
Units outstanding, December 31, 1999 ....................................... 10,700,441 5,686,038 10,043,976
Net asset value per unit, December 31, 1999 ................................ $ 2.976930 $ 1.315971 $ 1.238694
<CAPTION>
SELECT
EQUITY INDEX GOVERNMENT BOND AGGRESSIVE GROWTH
--------------- --------------- -----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 37,628,197 $ 5,177,193 $ 30,195,322
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 ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
--------------- --------------- -----------------
Total assets .......................................................... 37,628,197 5,177,193 30,195,322
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... 75,965 - -
--------------- --------------- -----------------
Net assets ............................................................. $ 37,552,232 $ 5,177,193 $ 30,195,322
--------------- --------------- -----------------
--------------- --------------- -----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 37,552,232 $ 5,177,193 $ 30,195,322
--------------- --------------- -----------------
--------------- --------------- -----------------
Units outstanding, December 31, 1999 ....................................... 11,440,299 4,117,854 11,108,225
Net asset value per unit, December 31, 1999 ................................ $ 3.282452 $ 1.257255 $ 2.718285
<CAPTION>
SELECT GROWTH SELECT VALUE
SELECT GROWTH AND INCOME OPPORTUNITY
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 40,381,292 $ 22,998,632 $ 14,229,174
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 ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
--------------- --------------- ---------------
Total assets .......................................................... 40,381,292 22,998,632 14,229,174
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - 75,512 -
--------------- --------------- ---------------
Net assets ............................................................. $ 40,381,292 $ 22,923,120 $ 14,229,174
--------------- --------------- ---------------
--------------- --------------- ---------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 40,381,292 $ 22,923,120 $ 14,229,174
--------------- --------------- ---------------
--------------- --------------- ---------------
Units outstanding, December 31, 1999 ....................................... 11,455,113 8,957,758 8,309,201
Net asset value per unit, December 31, 1999 ................................ $ 3.525176 $ 2.559024 $ 1.712460
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
December 31, 9999
<TABLE>
<CAPTION>
SELECT DGPF
INTERNATIONAL SELECT CAPITAL INTERNATIONAL
EQUITY APPRECIATION EQUITY
----------------- ------------------ ----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 22,588,494 $ 15,467,194 $ -
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 ................... - - 7,844,338
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
---------------- ---------------- -----------------
Total assets .......................................................... 22,588,494 15,467,194 7,844,338
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... 3 - 2
Net assets ............................................................. $ 22,588,491 15,467,194 7,844,336
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 22,588,491 $ 15,467,194 $ 7,844,336
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Units outstanding, December 31, 1999 ....................................... 10,840,734 6,678,146 4,559,804
Net asset value per unit, December 31, 1999 ................................ $ 2.083668 $ 2.316091 $ 1.7203236091
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP
HIGH INCOME EQUITY-INCOME GROWTH
----------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. 23,300,730 41,823,565 60,703,679
Investment in shares of T. Rowe Price International Series, Inc. ........... - - -
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
---------------- ---------------- ----------------
Total assets .......................................................... 23,300,730 41,823,565 60,703,679
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
---------------- ---------------- ----------------
Net assets ............................................................. $ 23,300,730 $ 41,823,565 $ 60,703,679
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 23,300,730 $ 41,823,565 $ 60,703,679
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Units outstanding, December 31, 1999 ....................................... 15,019,986 17,835,666 16,527,943
Net asset value per unit, December 31, 1999 ................................ $ 1.551315 $ 2.344940 $ 3.672791
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
-------------- ------------------ ---------------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. 9,725,194 8,748,250 -
Investment in shares of T. Rowe Price International Series, Inc. ........... - - 10,889,577
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
-------------- ------------------ ---------------------
Total assets .......................................................... 9,725,194 8,748,250 10,889,577
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
-------------- ------------------ ---------------------
Net assets ............................................................. $ 9,725,194 $ 8,748,250 $ 10,889,577
-------------- ------------------ ---------------------
-------------- ------------------ ---------------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 9,725,194 $ 8,748,250 $ 10,889,577
-------------- ------------------ ---------------------
-------------- ------------------ ---------------------
Units outstanding, December 31, 1999 ....................................... 4,796,337 4,613,840 5,937,367
Net asset value per unit, December 31, 1999 ................................ $ 2.027630 $ 1.896089 $ 1.834075
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 165,095 $ 460,500 $ 598,236 $ 284,297
------------- ------------ ------------ ------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 323,203 91,695 147,935 373,833
Administrative expense fees. . . . . . . . . . . . . . . . . 52,614 14,927 24,082 60,857
------------- ------------ ------------ ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 375,817 106,622 172,017 434,690
------------- ------------ ------------ ------------
Net investment income (loss) . . . . . . . . . . . . . . . (210,722) 353,878 426,219 (150,393)
------------- ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 2,354,633 5,800 - 45,159
Net realized gain (loss) from sales of investments . . . . . 314,692 (11,579) - 294,331
------------- ------------ ------------ ------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 2,669,325 (5,779) - 339,490
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 3,944,336 (523,111) - 5,088,920
------------- ------------ ------------ ------------
Net realized and unrealized gain (loss) . . . . . . . . . 6,613,661 (528,890) - 5,428,410
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from operations . . $ 6,402,939 $ (175,012) $ 426,219 $5,278,017
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
<CAPTION>
SELECT SELECT GROWTH
GOVERNMENT BOND AGGRESSIVE GROWTH SELECT GROWTH AND INCOME
--------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,146 $ - $ 15,054 $ 214,299
--------------- ----------------- ------------- -------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 57,267 286,970 367,811 240,871
Administrative expense fees. . . . . . . . . . . . . . . . . 9,322 46,716 59,876 39,211
--------------- ----------------- ------------- -------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 66,589 333,686 427,687 280,082
--------------- ----------------- ------------- -------------
Net investment income (loss) . . . . . . . . . . . . . . . 200,557 (333,686) (412,633) (65,783)
--------------- ----------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . - - 956,687 1,417,591
Net realized gain (loss) from sales of investments . . . . . (25,022) 348,108 242,691 166,282
--------------- ----------------- ------------- -------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . (25,022) 348,108 1,199,378 1,583,873
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (219,399) 7,883,902 7,400,373 1,439,837
--------------- ----------------- ------------- -------------
Net realized and unrealized gain (loss) . . . . . . . . . (244,421) 8,232,010 8,599,751 3,023,710
--------------- ----------------- ------------- -------------
Net increase (decrease) in net assets from operations . . $ (43,864) $ 7,898,324 $ 8,187,118 $ 2,957,927
--------------- ----------------- ------------- -------------
--------------- ----------------- ------------- -------------
<CAPTION>
SELECT VALUE
OPPORTUNITY
-------------
<S> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 77
-------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 168,326
Administrative expense fees. . . . . . . . . . . . . . . . . 27,402
-------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 195,728
-------------
Net investment income (loss) . . . . . . . . . . . . . . . (195,651)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 770,979
Net realized gain (loss) from sales of investments . . . . . (19,671)
-------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 751,308
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (1,364,169)
-------------
Net realized and unrealized gain (loss) . . . . . . . . . (612,861)
-------------
Net increase (decrease) in net assets from operations . . $ (808,512)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF OPERATIONS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT DGPF
INTERNATIONAL SELECT CAPITAL INTERNATIONAL FIDELITY VIP
EQUITY APPRECIATION EQUITY HIGH INCOME
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 136,850 $1,886,309
------------- -------------- ------------- ------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 223,269 155,151 85,251 277,658
Administrative expense fees. . . . . . . . . . . . . . . . . 36,347 25,257 13,879 45,201
------------- -------------- ------------- ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 259,616 180,408 99,130 322,859
------------- -------------- ------------- ------------
Net investment income (loss) . . . . . . . . . . . . . . . (259,616) (180,408) 37,720 1,563,450
------------- -------------- ------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . - 18,801 9,995 70,516
Net realized gain (loss) from sales of investments . . . . . 233,508 73,953 85,179 (255,991)
------------- -------------- ------------- ------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 233,508 92,754 95,174 (185,475)
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 5,024,680 2,949,396 776,394 (29,248)
------------- -------------- ------------- ------------
Net realized and unrealized gain (loss) . . . . . . . . . 5,258,188 3,042,150 871,568 (214,723)
------------- -------------- ------------- ------------
Net increase (decrease) in net assets from operations . . $ 4,998,572 $ 2,861,742 $ 909,288 $1,348,727
------------- -------------- ------------- ------------
------------- -------------- ------------- ------------
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP FIDELITY VIP II
EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 541,437 $ 64,545 $ 98,590 $ 206,350
------------- -------------- ------------ ---------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 500,740 571,004 89,844 89,813
Administrative expense fees. . . . . . . . . . . . . . . . . 81,516 92,955 14,626 14,621
------------- -------------- ------------ ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 582,256 663,959 104,470 104,434
------------- -------------- ------------ ---------------
Net investment income (loss) . . . . . . . . . . . . . . . (40,819) (599,414) (5,880) 101,916
------------- -------------- ------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 1,196,860 4,058,271 159,017 261,376
Net realized gain (loss) from sales of investments . . . . . 518,090 423,817 166,845 43,434
------------- -------------- ------------ ---------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 1,714,950 4,482,088 325,862 304,810
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (29,350) 10,852,568 2,373,555 284,089
------------- -------------- ------------ ---------------
Net realized and unrealized gain (loss) . . . . . . . . . 1,685,600 15,334,656 2,699,417 588,899
------------- -------------- ------------ ---------------
Net increase (decrease) in net assets from operations . . $ 1,644,781 $ 14,735,242 $2,693,537 $ 690,815
------------- -------------- ------------ ---------------
------------- -------------- ------------ ---------------
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
-------------------
<S> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,305
-------------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 108,177
Administrative expense fees. . . . . . . . . . . . . . . . . 17,611
-------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 125,788
-------------------
Net investment income (loss) . . . . . . . . . . . . . . . (86,483)
-------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 123,530
Net realized gain (loss) from sales of investments . . . . . 127,661
-------------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 251,191
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 2,415,777
-------------------
Net realized and unrealized gain (loss) . . . . . . . . . 2,666,968
-------------------
Net increase (decrease) in net assets from operations . . $ 2,580,485
-------------------
-------------------
</TABLE>
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (210,722) $ (60,681) $ 353,878 $ 284,315
Net realized gain (loss). . . . . . . . . . . . . . . . 2,669,325 227,744 (5,779) 22,115
Net unrealized gain (loss). . . . . . . . . . . . . . . 3,944,336 2,783,753 (523,111) 69,734
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 6,402,939 2,950,816 (175,012) 376,164
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 1,252,999 1,295,185 359,462 477,719
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (987,135) (854,008) (308,427) (278,536)
Contract benefits . . . . . . . . . . . . . . . . . . . . (216,420) (139,181) - -
Contract charges. . . . . . . . . . . . . . . . . . . . . (6,798) (5,051) (949) (805)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,506,045 3,331,381 653,869 1,501,451
Other transfers from (to) the General Account . . . . . . 1,358,025 267,895 (3,653) (45,851)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 3,906,716 3,896,221 700,302 1,653,978
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 10,309,655 6,847,037 525,290 2,030,142
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 21,544,810 14,697,773 6,957,372 4,927,230
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 31,854,465 $ 21,544,810 $ 7,482,662 $ 6,957,372
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 426,219 $ 412,863 $ (150,393) $ (38,931)
Net realized gain (loss). . . . . . . . . . . . . . . . - - 339,490 783,712
Net unrealized gain (loss). . . . . . . . . . . . . . . - - 5,088,920 3,420,684
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 426,219 412,863 5,278,017 4,165,465
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 41,248,758 42,956,520 2,053,314 1,870,086
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (663,576) (1,527,192) (1,285,807) (1,165,798)
Contract benefits . . . . . . . . . . . . . . . . . . . . (163,706) (7,305) (317,893) (196,777)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,910) (2,579) (6,761) (4,591)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . (38,919,763) (43,621,528) 6,865,573 5,748,639
Other transfers from (to) the General Account . . . . . . 141,135 2,251,241 1,513,207 548,442
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,639,938 49,157 8,821,633 6,800,001
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 2,066,157 462,020 14,099,650 10,965,466
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 10,375,255 9,913,235 23,452,582 12,487,116
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 12,441,412 $ 10,375,255 $ 37,552,232 $ 23,452,582
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
GOVERNMENT BOND
YEAR ENDED DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 200,557 $ 114,541
Net realized gain (loss). . . . . . . . . . . . . . . . (25,022) 18,037
Net unrealized gain (loss). . . . . . . . . . . . . . . (219,399) 22,198
--------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . (43,864) 154,776
--------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 377,457 341,848
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (121,601) (183,152)
Contract benefits . . . . . . . . . . . . . . . . . . . . (2,353) (230)
Contract charges. . . . . . . . . . . . . . . . . . . . . (695) (486)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,653,622 946,095
Other transfers from (to) the General Account . . . . . . (999) 24,821
--------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,905,431 1,128,896
--------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 1,861,567 1,283,672
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 3,315,626 2,031,954
--------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 5,177,193 $ 3,315,626
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SELECT
AGGRESSIVE GROWTH SELECT GROWTH
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (333,686) $ (248,987) $ (412,633) $ (223,375)
Net realized gain (loss). . . . . . . . . . . . . . . . 348,108 120,729 1,199,378 343,553
Net unrealized gain (loss). . . . . . . . . . . . . . . 7,883,902 1,626,872 7,400,373 4,813,123
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 7,898,324 1,498,614 8,187,118 4,933,301
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 1,341,167 1,667,973 2,185,824 1,762,877
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (1,018,716) (1,107,960) (1,027,454) (1,154,143)
Contract benefits . . . . . . . . . . . . . . . . . . . . (157,606) (5,407) (66,619) (46,068)
Contract charges. . . . . . . . . . . . . . . . . . . . . (7,973) (6,478) (9,601) (5,919)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,002,025 3,440,969 6,544,402 5,348,619
Other transfers from (to) the General Account . . . . . . 684,379 461,145 1,449,947 743,351
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,843,276 4,450,242 9,076,499 6,648,717
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 9,741,600 5,948,856 17,263,617 11,582,018
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 20,453,722 14,504,866 23,117,675 11,535,657
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 30,195,322 $ 20,453,722 $ 40,381,292 $ 23,117,675
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
SELECT GROWTH SELECT VALUE
AND INCOME OPPORTUNITY
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (65,783) $ (24,404) $ (195,651) $ (54,898)
Net realized gain (loss). . . . . . . . . . . . . . . . 1,583,873 185,469 751,308 67,905
Net unrealized gain (loss). . . . . . . . . . . . . . . 1,439,837 1,752,366 (1,364,169) 319,879
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,957,927 1,913,431 (808,512) 332,886
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 887,196 916,420 807,164 1,013,793
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (698,848) (709,978) (578,815) (592,743)
Contract benefits . . . . . . . . . . . . . . . . . . . . (239,854) (158,824) (70,078) (6,487)
Contract charges. . . . . . . . . . . . . . . . . . . . . (4,329) (3,598) (4,406) (3,938)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,882,328 2,191,454 853,303 2,413,513
Other transfers from (to) the General Account . . . . . . 653,591 641,774 823,362 408,183
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 3,480,084 2,877,248 1,830,530 3,232,321
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 6,438,011 4,790,679 1,022,018 3,565,207
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 16,485,109 11,694,430 13,207,156 9,641,949
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 22,923,120 $ 16,485,109 $ 14,229,174 $ 13,207,156
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL SELECT CAPITAL
EQUITY APPRECIATION
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (259,616) $ (1,682) $ (180,408) $ (134,524)
Net realized gain (loss). . . . . . . . . . . . . . . . 233,508 92,023 92,754 1,842,555
Net unrealized gain (loss). . . . . . . . . . . . . . . 5,024,680 1,717,818 2,949,396 (486,273)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 4,998,572 1,808,159 2,861,742 1,221,758
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 938,996 911,710 806,871 977,644
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (598,035) (543,238) (408,501) (481,265)
Contract benefits . . . . . . . . . . . . . . . . . . . . (103,902) (35,297) (73,268) (6,055)
Contract charges. . . . . . . . . . . . . . . . . . . . . (4,551) (4,110) (3,766) (3,180)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,043,370 1,774,816 844,374 676,351
Other transfers from (to) the General Account . . . . . . 722,884 388,199 291,915 83,210
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,998,762 2,492,080 1,457,625 1,246,705
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 6,997,334 4,300,239 4,319,367 2,468,463
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 15,591,157 11,290,918 11,147,827 8,679,364
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 22,588,491 $ 15,591,157 $ 15,467,194 $ 11,147,827
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
DGPF FIDELITY VIP
INTERNATIONAL EQUITY HIGH INCOME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 37,720 $ 97,218 $ 1,563,450 $ 834,606
Net realized gain (loss). . . . . . . . . . . . . . . . 95,174 37,951 (185,475) 658,212
Net unrealized gain (loss). . . . . . . . . . . . . . . 776,394 277,546 (29,248) (2,709,154)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 909,288 412,715 1,348,727 (1,216,336)
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 367,188 450,397 1,076,323 2,062,177
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (323,376) (251,355) (1,108,186) (987,162)
Contract benefits . . . . . . . . . . . . . . . . . . . . (75,382) - (80,940) (107,858)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,042) (1,772) (4,678) (4,164)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 460,977 1,017,275 924,886 5,202,627
Other transfers from (to) the General Account . . . . . . 252,896 99,261 472,556 607,069
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 680,261 1,313,806 1,279,961 6,772,689
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 1,589,549 1,726,521 2,628,688 5,556,353
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 6,254,787 4,528,266 20,672,042 15,115,689
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 7,844,336 $ 6,254,787 $ 23,300,730 $ 20,672,042
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP
EQUITY-INCOME GROWTH
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (40,819) $ (71,964) $ (599,414) $ (282,421)
Net realized gain (loss). . . . . . . . . . . . . . . . 1,714,950 1,679,271 4,482,088 3,404,903
Net unrealized gain (loss). . . . . . . . . . . . . . . (29,350) 1,360,035 10,852,568 6,094,613
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 1,644,781 2,967,342 14,735,242 9,217,095
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 2,283,854 2,398,189 3,005,646 2,265,258
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (1,561,021) (1,518,197) (1,926,189) (1,842,522)
Contract benefits . . . . . . . . . . . . . . . . . . . . (372,120) (137,044) (334,648) (153,105)
Contract charges. . . . . . . . . . . . . . . . . . . . . (11,244) (10,250) (13,812) (11,095)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,505,465 5,061,840 8,245,102 2,328,047
Other transfers from (to) the General Account . . . . . . 1,280,927 935,806 1,647,348 713,595
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 4,125,861 6,730,344 10,623,447 3,300,178
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 5,770,642 9,697,686 25,358,689 12,517,273
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 36,052,923 26,355,237 35,344,990 22,827,717
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 41,823,565 $ 36,052,923 $ 60,703,679 $ 35,344,990
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
FIDELITY VIP FIDELITY VIP II
OVERSEAS ASSET MANAGER
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (5,880) $ 11,939 $ 101,916 $ 75,632
Net realized gain (loss). . . . . . . . . . . . . . . . 325,862 318,370 304,810 515,185
Net unrealized gain (loss). . . . . . . . . . . . . . . 2,373,555 200,255 284,089 92,247
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,693,537 530,564 690,815 683,064
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 414,849 436,787 537,213 447,933
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (327,147) (334,149) (414,012) (551,001)
Contract benefits . . . . . . . . . . . . . . . . . . . . (25,172) (27,009) (32,731) (68,728)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,345) (2,070) (1,840) (1,417)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 528,915 833,047 1,419,160 701,410
Other transfers from (to) the General Account . . . . . . 156,409 175,177 464,372 102,018
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 745,509 1,081,783 1,972,162 630,215
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 3,439,046 1,612,347 2,662,977 1,313,279
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 6,286,148 4,673,801 6,085,273 4,771,994
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 9,725,194 $ 6,286,148 $ 8,748,250 $ 6,085,273
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
YEAR ENDED DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (86,483) $ (6,236)
Net realized gain (loss). . . . . . . . . . . . . . . . 251,191 75,474
Net unrealized gain (loss). . . . . . . . . . . . . . . 2,415,777 794,299
--------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,580,485 863,537
--------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 425,683 476,174
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (207,845) (231,411)
Contract benefits . . . . . . . . . . . . . . . . . . . . (102,701) (13,764)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,157) (1,792)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . (13,653) 1,103,994
Other transfers from (to) the General Account . . . . . . 294,802 174,146
--------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 394,129 1,507,347
--------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 2,974,614 2,370,884
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 7,914,963 5,544,079
--------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 10,889,577 $ 7,914,963
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Separate Account VA-K, which funds the Allmerica Advantage, ExecAnnuity Plus
and Allmerica Immediate Advantage variable annuity contracts, in addition to
other contracts (the Delaware Medallion variable annuity 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 and twenty Sub-Accounts under the
Allmerica Immediate Advantage variable annuity contracts. Each Sub-Account
invests exclusively in a corresponding investment portfolio of Allmerica
Investment Trust (the Trust) managed by Allmerica Financial Investment
Management Services, Inc. (AFIMS), an indirect 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
(DGPF) managed by Delaware International Advisers Ltd.; or of the T. Rowe Price
International Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming
International, Inc. The Trust, Fidelity VIP, Fidelity VIP II, DGPF, and T. Rowe
Price (the Funds) are open-end, management investment companies registered under
the 1940 Act.
Effective May 1, 2000, AIT Investment Grade Income Fund will be renamed
Select Investment Grade Income Fund and AIT Growth Fund will be renamed Core
Equity Fund.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS - Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Realized gains and losses
on securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of the
Funds at net asset value.
FEDERAL INCOME TAXES - The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. 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.
SA-9
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
-------------------- -------------- -------------- -----------
<S> <C> <C> <C>
Growth . . . . . . . . . . . . . . . . . . . . . . 9,563,995 $ 24,918,919 $ 3.311
Investment Grade Income . . . . . . . . . . . . . . 7,119,564 7,820,753 1.051
Money Market . . . . . . . . . . . . . . . . . . . 12,444,661 12,444,661 1.000
Equity Index. . . . . . . . . . . . . . . . . . . . 9,268,029 27,182,985 4.060
Government Bond . . . . . . . . . . . . . . . . . . 5,120,863 5,367,144 1.011
Select Aggressive Growth . . . . . . . . . . . . . 8,852,337 18,974,244 3.411
Select Growth . . . . . . . . . . . . . . . . . . . 13,244,110 26,686,731 3.049
Select Growth and Income. . . . . . . . . . . . . . 11,897,895 18,647,029 1.933
Select Value Opportunity. . . . . . . . . . . . . . 9,355,144 14,597,670 1.521
Select International Equity . . . . . . . . . . . . 11,121,858 15,206,169 2.031
Select Capital Appreciation . . . . . . . . . . . . 7,533,947 11,724,744 2.053
DGPF International Equity . . . . . . . . . . . . . 421,059 6,393,416 18.630
Fidelity VIP High Income . . . . . . . . . . . . . 2,060,188 24,328,238 11.310
Fidelity VIP Equity-Income . . . . . . . . . . . . 1,626,743 35,043,958 25.710
Fidelity VIP Growth . . . . . . . . . . . . . . . . 1,105,110 38,840,482 54.930
Fidelity VIP Overseas . . . . . . . . . . . . . . . 354,417 6,671,145 27.440
Fidelity VIP II Asset Manager . . . . . . . . . . . 468,573 7,634,435 18.670
T. Rowe Price International Stock . . . . . . . . . 571,932 7,547,860 19.040
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum to Allmerica Advantage,
ExecAnnuity Plus and to Allmerica Immediate Advantage 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 of Allmerica Advantage,
ExecAnnuity Plus and Allmerica Immediate Advantage 0.20% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
For contracts issued on Form A3018-94 (ExecAnnuity Plus), a contract fee is
deducted on the contract anniversary 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 contract anniversary 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) issued to and maintained by
the trustee of a 401(k) plan.
Allmerica Investments, Inc., (Allmerica Investments), an indirect
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. Allmerica Advantage and ExecAnnuity Plus
contracts have a contingent deferred sales charge and no deduction is made for
sales charges at the time of the sale.
SA-10
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------- ---------------------------------
UNITS AMOUNT UNITS AMOUNT
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Growth
Issuance of Units . . . . . . . . . . . . . . . 2,838,227 $ 7,105,831 3,196,609 $ 6,772,868
Redemption of Units . . . . . . . . . . . . . . (1,362,213) (3,199,115) (1,373,701) (2,876,647)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,476,014 $ 3,906,716 1,822,908 $ 3,896,221
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Investment Grade Income
Issuance of Units . . . . . . . . . . . . . . . 1,668,246 $ 2,226,512 2,044,414 $ 2,696,090
Redemption of Units . . . . . . . . . . . . . . (1,141,863) (1,526,210) (773,878) (1,042,112)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 526,383 $ 700,302 1,270,536 $ 1,653,978
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Money Market
Issuance of Units . . . . . . . . . . . . . . . 45,985,028 $ 50,757,480 48,203,810 $ 54,962,039
Redemption of Units . . . . . . . . . . . . . . (44,623,695) (49,117,542) (48,148,881) (54,912,882)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,361,333 $ 1,639,938 54,929 $ 49,157
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Equity Index
Issuance of Units . . . . . . . . . . . . . . . 4,377,991 $ 12,478,466 4,063,578 $ 9,923,583
Redemption of Units . . . . . . . . . . . . . . (1,416,195) (3,656,833) (1,295,473) (3,123,582)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 2,961,796 $ 8,821,633 2,768,105 $ 6,800,001
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Government Bond
Issuance of Units . . . . . . . . . . . . . . . 3,481,100 $ 4,068,069 2,440,242 $ 3,015,884
Redemption of Units . . . . . . . . . . . . . . (1,968,201) (2,162,638) (1,529,683) (1,886,988)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,512,899 $ 1,905,431 910,559 $ 1,128,896
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Aggressive Growth
Issuance of Units . . . . . . . . . . . . . . . 2,754,461 $ 5,755,614 3,742,763 $ 7,274,206
Redemption of Units . . . . . . . . . . . . . . (1,928,576) (3,912,338) (1,407,342) (2,823,964)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 825,885 $ 1,843,276 2,335,421 $ 4,450,242
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Growth
Issuance of Units . . . . . . . . . . . . . . . 4,449,518 $ 12,858,990 4,160,290 $ 9,729,097
Redemption of Units . . . . . . . . . . . . . . (1,383,502) (3,782,491) (1,360,001) (3,080,380)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 3,066,016 $ 9,076,499 2,800,289 $ 6,648,717
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Growth and Income
Issuance of Units . . . . . . . . . . . . . . . 2,419,585 $ 5,776,930 2,568,312 $ 4,993,792
Redemption of Units . . . . . . . . . . . . . . (980,376) (2,296,846) (1,170,883) (2,116,544)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,439,209 $ 3,480,084 1,397,429 $ 2,877,248
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Value Opportunity
Issuance of Units . . . . . . . . . . . . . . . 2,585,542 $ 4,303,678 2,771,415 $ 5,006,786
Redemption of Units . . . . . . . . . . . . . . (1,519,807) (2,473,148) (994,406) (1,774,465)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,065,735 $ 1,830,530 1,777,009 $ 3,232,321
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
SA-11
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------- ---------------------------------
UNITS AMOUNT UNITS AMOUNT
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Select International Equity
Issuance of Units . . . . . . . . . . . . . . . 2,901,922 $ 4,637,861 2,894,703 $ 4,527,204
Redemption of Units . . . . . . . . . . . . . . (1,774,034) (2,639,099) (1,258,209) (2,035,124)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,127,888 $ 1,998,762 1,636,494 $ 2,492,080
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Capital Appreciation
Issuance of Units . . . . . . . . . . . . . . . 1,668,178 $ 3,161,299 1,891,659 $ 3,122,674
Redemption of Units . . . . . . . . . . . . . . (936,701) (1,703,674) (1,142,204) (1,875,969)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 731,477 $ 1,457,625 749,455 $ 1,246,705
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
DGPF International Equity
Issuance of Units . . . . . . . . . . . . . . . 1,442,035 $ 1,822,469 1,486,205 $ 2,175,924
Redemption of Units . . . . . . . . . . . . . . (1,030,011) (1,142,208) (604,270) (862,118)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 412,024 $ 680,261 881,935 $ 1,313,806
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP High Income
Issuance of Units . . . . . . . . . . . . . . . 5,073,951 $ 7,695,969 6,929,705 $ 10,678,702
Redemption of Units . . . . . . . . . . . . . . (4,257,220) (6,416,008) (2,520,698) (3,906,013)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 816,731 $ 1,279,961 4,409,007 $ 6,772,689
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Equity-Income
Issuance of Units . . . . . . . . . . . . . . . 4,637,345 $ 10,608,146 5,589,831 $ 11,872,225
Redemption of Units . . . . . . . . . . . . . . (2,912,701) (6,482,285) (2,438,089) (5,141,881)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,724,644 $ 4,125,861 3,151,742 $ 6,730,344
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Growth
Issuance of Units . . . . . . . . . . . . . . . 5,332,578 $ 16,144,378 3,232,147 $ 7,273,604
Redemption of Units . . . . . . . . . . . . . . (1,839,285) (5,520,931) (1,772,972) (3,973,426)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 3,493,293 $ 10,623,447 1,459,175 $ 3,300,178
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Overseas
Issuance of Units . . . . . . . . . . . . . . . 1,511,089 $ 2,442,012 1,414,651 $ 1,993,759
Redemption of Units . . . . . . . . . . . . . . (1,072,506) (1,696,503) (657,938) (911,976)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 438,583 $ 745,509 756,713 $ 1,081,783
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP II Asset Manager
Issuance of Units . . . . . . . . . . . . . . . 1,723,766 $ 2,984,705 1,093,306 $ 1,742,931
Redemption of Units . . . . . . . . . . . . . . (623,602) (1,012,543) (704,485) (1,112,716)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,100,164 $ 1,972,162 388,821 $ 630,215
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
T. Rowe Price International Stock
Issuance of Units . . . . . . . . . . . . . . . 1,268,569 $ 1,791,489 1,891,293 $ 2,454,236
Redemption of Units . . . . . . . . . . . . . . (1,001,312) (1,397,360) (756,997) (946,889)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 267,257 $ 394,129 1,134,296 $ 1,507,347
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that 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 shares of the Funds by Separate
Account VA-K during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
-------------------- -------------- --------------
<S> <C> <C>
Growth . . . . . . . . . . . . . . . . . . . $ 7,440,215 $ 1,859,502
Investment Grade Income. . . . . . . . . . . 2,167,164 1,107,184
Money Market . . . . . . . . . . . . . . . . 29,732,493 27,663,120
Equity Index . . . . . . . . . . . . . . . . 10,065,420 1,234,110
Government Bond. . . . . . . . . . . . . . . 3,952,169 1,846,181
Select Aggressive Growth . . . . . . . . . . 3,077,841 1,568,251
Select Growth . . . . . . . . . . . . . . . 10,606,061 985,508
Select Growth and Income . . . . . . . . . . 5,923,944 984,048
Select Value Opportunity . . . . . . . . . . 3,494,767 1,088,909
Select International Equity. . . . . . . . . 2,921,317 1,182,168
Select Capital Appreciation. . . . . . . . . 1,989,362 693,344
DGPF International Equity. . . . . . . . . . 1,425,526 697,548
Fidelity VIP High Income . . . . . . . . . . 7,052,384 4,138,457
Fidelity VIP Equity-Income . . . . . . . . . 8,326,912 3,045,010
Fidelity VIP Growth. . . . . . . . . . . . . 15,675,402 1,593,098
Fidelity VIP Overseas. . . . . . . . . . . . 2,032,652 1,134,006
Fidelity VIP II Asset Manager. . . . . . . . 2,914,612 579,158
T. Rowe Price International Stock. . . . . . 1,290,960 859,784
-------------- --------------
Totals . . . . . . . . . . . . . . . . . . $120,089,201 $ 52,259,386
-------------- --------------
-------------- --------------
</TABLE>
NOTE 8 - PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-13
<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 AIM VARIABLE INSURANCE FUNDS, THE ALGER AMERICAN FUND,
ALLMERICA INVESTMENT TRUST, DREYFUS VARIABLE INVESTMENT FUND, THE DREYFUS
SOCIALLY RESPONSIBLE GROWTH FUND, INC., EVERGREEN VARIABLE ANNUITY TRUST,
FEDERATED INSURANCE SERIES, FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST, MFS VARIABLE INSURANCE TRUST-SM-,
AND OPPENHEIMER VARIABLE ACCOUNT FUNDS
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE VALUPLUS ASSURANCE VARIABLE IMMEDIATE ANNUITY PROSPECTUS
OF SEPARATE ACCOUNT VA-K DATED MAY 4, 2000 ("THE PROSPECTUS"). THE PROSPECTUS
MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES, FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653,
TELEPHONE 1-800-723-6550.
DATED MAY 4, 2000
FAFLIC ValuPlus Assurance Variable Immediate Annuity
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY........................................2
THE VARIABLE ACCOUNT AND THE COMPANY...................................4
SERVICES...............................................................4
UNDERWRITERS...........................................................4
ANNUITY PAYMENTS.......................................................5
PERFORMANCE INFORMATION................................................6
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") authorized
by vote of its Board of Directors on August 20, 1991. The Company, organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1999, the Company and its subsidiaries
had over $25 billion in combined assets and over $43 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, 23 Sub-Accounts of the Variable Account are available under the
ValuPlus Assurance Variable Immediate Annuity contract (the "Contract").
Each Sub-Account invests in a corresponding investment portfolio of AIM Variable
Insurance Funds ("AVIF"), The Alger American Fund ("Alger"), Allmerica
Investment Trust ("AIT"), Dreyfus Variable Investment Fund (the "Dreyfus
Variable Investment Fund"), The Dreyfus Socially Responsible Growth Fund, Inc.
(the "Dreyfus Socially Responsible Growth Fund"), Evergreen Variable Annuity
Trust (the "Evergreen Trust"), Federated Insurance Series ("FIS"), Franklin
Templeton Variable Insurance Products Trust ("FT VIP"), MFS Variable Insurance
Trust-SM- (the "MFS Trust"), and Oppenheimer Variable Account Funds
("Oppenheimer"), which are open-end, diversified management investment
companies. Each Fund, Portfolio and Series available under the Contract
(together, the "Underlying Funds") has its own investment objectives and certain
attendant risks.
AIM VARIABLE INSURANCE FUNDS
Two portfolios of AVIF are available under the Contract: AIM V.I. Capital
Appreciation Fund and AIM V.I. Value Fund. The investment adviser for the AIM
V.I. Capital Appreciation Fund and AIM V.I. Value Fund is A I M Advisors, Inc.
("AIM").
THE ALGER AMERICAN FUND
Three portfolios of Alger are available under the Contract: Alger American
Growth Portfolio, Alger American Leveraged AllCap Portfolio, and Alger American
Small Capitalization Portfolio. Fred Alger Management, Inc. is the investment
adviser for the Alger American Growth, Alger American Leveraged AllCap, and
Alger American Small Capitalization Portfolios.
2
<PAGE>
ALLMERICA INVESTMENT TRUST
One fund of AIT is available under the Contract: AIT Money Market Fund. The
investment adviser for AIT is Allmerica Financial Investment Management
Services, Inc.
DREYFUS VARIABLE INVESTMENT FUND
Two portfolios of the Dreyfus Variable Investment Fund are available under the
Contract: Dreyfus VIF Capital Appreciation Portfolio and Dreyfus VIF Quality
Bond Portfolio. The Dreyfus Corporation serves as the investment adviser to the
Dreyfus investment portfolios.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
One portfolio of the Dreyfus Socially Responsible Growth Fund is available under
the Contract: Dreyfus Socially Responsible Growth Fund. The Dreyfus Corporation
serves as the investment adviser to the Dreyfus Socially Responsible Growth Fund
and NCM Capital Management Group, Inc. provides sub-investment advisory
services.
EVERGREEN VARIABLE ANNUITY TRUST
Four series of the Evergreen Trust are available under the Contract: Evergreen
VA Small Cap Value Fund, Evergreen VA Equity Index Fund, Evergreen VA Foundation
Fund, and Evergreen VA Global Leaders Fund. The investment adviser to the
Evergreen VA Equity Index Fund is Evergreen Investment Management ("EIM"). The
investment adviser to the Evergreen VA Global Leaders Fund and Evergreen VA
Small Cap Value Fund is Evergreen Asset Management Corp. ("EAMC"). Lieber &
Company acts as sub-advisor to these and provides investment research,
information, investment recommendation advice and assistance to EAMC, and is
reimbursed by EAMC for the costs of providing such sub-advisory services. EAMC
is also the investment adviser to the Evergreen VA Foundation Fund.
FEDERATED INSURANCE SERIES
Three portfolios of FIS are available under the Contract: Federated American
Leaders Fund II, Federated High Income Bond Fund II, and Federated Prime Money
Fund II. The Portfolio's investment adviser is Federated Investment Management
Company ("Federated").
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Two portfolios of F.T. VIP are available under the Contract: Templeton
International Securities Fund and Templeton Asset Strategy Fund. Templeton
Investment Counsel, Inc. ("TICI") is adviser to the Templeton Asset Strategy
Fund and Templeton International Securities Fund.
MFS-VARIABLE INSURANCE TRUST-SM-
Two portfolios of the MFS Trust are available under the Contract: MFS Growth
With Income Series, and MFS Utilities Series. The investment adviser of MFS
Growth With Income Series and MFS Utilities Series is Massachusetts Financial
Services Company ("MFS").
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Three portfolios of Oppenheimer are available under the Contract: Oppenheimer
Main Street Growth & Income Fund/VA, Oppenheimer Small Cap Growth Fund/VA, and
Oppenheimer Strategic Bond Fund/VA. The investment adviser for the Oppenheimer
Main Street Growth & Income Fund/VA, Oppenheimer Small Cap Growth Fund/VA, and
Oppenheimer Strategic Bond Fund/VA is OppenheimerFunds, Inc.
("OppenheimerFunds").
3
<PAGE>
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, 1999 and
1998 and for each of the three years in the period ended December 31, 1999, and
the financial statements of Separate Account VA-K of the Company as of December
31, 1999 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, an
indirect wholly owned subsidiary of First Allmerica, acts as the principal
underwriter and general distributor of the Contract. Allmerica Investments, Inc.
is a registered broker-dealer under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc. ("NASD"). First
Union Securities, Inc. acts as the distributor and wholesaler of the Contract.
First Union Securities, Inc. is a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. ("NASD").
The Contract offered by this Prospectus is offered continuously, and may be
purchased from broker-dealers which are NASD members and whose representatives
are authorized by applicable law to sell variable annuity contracts. All persons
selling the Contract are required to be licensed by their respective state
insurance authorities for the sale of variable annuity policies. Broker-dealers
who sell the Contract will receive commissions not to exceed 7.00% of the Single
Purchase Payment. Additional compensation not to exceed 1.50% of the Single
Purchase Payment may be available when the Contract is sold in connection with
certain estate planning programs.
The Company, Allmerica Investments, Inc, and First Union Securities, Inc. have
sales agreements with various broker-dealers and banks under which the Contract
will be sold by registered representatives of the broker-
4
<PAGE>
dealers or employees of the banks. These registered representatives and
employees must also be licensed by their respective state insurance authorities
for the sale of variable annuity contracts. The broker-dealers are ordinarily
required to be registered with the SEC and must be members of the NASD.
Commissions are paid by the Company on sales of the Contract. The Company
intends to recoup commissions and other sales expenses through a combination of
anticipated 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.
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.
The aggregate amounts of commissions paid to Allmerica Investments for sales of
all contracts funded by Separate Account VA-K (including contracts not described
in the Prospectus) for the years 1997, 1998 and 1999 were $3,098,375.76,
$3,517,207.62 and $3,451,291.08.
No commissions were retained by Allmerica Investments for sales of all contracts
funded by Separate Account VA-K (including contracts not described in the
Prospectus) for the years 1997, 1998 and 1999.
ANNUITY PAYMENTS
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE.
The determination of the Annuity Unit Value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume an Owner has 40,000
Accumulation Units in a Variable Account, and that the value of an Accumulation
Unit on the Valuation Date used to determine the amount of the first variable
annuity payment is $1.120000. Therefore, the Accumulated Value of the Contract
is $44,800 (40,000 x $1.120000). Assume also that the Owner elects an option for
which the first monthly payment is $6.57 per $1,000 of Accumulated Value
applied. Assuming no premium tax, the first monthly payment would be $44.80
($44,800 divided by $1,000) multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit Value for the Assumed Investment Return of
3.0% per annum for the Valuation Date as of which the first payment was
calculated was $1.100000. 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 payment is 1.000109. Multiplying this factor by .999919 (the one-day
adjustment factor for the Assumed Investment Return of 3.0% per annum) produces
a factor of 1.000109. This then is multiplied by the Annuity Unit Value on the
immediately preceding Valuation Date (assumed here to be $1.105000). The result
is an Annuity Unit Value of $1.105120 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 $1.105120, which
produces a current monthly payment of $295.71.
5
<PAGE>
PERFORMANCE INFORMATION
In order to help people understand how investment performance can affect money
invested in the Sub-Accounts, the Company may advertise "total return" and
"average annual total return" performance information based on (1) the periods
that the Sub-Accounts have been in existence and (2) the periods that the
Underlying Funds have been in existence. Performance are calculated with all
charges assumed to be those applicable to the Contract, the Sub-Accounts and the
Underlying Funds. Both the total return and yield figures are based on
historical earnings and are not intended to indicate future performance.
The "total return" of a Sub-Account refers to the total of the income generated
by an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage. The "average annual total return" represents the average annual
percentage change in the value of an investment in the Sub-Account over a given
period of time. It represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Quotations of average annual total return 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% and the Underlying
Fund charges which would be assessed if the investment were completely withdrawn
at the end of the specified period.
The performance for the periods that the Underlying Funds have been in existence
is calculated in exactly the same manner as that for the periods that the
Sub-Accounts have been in existence; 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.
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, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services,
6
<PAGE>
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain
contract features.
At times, we 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 our 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.
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.
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 specific 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.
7
<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 even-day period ended December 31, 1999:
<TABLE>
<S> <C>
Yield N/A
Effective Yield N/A
</TABLE>
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
FINANCIAL STATEMENTS
Financial Statements are included for First Allmerica Financial Life Insurance
Company and for its Separate Account VA-K.
8
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of First Allmerica Financial Life Insurance Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<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) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 954.5 $1,969.5 $1,980.4
Universal life and investment product
policy fees.............................. 359.3 296.6 237.3
Net investment income...................... 503.1 593.9 619.5
Net realized investment gains.............. 100.3 60.9 76.3
Other income............................... 107.3 100.0 81.5
-------- -------- --------
Total revenues......................... 2,024.5 3,020.9 2,995.0
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 1,056.3 1,803.0 1,763.9
Policy acquisition expenses................ 240.9 449.6 421.8
Sales practice litigation.................. -- 31.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Restructuring costs........................ -- 9.0 --
Other operating expenses................... 346.3 419.7 404.0
-------- -------- --------
Total benefits, losses and expenses.... 1,643.5 2,712.3 2,643.6
-------- -------- --------
Income from continuing operations before
federal income taxes.......................... 381.0 308.6 351.4
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 88.7 74.6 74.4
Deferred................................... 4.3 (15.4) 14.2
-------- -------- --------
Total federal income tax expense....... 93.0 59.2 88.6
-------- -------- --------
Income from continuing operations before
minority interest............................. 288.0 249.4 262.8
Minority interest.......................... (39.9) (55.0) (79.4)
-------- -------- --------
Income from continuing operations.............. 248.1 194.4 183.4
(Loss) income from operations of discontinued
business (less applicable income taxes
(benefit) of $(10.1), $(7.0) and $8.9 for the
years ended December 31, 1999, 1998 and 1997,
respectively) (17.2) (13.5) 16.6
Loss on disposal of group life and health
business, including provision of $72.2 for
operating losses during phase-out period for
the year ended December 31, 1999 (less
applicable income tax benefit of $16.4) (30.5) -- --
-------- -------- --------
Net income..................................... $ 200.4 $ 180.9 $ 200.0
======== ======== ========
</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, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$3,721.6 and $7,520.8)............................ $ 3,660.7 $ 7,683.9
Equity securities at fair value (cost of $27.9 and
$253.1)........................................... 51.4 397.1
Mortgage loans...................................... 521.2 562.3
Policy loans........................................ 170.5 154.3
Real estate and other long-term investments......... 177.0 163.1
--------- ---------
Total investments............................... 4,580.8 8,960.7
--------- ---------
Cash and cash equivalents............................. 279.3 504.0
Accrued investment income............................. 73.3 141.0
Deferred policy acquisition costs..................... 1,219.5 1,161.2
Reinsurance receivable on unpaid losses, benefits and
unearned premiums................................... 480.3 1,136.4
Deferred federal income taxes......................... 18.1 19.4
Premiums, accounts and notes receivable............... 81.0 510.5
Other assets.......................................... 199.6 530.6
Closed Block assets................................... 772.3 803.1
Separate account assets............................... 17,629.6 13,697.7
--------- ---------
Total assets.................................... $25,333.8 $27,464.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,825.0 $ 2,802.2
Outstanding claims, losses and loss adjustment
expenses.......................................... 218.8 2,815.9
Unearned premiums................................... 6.6 843.2
Contractholder deposit funds and other policy
liabilities....................................... 2,025.5 2,637.0
--------- ---------
Total policy liabilities and accruals........... 5,075.9 9,098.3
--------- ---------
Expenses and taxes payable............................ 512.0 681.9
Reinsurance premiums payable.......................... 17.9 50.2
Trust instruments supported by funding obligations.... 50.6 --
Short-term debt....................................... -- 221.3
Closed Block liabilities.............................. 842.1 872.0
Separate account liabilities.......................... 17,628.9 13,691.5
--------- ---------
Total liabilities............................... 24,127.4 24,615.2
--------- ---------
Minority interest..................................... -- 532.9
Commitments and contingencies (Notes 16 and 21)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,001 shares issued and outstanding... 5.0 5.0
Additional paid-in capital............................ 569.0 444.0
Accumulated other comprehensive (loss) income......... (14.9) 169.2
Retained earnings..................................... 647.3 1,698.3
--------- ---------
Total shareholder's equity...................... 1,206.4 2,316.5
--------- ---------
Total liabilities and shareholder's equity...... $25,333.8 $27,464.6
========= =========
</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) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 444.0 453.7 392.4
Capital contribution from parent........... 125.0 -- 61.3
Loss on change of interest-Allmerica P&C... -- (9.7) --
-------- -------- --------
Balance at end of period................... 569.0 444.0 453.7
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 169.2 209.3 131.4
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities.......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes........................... 105.0 28.9 (59.8)
Minority interest........................ 31.8 13.4 (33.2)
-------- -------- --------
Distribution of subsidiaries (Note 3)...... (22.7) -- --
-------- -------- --------
(184.1) (40.1) 77.9
-------- -------- --------
Balance at end of period................... (14.9) 169.2 209.3
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,698.3 1,567.4 1,367.4
Net income................................. 200.4 180.9 200.0
Dividend to shareholder.................... -- (50.0) --
Distribution of subsidiaries (Note 3)...... (1,251.4) -- --
-------- -------- --------
Balance at end of period................... 647.3 1,698.3 1,567.4
-------- -------- --------
Total shareholder's equity............. $1,206.4 $2,316.5 $2,235.4
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- ------
<S> <C> <C> <C>
Net income.................................. $ 200.4 $ 180.9 $200.0
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes.......................... 105.0 28.9 (59.8)
Minority interest....................... 31.8 13.4 (33.2)
Distribution of subsidiaries (Note 3)... (22.7) -- --
------- ------- ------
Other comprehensive (loss) income... (184.1) (40.1) 77.9
------- ------- ------
Comprehensive (loss) income................. $ (16.3) $ 140.8 $277.9
======= ======= ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.4 $ 180.9 $ 200.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 39.9 55.0 79.4
Net realized gains.................. (100.9) (62.7) (77.8)
Net amortization and depreciation... 31.5 20.7 31.6
Deferred federal income taxes....... 20.7 (15.4) 14.2
Sales practice litigation expense... -- 31.0 --
Loss from exiting reinsurance
pools............................. -- 25.3 --
Payment related to exiting
reinsurance pools................. -- (30.3) --
Loss from cession of disability
income business................... -- -- 53.9
Payment related to cession of
disability income business........ -- -- (207.0)
Loss from disposal of group life and
health business................... 30.5 -- --
Change in deferred acquisition
costs............................. (181.6) (185.8) (189.7)
Change in premiums and notes
receivable, net of reinsurance
payable........................... (41.8) 56.7 (15.1)
Change in accrued investment
income............................ 8.3 0.8 7.1
Change in policy liabilities and
accruals, net..................... (15.6) 168.1 (134.9)
Change in reinsurance receivable.... (46.3) (115.4) 27.2
Change in expenses and taxes
payable........................... 79.4 (3.3) 49.4
Separate account activity, net...... 5.5 (48.5) --
Other, net.......................... 18.5 (63.8) 20.4
--------- --------- ---------
Net cash provided by (used in)
operating activities.......... 48.5 13.3 (141.3)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and
maturities of available-for-sale
fixed maturities.................. 2,801.0 1,715.2 2,892.9
Proceeds from disposals of equity
securities........................ 422.9 285.3 162.7
Proceeds from disposals of other
investments....................... 30.3 120.8 116.3
Proceeds from mortgages matured or
collected......................... 131.2 171.2 204.7
Purchase of available-for-sale fixed
maturities........................ (2,227.3) (2,374.5) (2,596.0)
Purchase of equity securities....... (78.9) (119.9) (67.0)
Purchase of other investments....... (140.6) (274.4) (175.0)
Capital expenditures................ (29.2) (22.3) (15.3)
Purchase of minority interest in
Citizens Corporation.............. -- (195.9) --
Distribution of subsidiaries........ (202.2) -- --
Other investing activities, net..... -- 26.7 1.3
--------- --------- ---------
Net cash provided by (used in)
investing activities.......... 707.2 (667.8) 524.6
--------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds...... 1,514.6 1,419.2 457.6
Withdrawals from contractholder
deposit funds..................... (2,037.5) (625.0) (647.1)
Change in trust agreements supported
by funding agreements............. 50.6 -- --
Change in short-term debt........... (180.9) 188.3 (5.4)
Change in long-term debt............ -- (2.6) (0.1)
Dividend paid to shareholder........ -- (50.0) (9.4)
Contribution from parent............ 36.0 -- 0.1
Subsidiary treasury stock purchased,
at cost........................... (350.0) (1.0) (140.0)
--------- --------- ---------
Net cash (used in) provided by
financing activities.......... (967.2) 928.9 (344.3)
--------- --------- ---------
Net change in cash and cash equivalents..... (211.5) 274.4 39.0
Net change in cash held in the Closed
Block...................................... (13.2) 15.7 (1.0)
Cash and cash equivalents, beginning of
period..................................... 504.0 213.9 175.9
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 279.3 $ 504.0 $ 213.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.1 $ 7.3 $ 3.6
Income taxes paid....................... $ 24.0 $ 135.3 $ 66.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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") is
organized as a stock life insurance company, and is a wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC").
Prior to July 1, 1999, the consolidated financial statements of FAFLIC included
the accounts of its wholly-owned life insurance subsidiary Allmerica Financial
Life Insurance and Annuity Company ("AFLIAC"), its non-insurance subsidiaries
(principally brokerage and investment advisory services), Allmerica Property and
Casualty Companies, Inc. ("Allmerica P&C") (an 85.0%-owned non-insurance holding
company), and various other non-insurance subsidiaries.
Effective July 1, 1999, AFC made certain changes to its corporate structure
(Note 3). These changes included the transfer of the Company's ownership of
Allmerica P&C and its subsidiaries, as well as several other non-insurance
subsidiaries from the Company to AFC. In exchange, AFC contributed capital to
the Company and agreed to maintain the Company's statutory surplus at specified
levels during the following 6 years. Comparability between current and prior
period financial statements and footnotes has been significantly impacted by the
Company's divestiture of these subsidiaries during 1999, as disclosed in Note 3.
The Closed Block (Note 1B) assets and liabilities at December 31, 1999 and 1998
are presented in the consolidated balance sheets as single line items. The
contribution from the Closed Block is included in the consolidated statements of
income in other income. Unless specifically stated, all disclosures contained
herein supporting the consolidated financial statements at December 31, 1999,
1998 and 1997, and the years then ended exclude the Closed Block related
amounts. All significant intercompany accounts and transactions have been
eliminated.
On or about December 3, 1998, the Company acquired all of the outstanding common
stock of Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary
of The Hanover Insurance Company ("Hanover"), a wholly-owned subsidiary of
Allmerica P&C) that it did not already own in exchange for cash of $195.9
million (Note 4). The acquisition has been recognized as a purchase. The
minority interest acquired totaled $158.5 million. A total of $40.8 million
representing the excess of the purchase price over the fair values of the net
assets acquired, net of deferred taxes, has been allocated to goodwill and is
being amortized over a 40-year period.
Prior to the July 1, 1999 changes in AFC's corporate structure, minority
interest relates to the Company's investment in Allmerica P&C and its only
significant subsidiary, Hanover. Hanover's wholly-owned subsidiary is Citizens
Corporation, the holding company for Citizens. Minority interest also includes
an amount related to the minority interest in Citizens Corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
The Company established and began operating a closed block ("the Closed Block")
for the benefit of the participating policies included therein, consisting of
certain individual life insurance participating policies,
F-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual deferred annuity contracts and supplementary contracts not involving
life contingencies which were in force as of FAFLIC's demutualization on
October 16, 1995; such policies constitute the "Closed Block Business". The
purpose of the Closed Block is to protect the policy dividend expectations of
such FAFLIC dividend paying policies and contracts. Unless the Commonwealth of
Massachusetts Insurance Commissioner ("the Insurance Commissioner") consents to
an earlier termination, the Closed Block will continue to be in effect until the
date none of the Closed Block policies are in force. FAFLIC allocated to the
Closed Block assets in an amount that is expected to produce cash flows which,
together with future revenues from the Closed Block Business, are reasonably
sufficient to support the Closed Block Business, including provision for payment
of policy benefits, certain future expenses and taxes and for continuation of
policyholder dividend scales payable in 1994 so long as the experience
underlying such dividend scales continues. The Company expects that the factors
underlying such experience will fluctuate in the future and policyholder
dividend scales for Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets as measured on a GAAP basis
represent the expected future post-tax income from the Closed Block which may be
recognized in income over the period the policies and contracts in the Closed
Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at the inception of the Closed
Block, the expected income would be recognized in income for that period.
Further, any excess of the actual income over the expected income would also be
recognized in income to the extent that the aggregate expected income for all
prior periods exceeded the aggregate actual income. Any remaining excess of
actual income over expected income would be accrued as a liability for
policyholder dividends in the Closed Block to be paid to the Closed Block
policyholders. This accrual for future dividends effectively limits the actual
Closed Block income recognized in income to the Closed Block income expected to
emerge from operation of the Closed Block as determined at inception.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), the Company is required to classify its investments into
one of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Debt securities and marketable equity 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 as 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.
F-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there were 2 properties remaining in the Company's real
estate portfolio, both of which are being actively marketed. These assets are
carried at the estimated fair value less costs of disposal. Depreciation is not
recorded on these assets while they are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other than temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
D. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, investment and loan
commitments, swap contracts and interest rate futures contracts. These
instruments involve credit risk and also may be subject to risk of loss due to
interest rate fluctuation. The Company evaluates and monitors each financial
instrument individually and, when appropriate, obtains collateral or other
security to minimize losses.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge the
foreign currency exchange risk associated with investment securities 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 associated with funding agreements
are accounted for using the fair value method, with changes in fair value
reported in other operating income consistent with the underlying hedged trust
obligation liability. Futures contracts used to hedge interest rate risk are
accounted for using the deferral method, with gains and losses deferred in
unrealized gains and losses in equity and recognized in earnings in conjunction
with the earnings recognition of the underlying hedged item. Default swap
contracts entered into for investment purposes are accounted for using the fair
value method, with changes in fair value, if any, reported in realized
investment gains and losses in earnings. Premium paid to the Company on default
swap contracts is reported in net investment income in earnings. Other swap
contracts entered into for investment purposes are accounted for using the fair
value method, with changes in fair value reported in realized investment gains
and
F-9
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses in earnings. Any ineffective swaps or futures hedges are recognized
currently in realized investment gains and losses in earnings.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
F. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. Acquisition costs related to universal life products, variable
annuities and contractholder deposit funds are deferred and amortized in
proportion to total estimated gross profits from investment yields, mortality,
surrender charges and expense margins over the expected life of the contracts.
This amortization is reviewed annually and adjusted retrospectively when the
Company revises its estimate of current or future gross profits to be realized
from this group of products, including realized and unrealized gains and losses
from investments. Acquisition costs related to fixed annuities and other life
insurance products are deferred and amortized, generally in proportion to the
ratio of annual revenue to the estimated total revenues over the contract
periods based upon the same assumptions used in estimating the liability for
future policy benefits.
Deferred acquisition costs for each life product and property and casualty line
of business are reviewed to determine if they are recoverable from future
income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. Although
realization of deferred policy acquisition costs is not assured, the Company
believes it is more likely than not that all of these costs will be realized.
The amount of deferred policy acquisition costs considered realizable, however,
could be reduced in the near term if the estimates of gross profits or total
revenues discussed above are reduced. The amount of amortization of deferred
policy acquisition costs could be revised in the near term if any of the
estimates discussed above are revised.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
F-10
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 6.0%
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, variable universal life and variable annuities 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 variable annuities include a reserve for
benefit claims in excess of a guaranteed minimum fund value.
Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE incurred
but not reported. These liabilities are determined using case basis evaluations
and statistical analyses and represent estimates of the ultimate cost of all
losses incurred but not paid. These estimates are continually reviewed and
adjusted as necessary; such adjustments are reflected in current operations.
Estimated amounts of salvage and subrogation on unpaid property and casualty
losses are deducted from the liability for unpaid claims.
Premiums for property and casualty 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 ("GICs"),
deposit administration funds and immediate participation guarantee funds and
consist of deposits received from customers and investment earnings on their
fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty 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 include annuity benefit claims in excess of a
guaranteed minimum fund value, and 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, with mortality, administration
and surrender charges assessed against the fund values. Related benefit expenses
include universal life benefit claims in excess of fund values and net
investment income credited to universal life fund values. Certain policy charges
that represent compensation for services
F-11
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to be provided in future periods are deferred and amortized over the period
benefited using the same assumptions used to amortize capitalized acquisition
costs.
K. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life company taxable income. Prior to
the merger on July 16, 1997, Allmerica P&C and its subsidiaries filed a separate
United States federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). These differences result primarily from loss and LAE
reserves, policy reserves, policy acquisition expenses, and unrealized
appreciation or depreciation on investments.
L. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 2000. The Company is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $12.4 million through December 31, 1998. The adoption of SOP 98-1 did
not have a material effect on the results of operations or financial position
for the three months ended March 31, 1998.
In December 1997, the AICPA issued Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SoP 97-3").
SoP 97-3 provides guidance on when a liability should be recognized for guaranty
fund and other assessments and how to measure the liability. This statement
allows for the discounting of the liability if the amount and timing of the cash
payments are fixed
F-12
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and determinable. In addition, it provides criteria for when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges. This
statement is effective for fiscal years beginning after December 15, 1998. The
adoption of this statement did not have a material effect on the results of
operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations (See Note 15).
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and other events and
circumstances from non-owner sources. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted Statement No. 130
for the first quarter of 1998, which resulted primarily in reporting unrealized
gains and losses on investments in debt and equity securities in comprehensive
income.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation, resulting primarily from the reporting of Discontinued Operations
as disclosed in Note 2.
2. DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company approved a plan to exit its group
life and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of the discontinued segment, including its reinsurance pool business,
have been reported in the Consolidated Statements of Income as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB Opinion No. 30"). In the third quarter of 1999,
the operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior years. On
October 6, 1999, the Company entered into an agreement with Great-West Life and
Annuity Insurance Company of Denver,
F-13
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which provides for the sale of the Company's EBS business effective March 1,
2000. The Company has recorded a $30.5 million loss, net of taxes, on the
disposal of its group life and health business. Subsequent to the June 30, 1999
measurement date, operations from the discontinued business generated losses of
approximately $8.7 million, net of taxes.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At December 31,
1999, the discontinued segment had assets of approximately $531.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $482.5 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $361.1 million, $398.5 million, and $389.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
3. REORGANIZATION OF AFC CORPORATE STRUCTURE
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes included transfer of the Company's ownership of Allmerica P&C and
all of its subsidiaries, as well as certain other non-insurance subsidiaries,
from FAFLIC to AFC, referred to as the "distribution of subsidiaries". The
Company retained its ownership of its primary insurance subsidiary, AFLIAC and
certain broker dealer and investment management and advisory subsidiaries. AFC
contributed capital to FAFLIC in the amount of $125.0 million, consisting of
cash and securities of $36.0 million and $89.0 million, respectively, and agreed
to maintain the Company's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 requires the prior approval of the Commonwealth of Massachusetts
Insurance Commissioner. This transaction was approved by the Commissioner on
May 24, 1999.
The equity of the subsidiaries transferred from FAFLIC on July 1, 1999 was
$1,274.1 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million, including cash and cash equivalents of $202.2
million, and total revenue of $1,196.5 million.
The Company's consolidated results of operations in 1999 include $107.2 million
of net income associated with these subsidiaries through June 30, 1999. The
unaudited pro forma information below presents consolidated results of
operations as if the reorganization had occurred at the beginning of 1998.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the Company had the transfer occurred
at the beginning of 1998, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Revenue..................................................... $828.0 $750.2
====== ======
Net realized capital (losses) gains included in revenue..... (11.8) 19.6
====== ======
Income from continuing operations before taxes.............. 192.1 141.2
Income taxes................................................ 51.2 41.2
------ ------
Net income from continuing operations....................... $140.9 100.0
(Loss) from operations of discontinued business (less
applicable income taxes (benefit) of $(10.4), $(7.0) and
$8.9 for the years ended December 31, 1999, 1998 and 1997,
respectively............................................... (17.2) (13.5)
</TABLE>
F-14
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
(Loss) on disposal of group life and health business,
including provision of $72.2 for operating losses during
phase-out period for the tear ended December 31, 1999 (less
applicable income tax benefit of $16.4).................... (30.5) --
------ ------
Net income.................................................. $ 93.2 $ 86.5
====== ======
</TABLE>
4. ACQUISITION OF MINORITY INTEREST OF CITIZENS CORPORATION
On December 3, 1998 Citizens Acquisition Corporation, a wholly-owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly-owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 million representing the excess of the purchase price over the fair values
of the net assets acquired, net of deferred taxes, has been allocated to
goodwill and is being amortized over a 40-year period.
The Company's consolidated results of operations include minority interest in
Citizens Corporation prior to December 3, 1998. The unaudited pro forma
information below presents consolidated results of operation as if the
acquisition had occurred at the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,006.6 $2,977.1
======== ========
Net realized capital gains included in revenue.............. $ 58.1 $ 71.6
======== ========
Income before taxes and minority interest................... 293.4 332.5
Income taxes................................................ (54.2) (82.4)
Minority Interest:
Equity in earnings........................................ (42.6) (64.1)
-------- --------
Net income.................................................. $ 196.6 $ 186.0
======== ========
</TABLE>
5. OTHER SIGNIFICANT TRANSACTIONS
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated reinsurer. The
reinsurance agreement provides accident year coverage for the three years 1999
to 2001 for the Company's property and casualty business, and is subject to
cancellation or commutation annually at the Company's option. The program covers
losses and allocated loss adjustment
F-15
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual and aggregate
coverage limits for losses and allocated LAE are $150.0 million and $300.0
million, respectively. The effect of this agreement on results of operations in
each reporting period is based on losses and allocated LAE ceded, reduced by a
sliding scale premium of 50.0-67.0% depending on the size of the loss, and
increased by a ceding commission of 20.0% of ceded premium. In addition, net
investment income is reduced for amounts credited to the reinsurer. Prior to the
AFC corporate reorganization, the Company recognized a net benefit of $16.9
million as a result of this agreement, based on year-to-date and annual
estimates of losses and allocated loss adjustment expenses for accident year
1999.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the segment consolidated its property and casualty field support activities from
fourteen regional branches into three hub locations. As a result of the
Company's restructuring initiative, it recognized a pretax loss of $9.0 million,
in the fourth quarter of 1998.
Approximately $4.8 million of this loss relates to severance and other employee
related costs resulting from the elimination of 306 positions, of which 207 and
106 employees had been terminated as of December 31, 1999 and 1998,
respectively. In addition, lease cancellations and contract terminations
resulted in losses of approximately $2.5 million and $1.7 million, respectively.
The Company made payments of approximately $4.2 million and $0.1 million through
June 30, 1999 and in 1998, respectively, related to this restructuring
initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, relating to the Company's reinsurance pool business. These pools
consist primarily of the Company's assumed stop loss business, small group
managed care pools, long-term disability and long-term care pools, student
accident and special risk business. The agreement is consistent with
management's decision to exit this line of business, which the Company expects
to run-off over the next three years. As a result of this transaction, the
Company recognized a $25.3 million pre-tax loss in the third quarter of 1998.
This loss is reported in 1999 as part of the discontinued operations of the
Company.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on substantially all of the
universal life and variable universal life blocks of business. The agreement did
not have a material effect on its results of operations or financial position.
In 1999, 1998 and 1997, Allmerica P&C redeemed 8,662.7, 3,289.5 and 5,735.3
shares, respectively, of its issued and outstanding common stock owned by AFC
for $350.0 million, $125.0 million and $195.0 million, respectively, thereby
increasing the Company's total ownership to 84.5% as of June 30, 1999. The
increases in the Company's ownership of Allmerica P&C through June 30, 1999, and
for 1998 and 1997 were 14.5%, 4.3% and 6.3%, respectively. The 1999 transaction
consisted of cash and cash equivalents. The 1998 transaction consisted of $124.0
million of securities and $1.0 million of cash. The 1997 transaction consisted
of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C and a wholly-owned subsidiary of AFC was consummated
on July 16, 1997. Through the merger, AFC acquired all of the outstanding common
stock of Allmerica P&C that FAFLIC did not already own in exchange for cash of
$425.6 million and approximately 9.7 million shares of AFC stock valued at
$372.5 million. At consummation of this transaction AFC owned 59.5% through
FAFLIC and 40.5% directly. The merger has been recognized as a purchase. Total
consideration of approximately $798.1 million
F-16
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has been allocated to the minority interest in the assets and liabilities based
on estimates of their fair values. The minority interest acquired totaled $703.5
million. A total of $90.6 million representing the excess of the purchase price
over the fair values of the net assets acquired, net of deferred taxes, has been
allocated to goodwill and is being amortized over a 40-year period.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
6. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
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....... $ 62.6 $ 1.0 $ 0.5 $ 63.1
States and political subdivisions....... 13.5 0.1 0.1 13.5
Foreign governments..................... 80.0 2.1 0.1 82.0
Corporate fixed maturities.............. 3,206.5 63.2 116.9 3,152.8
Mortgage-backed securities.............. 359.0 1.3 11.0 349.3
-------- ------ ------ --------
Total fixed maturities.................. $3,721.6 $ 67.7 $128.6 $3,660.7
======== ====== ====== ========
Equity securities....................... $ 27.9 $ 24.7 $ 1.2 $ 51.4
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions....... 2,408.9 83.0 5.2 2,486.7
Foreign governments..................... 107.9 7.7 4.5 111.1
Corporate fixed maturities.............. 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities.............. 517.9 11.5 2.8 526.6
-------- ------ ------ --------
Total fixed maturities.................. $7,520.8 $282.0 $118.9 $7,683.9
======== ====== ====== ========
Equity securities....................... $ 253.1 $151.1 $ 7.1 $ 397.1
======== ====== ====== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-17
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
1999, the amortized cost and market value of these assets on deposit in New York
were $196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $18.3 million and
$105.4 million were on deposit with various state and governmental authorities
at December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
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>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 224.4 $ 225.7
Due after one year through five years....................... 1,324.0 1,328.4
Due after five years through ten years...................... 1,409.1 1,369.9
Due after ten years......................................... 764.1 736.7
-------- --------
Total....................................................... $3,721.6 $3,660.7
======== ========
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1999
Net appreciation, beginning of year......................... $ 79.0 $ 90.2 $169.2
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (254.4) (122.3) (376.7)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 78.5 -- 78.5
Provision for deferred federal income taxes and minority
interest................................................... 72.1 64.7 136.8
Distribution of subsidiaries (See Note 3)................... (5.6) (17.1) (22.7)
------ ------ ------
(109.4) (74.7) (184.1)
------ ------ ------
Net appreciation, end of year............................... $(30.4) $ 15.5 $(14.9)
====== ====== ======
</TABLE>
F-18
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $122.6 $ 86.7 $209.3
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens....................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest................................................... 38.7 (11.6) 27.1
------ ------ ------
(43.6) 3.5 (40.1)
------ ------ ------
Net appreciation, end of year............................... $ 79.0 $ 90.2 $169.2
====== ====== ======
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $131.4
------ ------ ------
Net appreciation (depreciation) on available-for-sale
securities................................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C.............................................. 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................... (65.9) (27.1) (93.0)
------ ------ ------
51.3 26.6 77.9
------ ------ ------
Net appreciation, end of year............................... $122.6 $ 86.7 $209.3
====== ====== ======
</TABLE>
(1) Includes net (depreciation) appreciation on other investments of $(1.1)
million, $0.8 million, and $1.8 million, in 1999, 1998, and 1997, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans are diversified by property type and location. Real
estate investments have been obtained primarily through foreclosure. Mortgage
loans are collateralized by the related properties and generally are no more
than 75% of the property's value at the time the original loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were $533.6 million and $582.7 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $5.8 million and $11.5
million at December 31, 1999 and 1998, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there were 2 properties remaining in the Company's
real estate portfolio which are being actively marketed. 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 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
F-19
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $301.5 $304.4
Residential............................................... 50.3 52.8
Retail.................................................... 92.2 108.5
Industrial/warehouse...................................... 83.6 110.0
Other..................................................... 11.8 18.5
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
Geographic region:
South Atlantic............................................ $132.2 $136.1
Pacific................................................... 133.6 155.1
East North Central........................................ 62.5 80.5
Middle Atlantic........................................... 50.3 61.2
West South Central........................................ 90.8 54.7
New England............................................... 40.7 60.7
Other..................................................... 29.3 45.9
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows: 2000
- -- $108.1 million; 2001 -- $33.9 million; 2002 -- $27.5 million; 2003 -- $40.6
million; 2004 -- $76.4 million; and $234.7 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 1999, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $11.5 $(2.4) $ 3.3 $ 5.8
===== ===== ===== =====
1998
Mortgage loans.............................................. $20.7 $(6.8) $ 2.4 $11.5
===== ===== ===== =====
1997
Mortgage loans.............................................. $19.6 $ 2.5 $ 1.4 $20.7
Real estate................................................. 14.9 6.0 20.9 --
----- ----- ----- -----
Total....................................................... $34.5 $ 8.5 $22.3 $20.7
===== ===== ===== =====
</TABLE>
F-20
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $20.9 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $18.0 million and $22.0 million, with
related reserves of $0.8 million and $6.0 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $21.0 million, $26.1 million
and $30.8 million, with related interest income while such loans were impaired
of $2.1 million, $3.2 million and $3.2 million as of December 31, 1999, 1998 and
1997, 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") and other funding agreements. 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 only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
The notional amount of futures contracts outstanding was $37.1 million and $92.7
million at December 31, 1999 and 1998, respectively. The notional amounts of the
contracts represent the extent of the Company's investment but not future cash
requirements, as the Company generally settles open positions prior to maturity.
The maturity of all futures contracts outstanding is less than one year. The
fair value of futures contracts outstanding was $36.8 million and $92.5 million
at December 31, 1999 and 1998, respectively.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. Deferred
hedging losses were $0.9 million and $1.8 million in 1999 and 1998,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
the Company are realized immediately. There was $0.1 million of gains realized
on ineffective hedges in 1998. There were no gains or losses in 1999 and 1997.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- --------- --------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 92.7 $ -- $(33.0)
New contracts............................................... 947.0 1,117.5 (0.2)
Contracts terminated........................................ (1,002.6) (1,024.8) 33.2
--------- --------- ------
Contracts outstanding, end of year.......................... $ 37.1 $ 92.7 $ --
========= ========= ======
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities.
Additionally, in 1999, the Company entered into a foreign
F-21
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
currency swap contract to hedge foreign currency exposure on specific fixed rate
funding agreements. Interest and principal related to foreign fixed income
securities and liabilities payable in foreign currencies, at current exchange
rates, are exchanged for the equivalent payment in U.S dollars translated at a
specific currency exchange rate. The primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by nationally recognized rating agencies. The Company's maximum
exposure to counterparty credit risk is the difference between the foreign
currency exchange rate, as agreed upon in the swap contract, and the foreign
currency spot rate on the date of the exchange, as indicated by the fair value
of the contract. The fair values of the foreign currency swap contracts
outstanding were $(4.7) million and $1.2 million at December 31, 1999 and 1998,
respectively. Changes in the fair value of contracts hedging fixed income
securities are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Changes in fair value of contracts hedging fixed
rate funding agreements are reported as other operating income, consistent with
the underlying hedged liability. The net decrease in other operating income
related to these contracts was $2.6 million in 1999. 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 1999, 1998 and 1997. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gain or loss on foreign
currency swap contracts in 1999 or 1998.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 42.6 $42.6 $ 47.6
New contracts............................................... 52.9 -- 5.0
Contracts expired........................................... (24.0) -- (10.0)
------ ----- ------
Contracts outstanding, end of year.......................... $ 71.5 $42.6 $ 42.6
====== ===== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at
December 31, 1999 are $8.3 million in 2000, $52.9 million in 2001 and $10.3
million thereafter. There are no expected maturities of such foreign currency
swap contracts in 2002, 2003 and 2004.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. Under these swap contracts,
the Company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated on an agreed-upon notional
principal amount. As with foreign currency swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1999 and 1998 were net payables of
$4.2 million and $3.9 million, respectively. The Company does not require
collateral or other security to support financial instruments with credit risk.
F-22
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The decrease in net
investment income related to interest rate swap contracts was $7.0 million, $2.8
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The fair value of interest rate swap contracts outstanding was
$33.1 million and $(28.3) million at December 31, 1999 and 1998, respectively.
Changes in the fair value of contracts are reported as an unrealized gain or
loss, consistent with the underlying hedged security. Any gain or loss on the
termination of interest rate swap contracts accounted for as hedges are deferred
and recognized with the gain or loss on the hedged transaction. The Company had
no deferred gain or loss on interest rate swap contracts in 1999 or 1998.
A reconciliation of the notional amount of interest rate swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $1,112.6 $ 244.1 $ 5.0
New contracts............................................... 905.4 873.5 244.7
Contracts terminated........................................ (888.5) -- --
Contracts expired........................................... (80.0) (5.0) (5.6)
Distribution of subsidiaries (Note 3)....................... (23.6) -- --
-------- -------- ------
Contracts outstanding, end of year.......................... $1,025.9 $1,112.6 $244.1
======== ======== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1999 are $44.0 million in 2000, $43.1 million in 2001, $83.5 million in 2002,
$536.0 million in 2003, and $319.3 million in 2004. There are no expected
maturities of such interest rate swap contracts thereafter.
G. OTHER SWAP CONTRACTS
The Company enters into insurance portfolio-linked and credit default swap
contracts for investment purposes. 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 insurance
portfolio-linked swap contracts is the inability of the counterparty to meet its
obligation. Under the terms of the credit default swap contracts, the Company
assumes the default risk of a specific high credit quality issuer in exchange
for a stated annual premium. In the case of default, the Company will pay the
counterparty par value for a pre-determined security of the issuer. The primary
risk associated with these transactions is the default risk of the underlying
companies. The Company regularly assesses the financial strength of its
counterparties and the underlying companies in default swap contracts, and
generally enters into forward or swap agreements with counterparties rated "A"
or better by nationally recognized rating agencies. Because the underlying
principal of swap contracts is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged, which at
December 31, 1999, was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.3) million and
$(0.1) million at December 31, 1999 and 1998, respectively. The net amount
receivable or payable under insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net (decrease) increase
in realized investment gains related to these contracts was $(0.2) million, $1.0
million and $(1.4) million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.4 million and $0.2 million for
the years ended December 31, 1999 and 1998, respectively. There was no net
investment income recognized in 1997.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------ -------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 255.0 $ 15.0 $ 58.6
New contracts............................................... 50.0 266.3 192.1
Contracts expired........................................... (115.0) (26.3) (211.6)
Contracts terminated........................................ -- -- (24.1)
------- ------ -------
Contracts outstanding, end of year.......................... $ 190.0 $255.0 $ 15.0
======= ====== =======
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1999 are
as follows: $140.0 million in 2000 and $50.0 million in 2001. There are no
expected maturities of such other swap contracts in 2002, 2003, 2004 and
thereafter.
H. OTHER
At December 31, 1999 and 1998, FAFLIC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
7. 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) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $415.7 $509.6 $523.3
Mortgage loans.............................................. 45.5 57.6 57.1
Equity securities........................................... 1.7 7.2 10.5
Policy loans................................................ 12.7 11.9 10.9
Real estate and other long-term investments................. 14.4 7.0 31.5
Short-term investments...................................... 26.6 15.6 9.9
------ ------ ------
Gross investment income..................................... 516.6 608.9 643.2
Less investment expenses.................................... (13.5) (15.0) (23.7)
------ ------ ------
Net investment income....................................... $503.1 $593.9 $619.5
====== ====== ======
</TABLE>
At December 31, 1999, the company had fixed maturities with a carrying value of
$1.0 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. At December 31, 1998, there was one mortgage loan
on non-accrual status which had an outstanding principal balance of $4.3
million. This loan was restructured and fully impaired. There were no fixed
maturities on non-accrual status at December 31, 1998. The effect of
non-accruals, compared with amounts that would have been recognized in
F-24
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with the original terms of the investments, was a reduction in net
income by $1.4 million in 1999, and had no impact in 1998 and 1997.
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 $18.8 million, $28.7 million and $40.3 million at
December 31, 1999, 1998 and 1997, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $2.5 million, $3.3 million and $3.9 million in
1999, 1998 and 1997, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $3.3 million and $4.2
million in 1999, 1998 and 1997, respectively.
There were no mortgage loans which were non-income producing for the year ended
December 31, 1999. There were, however, fixed maturities with a carrying value
of $0.3 million which were non-income producing for the year ended December 31,
1999.
Included in other long-term investments is income from limited partnerships of
$6.6 million in 1999, losses of $6.3 million in 1998, and income of $7.6 million
in 1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Fixed maturities............................................ $(52.0) $(11.6) $14.2
Mortgage loans.............................................. 2.5 8.8 (1.2)
Equity securities........................................... 141.3 63.7 53.5
Real estate and other....................................... 8.5 -- 9.8
------ ------ -----
Net realized investment gains............................... $100.3 $ 60.9 $76.3
====== ====== =====
</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>
1999
Fixed maturities............................................ $1,480.5 $ 9.2 $ 27.1
Equity securities........................................... 421.2 149.0 7.6
1998
Fixed maturities............................................ $ 979.2 $ 17.9 $ 11.3
Equity securities........................................... 258.7 72.8 9.0
1997
Fixed maturities............................................ $1,870.7 $ 27.0 $ 15.9
Equity securities........................................... 144.9 55.5 1.2
</TABLE>
F-25
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE (LOSS) INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the Consolidated Statements of Comprehensive (Loss)
Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period,
(includes $22.7 resulting from the distribution of
subsidiaries in 1999, net of taxes (benefit) and minority
interest of $(103.3) million, $(20.8) million and $123.7
million in 1999, 1998 and 1997, respectively).............. $ (121.9) $ (6.8) $115.5
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes and minority interest
of $33.5 million, $21.5 million and $30.7 million in 1999,
1998 and 1997, respectively)............................... (62.2) 33.3 37.6
-------- -------- ------
Other comprehensive (loss) income........................... $ (184.1) $ (40.1) $ 77.9
======== ======== ======
</TABLE>
8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $31.1 million and $(27.1) million
at December 31, 1999 and 1998, respectively. In addition, the Company held
futures contracts with a carrying value of $(0.9) million and $(1.8) million at
December 31, 1999 and 1998, respectively. The fair value of these contracts was
$36.8 million and $92.5 million at December 31, 1999 and 1998, respectively.
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-26
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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 is
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets approximates
fair value since policy loans have no defined maturity dates and are inseparable
from the insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Liabilities under individual fixed
annuity contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
All other liabilities are based on surrender values.
TRUST INSTRUMENTS SUPPORTED BY FUNDING OBLIGATIONS
Fair values 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.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value.
F-27
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 279.3 $ 279.3 $ 504.0 $ 504.0
Fixed maturities.......................................... 3,660.7 3,660.7 7,683.9 7,683.9
Equity securities......................................... 51.4 51.4 397.1 397.1
Mortgage loans............................................ 521.2 521.9 562.3 587.1
Policy loans.............................................. 170.5 170.5 154.3 154.3
-------- -------- -------- --------
$4,683.1 $4,683.8 $9,301.6 $9,326.4
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,316.0 $1,341.4 $1,791.8 $1,830.8
Supplemental contracts without life contingencies......... 48.8 48.8 37.3 37.3
Dividend accumulations.................................... 88.1 88.1 88.4 88.4
Other individual contract deposit funds................... 48.4 48.2 61.6 61.1
Other group contract deposit funds........................ 602.9 583.5 700.4 704.0
Individual fixed annuity contracts........................ 1,092.5 1,057.1 1,110.6 1,073.6
Trust instruments supported by funding obligations........ 50.6 49.6 -- --
Short-term debt........................................... -- -- 221.3 221.3
-------- -------- -------- --------
$3,247.3 $3,216.7 $4,011.4 $4,016.5
======== ======== ======== ========
</TABLE>
F-28
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income in 1999, 1998
and 1997 is a net pre-tax contribution from the Closed Block of $13.8 million,
$10.4 million and $9.1 million, respectively. Summarized financial information
of the Closed Block as of December 31, 1999 and 1998 and for the periods ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $387.4
and $399.1
respectively)........................................... $372.9 $414.2
Mortgage loans............................................ 136.3 136.0
Policy loans.............................................. 201.1 210.9
Cash and cash equivalents................................. 22.6 9.4
Accrued investment income................................. 14.0 14.1
Deferred policy acquisition costs......................... 13.1 15.6
Other assets.............................................. 12.3 2.9
------ ------
Total assets................................................ $772.3 $803.1
====== ======
Liabilities
Policy liabilities and accruals........................... $835.2 $862.9
Other liabilities......................................... 6.9 9.1
------ ------
Total liabilities........................................... $842.1 $872.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Revenues
Premiums and other income................................. $ 52.1 $ 55.4 $ 58.3
Net investment income..................................... 53.8 53.3 53.4
Realized investment (loss) gain........................... (0.6) 0.1 1.3
------ ------ ------
Total revenues.............................................. 105.3 108.8 113.0
------ ------ ------
Benefits and expenses
Policy benefits........................................... 88.9 95.0 100.5
Policy acquisition expenses............................... 2.5 2.7 3.0
Other operating expenses.................................. 0.1 0.7 0.4
------ ------ ------
Total benefits and expenses................................. 91.5 98.4 103.9
------ ------ ------
Contribution from the Closed Block.......................... $ 13.8 $ 10.4 $ 9.1
====== ====== ======
</TABLE>
F-29
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------- -------
<S> <C> <C> <C>
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block........................ $ 13.8 $ 10.4 $ 9.1
Change in:
Deferred policy acquisition costs, net.................. 2.5 2.6 2.9
Premiums and other receivables.......................... -- 0.3 --
Policy liabilities and accruals......................... (13.1) (13.5) (11.6)
Accrued investment income............................... 0.1 - 0.2
Deferred taxes.......................................... -- 0.1 (5.1)
Other assets............................................ (8.3) 2.4 (2.9)
Expenses and taxes payable.............................. (2.9) (2.9) (2.0)
Other, net.............................................. 0.8 (0.1) (1.2)
------- ------- -------
Net cash used in operating activities..................... (7.1) (0.7) (10.6)
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 139.0 83.6 161.6
Purchases of investments................................ (128.5) (106.5) (161.4)
Other, net.............................................. 9.8 7.9 11.4
------- ------- -------
Net cash provided by (used in) investing activities....... 20.3 (15.0) 11.6
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 13.2 (15.7) 1.0
Cash and cash equivalents, beginning of year................ 9.4 25.1 24.1
------- ------- -------
Cash and cash equivalents, end of year...................... $ 22.6 $ 9.4 $ 25.1
======= ======= =======
</TABLE>
There were no valuation allowances on mortgage loans in the Closed Block at
December 31, 1999, 1998 or 1997, 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.
10. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Short-term
Commercial paper.......................................... $ -- $ 41.3
Borrowings under bank credit facility..................... -- 150.0
Repurchase agreements..................................... -- 30.0
------ ------
Total short-term debt....................................... $ -- $221.3
====== ======
</TABLE>
F-30
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1999, there was no commercial
paper outstanding.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at
December 31, 1998 were $150.0 million. These borrowings were repaid in February
1999.
The company utilizes repurchase agreements to finance certain transactions and
had approximately $30 million in such agreements outstanding at December
31,1998. There were no repurchase agreements outstanding at December 31, 1999.
In 1999, there was no interest expense related to borrowings under the credit
agreement. Interest expense related to borrowings under the credit agreement was
approximately $0.7 million and $2.8 million in 1998 and 1997, respectively. All
interest expense is recorded in other operating expenses.
In October, 1995, AFC issued Senior Debentures with a face value of $200.0
million, pay interest at a rate of 7 5/8%, and mature on October 16, 2025. The
primary source of cash for repayment of the debt by AFC is dividends from FAFLIC
and Allmerica P&C.
11. 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) on continuing operations in the consolidated statements of income is
shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $88.7 $ 74.6 $74.4
Deferred.................................................. 4.3 (15.4) 14.2
----- ------ -----
Total....................................................... $93.0 $ 59.2 $88.6
===== ====== =====
</TABLE>
The federal income taxes attributable to the consolidated results of continuing
operations are different from the amounts determined by multiplying income
before federal income taxes by the statutory 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) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Expected federal income tax expense on continuing
operations................................................ $133.9 $107.9 $122.9
Tax-exempt interest....................................... (24.2) (38.9) (37.9)
Dividend received deduction............................... -- (5.1) (3.2)
Changes in tax reserve estimates.......................... (8.7) 2.3 7.8
Tax credits............................................... (8.5) (8.5) (2.7)
Other, net................................................ 0.5 1.5 1.7
------ ------ ------
Federal income tax expense on continuing operations......... $ 93.0 $ 59.2 $ 88.6
====== ====== ======
</TABLE>
F-31
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred income tax (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards......................................... $ -- $ (16.8)
Loss reserve discounting.................................. (283.5) (406.6)
Deferred acquisition costs................................ 355.7 345.8
Employee benefit plans.................................... (52.0) (45.3)
Investments, net.......................................... (19.5) 121.7
Bad debt reserve.......................................... -- (1.8)
Litigation reserve........................................ (6.0) (10.9)
Discontinued operations................................... (11.7) --
Other, net................................................ (1.1) (5.5)
------- -------
Deferred tax asset, net..................................... $ (18.1) $ (19.4)
======= =======
</TABLE>
Gross deferred income tax assets totaled $515.8 million and $486.9 millions at
December 31, 1999 and 1998, respectively. Gross deferred income tax liabilities
totaled $497.7 million and $467.5 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on the its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary. At December 31, 1999 there are no available
alternative minimum tax credit carryforwards.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Services ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The IRS has also examined the former Allmerica P&C consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the federal income tax returns for 1992,
1993 and 1994 for the FAFLIC/AFLIAC consolidated group. Also, certain
adjustments proposed by the IRS with respect to FAFLIC/AFLIAC's federal income
tax returns for 1982 and 1983 remain unresolved. If upheld, these adjustments
would result in additional payments; however, the Company will vigorously defend
its position with respect to these adjustments. In the Company's opinion,
adequate tax liabilities have been established for all years. However, the
amount of these tax liabilities could be revised in the near term if estimates
of the Company's ultimate liability are revised.
12. PENSION PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple benefit plans to employees and agents of these affiliated
Companies, including retirement plans. The salaries of employees and agents
covered by these plans and the expenses of these plans are charged to the
affiliated Companies in accordance with an intercompany cost sharing agreement.
F-32
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAFLIC provides retirement benefits to substantially all of its employees under
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby the Company annually provides an allocation to each
eligible employee based on a percentage of that employee's salary, similar to a
defined contribution plan arrangement. The 1999, 1998 and 1997 allocations were
based on 7.0% of each eligible employee's salary. In addition to the cash
balance allocation, certain transition group employees, who have met specified
age and service requirements as of December 31, 1994, are eligible for a
grandfathered benefit based primarily on the employees' years of service and
compensation during their highest five consecutive plan years of employment. The
Company's policy for the plans is to fund at least the minimum amount required
by the Employee Retirement Income Security Act of 1974.
Components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.3 $ 19.0 $ 19.9
Interest cost............................................... 26.5 25.5 23.5
Expected return on plan assets.............................. (38.9) (34.9) (31.2)
Recognized net actuarial loss............................... 0.4 0.4 0.1
Amortization of transition asset............................ (1.4) (1.8) (1.9)
Amortization of prior service cost.......................... (2.2) (1.7) (2.0)
------- ------- -------
Net periodic pension cost................................. $ 3.7 $ 6.5 $ 8.4
======= ======= =======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.7
million of the net periodic pension cost was allocated to the distributed
subsidiaries.
The following table summarizes the status of the plan. At December 31, 1999 and
1998 the plans' assets exceeded their projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year......... $ 414.2 $ 370.4
Service cost -- benefits earned during the year........... 19.3 19.0
Interest cost............................................. 26.5 25.5
Actuarial (gains) losses.................................. (44.4) 20.4
Benefits paid............................................. (22.9) (21.1)
------- -------
Projected benefit obligation at end of year............. 392.7 414.2
------- -------
</TABLE>
F-33
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year............ 441.6 395.5
Actual return on plan assets.............................. 51.9 67.2
Benefits paid............................................. (22.9) (21.1)
Fair value of plan assets at end of year................ 470.6 441.6
Funded status of the plan................................. 77.9 27.4
Unrecognized transition obligation........................ (21.6) (23.9)
Unamortized prior service cost............................ (12.0) (11.0)
Unrecognized net actuarial gains.......................... (101.6) (54.9)
------- -------
Net pension liability................................... $ (57.3) $ (62.4)
======= =======
</TABLE>
As a result of AFC's merger with Allmerica P&C in 1997, certain pension
liabilities were reduced to reflect their fair value as of the merger date.
These pension liabilities were reduced by $8.9 million and $10.3 million in 1999
and 1998, respectively, which reflects fair value, net of applicable
amortization.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.75% and 6.5% in 1999 and 1998, respectively, and the
assumed long-term rate of return on plan assets was 9.0% in both 1999 and 1998.
The actuarial present value of the projected benefit obligations was determined
using assumed rates of increase in future compensation levels ranging from 5.0%
to 5.5%. Plan assets are invested primarily in various separate accounts and the
general account of FAFLIC. Plan assets also include 796,462 shares and 973,262
shares of AFC Common Stock at December 31, 1999 and 1998, respectively, with a
market value of $44.3 million and $56.3 million at December 31, 1999 and 1998,
respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1999, 1998 and
1997, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expense related to this plan was $5.9 million, $5.6
million and $3.3 million in 1999, 1998 and 1997, respectively. In 1999,
subsequent to the AFC corporate reorganization, approximately $1.4 million of
the 401(k) expense was allocated to the distributed subsidiaries. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The plan expense in 1999, 1998 and 1997 was $3.1 million, $3.0
million and $2.8 million, respectively.
On January 1, 1998, substantially all of the defined benefit and defined
contribution 401(k) plans previously provided by the affiliated Companies were
merged with the existing benefit plans of FAFLIC. The merger of benefit plans
resulted in a $5.9 million change of interest adjustment to additional paid-in
capital during 1998. The change of interest adjustment arose from FAFLIC's
forgiveness of certain Allmerica P&C benefit plan liabilities attributable to
Allmerica P&C's minority interest.
13. OTHER POSTRETIREMENT BENEFIT PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple postretirement medical and death benefit plans to employees,
agents and retirees of these affiliated Companies. The costs of these plans are
charged to the affiliated Companies in accordance with an intercompany cost
sharing agreement.
F-34
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective
January 1, 1996, the Company revised these benefits so as to establish limits on
future benefit payments and to restrict eligibility to current employees. The
medical plans have varying copayments and deductibles, depending on the plan.
These plans are unfunded.
The plans' funded status reconciled with amounts recognized in the Company's
Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 84.0 $ 71.8
Service cost................................................ 2.9 3.1
Interest cost............................................... 4.6 5.1
Actuarial (gains) losses.................................... (21.2) 7.6
Benefits paid............................................... (3.5) (3.6)
------- -------
Accumulated postretirement benefit obligation at end of
year.................................................... 66.8 84.0
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status of the plan................................... (66.8) (84.0)
Unamortized prior service cost.............................. (9.8) (12.9)
Unrecognized net actuarial (gains) losses................... (13.8) 7.5
------- -------
Accumulated postretirement benefit costs.................. $ (90.4) $ (89.4)
======= =======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 2.9 $ 3.1 $ 3.0
Interest cost............................................... 4.6 5.1 4.6
Recognized net actuarial loss (gain)........................ 0.1 0.1 (0.1)
Amortization of prior service cost.......................... (2.3) (2.4) (2.7)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.3 $ 5.9 $ 4.8
====== ====== ======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.1
million of the net periodic postretirement cost was allocated to the distributed
subsidiaries.
As a result of AFC's merger with Allmerica P&C in 1997, certain postretirement
liabilities were reduced to reflect their fair value as of the merger date.
These postretirement liabilities were reduced by $4.6 million and $5.4 million
in 1999 and 1998, respectively, which reflects fair value, net of applicable
amortization.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1999, health care costs were assumed to increase 6.0% in 2000,
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
F-35
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
one percentage point in each year would increase the accumulated postretirement
benefit obligation at December 31, 1999 by $4.1 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1999 by $0.6 million. Conversely, decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation at December 31, 1999 by $3.6
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 6.5% at December 31, 1999 and
1998, respectively. In addition, the actuarial present value of the accumulated
postretirement benefit obligation was determined using an assumed rate of
increase in future compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the postretirement medical and death
benefits plans previously provided by the affiliated Companies were merged with
the existing benefit plans of FAFLIC. The merger of benefit plans resulted in a
$3.8 million change of interest adjustment to additional paid-in capital during
1998. The change of interest adjustment arose from FAFLIC's forgiveness of
certain Allmerica P&C benefit plan liabilities attributable to Allmerica P&C's
minority interest.
14. DIVIDEND RESTRICTIONS
Massachusetts and Delaware have enacted laws governing the payment of dividends
to stockholders by insurers. These laws affect the dividend paying ability of
FAFLIC and AFLIAC, respectively.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. During 1999 and 1997, no dividends were
declared by FAFLIC to AFC. During 1998, FAFLIC paid dividends of $50.0 million
to AFC. As of July 1, 1999, FAFLIC's ownership of Allmerica P&C, as well as
several non-insurance subsidiaries, was transferred from FAFLIC to AFC. Under an
agreement with the Commissioner, any dividend from FAFLIC to AFC for years 2000
and 2001 would require the prior approval of the Commissioner and may require
AFC to make additional capital contributions to FAFLIC.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an insurer,
whether or not in excess of the aforementioned threshold, from a source other
than statutory earned surplus would also require the prior approval of the
Delaware Commissioner of Insurance. No dividends were declared by AFLIAC to
FAFLIC during 1999, 1998 or 1997. During 2000, AFLIAC could pay dividends of
$34.3 million to FAFLIC without prior approval.
F-36
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
The Company offers Asset Accumulation financial products and services. Prior to
the AFC corporate reorganization, the Company offered financial products and
services in two major areas: Risk Management and Asset Accumulation. Within
these broad areas, the Company conducted business principally in three operating
segments. These segments were Risk Management, Allmerica Financial Services and
Allmerica Asset Management. In accordance with Statement No. 131, the separate
financial information of each segment is presented consistent with the way
results are regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. A summary of
the Company's reportable segments is included below.
In 1999, the Company reorganized its Property and Casualty business and
Corporate Risk Management Services operations within the Risk Management
segment. Under the new structure, the Risk Management segment manages its
business through five distribution channels identified as Hanover North, Hanover
South, Citizens Midwest, Allmerica Voluntary Benefits and Allmerica Specialty.
During the second quarter of 1999, the Company approved a plan to exit its group
life and health business, consisting of its EBS business, its AGU business and
its reinsurance pool business. Results of operations from this business,
relating to both the current and the prior periods, have been segregated and
reported as a component of discontinued operations in the Consolidated
Statements of Income. Operating results from this business were previously
reported in the Allmerica Voluntary Benefits and Allmerica Specialty
distribution channels. Prior to 1999, results of the group life and health
business were included in the Corporate Risk Management Services segment, while
all other Risk Management business was reflected in the Property and Casualty
segment.
The Risk Management segment's property and casualty business is offered
primarily through the Hanover North, Hanover South and Citizens Midwest
distribution channels utilizing the Company's independent agent network
primarily in the Northeast, Midwest and Southeast United States, maintaining a
strong regional focus. Allmerica Voluntary Benefits focuses on worksite
distribution, which offers discounted property and casualty products through
employer sponsored programs, and affinity group property and casualty business.
Allmerica Specialty offers special niche property and casualty products in
selected markets. On July 1, 1999, AFC made certain changes to its corporate
structure as discussed in Note 3. As a result, FAFLIC distributed its interest
in the property and casualty business after that date.
The Asset Accumulation group includes two segments: Allmerica Financial Services
and Allmerica Asset Management. The Allmerica Financial Services segment
includes variable annuities, variable universal life and traditional life
insurance products distributed via retail channels as well as group retirement
products, such as defined benefit and 401(k) plans and tax-sheltered annuities
distributed to institutions. Through its Allmerica Asset Management segment, the
Company offers its customers the option of investing in GICs such as the
traditional GIC, synthetic GIC and other funding agreements. Funding agreements
are investment contracts issued to institutional buyers, such as money market
funds, corporate cash management programs and securities lending collateral
programs, which typically have short maturities and periodic interest rate
resets based on an index such as LIBOR. This segment is also a Registered
Investment Advisor providing investment advisory services, primarily to
affiliates, and to other institutions, such as insurance companies and pension
plans. As a result of the aforementioned change in the AFC corporate structure,
FAFLIC distributed its ownership of certain investment advisory business as of
July 1, 1999.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt, Capital
Securities and corporate overhead expenses. Corporate overhead
F-37
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses reflect costs not attributable to a particular segment, such as those
generated by certain officers and directors, Corporate Technology, Corporate
Finance, Human Resources and the Legal department.
Management evaluates the results of the aforementioned segments based on a
pre-tax and minority interest basis. Segment income is determined by adjusting
net income for net realized investment gains and losses, net gains and losses on
disposals of businesses, discontinued operations, extraordinary items, the
cumulative effect of accounting changes and certain other items which management
believes are not indicative of overall operating trends. While these items may
be significant components in understanding and assessing the Company's financial
performance, management believes that the presentation of segment income
enhances understanding of the Company's results of operations by highlighting
net income attributable to the normal, recurring operations of the business.
However, segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management........................................... $1,075.2 $2,220.8 $2,227.3
Asset Accumulation
Allmerica Financial Services............................ 797.0 721.2 713.9
Allmerica Asset Management.............................. 144.5 121.7 91.1
-------- -------- --------
Subtotal............................................ 941.5 842.9 805.0
-------- -------- --------
Corporate................................................. 0.4 2.3 4.7
Intersegment revenues..................................... (0.8) (7.6) (11.5)
-------- -------- --------
Total segment revenues including Closed Block........... 2,016.3 3,058.4 3,025.5
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block........................... (92.1) (98.4) (102.6)
Change in mortality................................... -- -- (4.2)
Net realized gains.................................... 100.3 60.9 76.3
-------- -------- --------
Total revenues............................................ $2,024.5 $3,020.9 $2,995.0
======== ======== ========
</TABLE>
F-38
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
Segment income (loss) before income taxes and minority interest:
<S> <C> <C> <C>
Risk Management............................................. $ 85.1 $ 149.7 $ 174.2
Asset Accumulation
Allmerica Financial Services.............................. 207.1 169.0 134.6
Allmerica Asset Management................................ 21.3 23.7 18.4
-------- -------- --------
Subtotal.............................................. 228.4 192.7 153.0
-------- -------- --------
Corporate................................................... (38.6) (45.2) (44.6)
Segment income before income taxes and minority interest... 274.9 297.2 282.6
Adjustments to segment income:
Net realized investment gains, net of amortization........ 106.1 52.2 78.5
Sales practice litigation expense......................... -- (31.0) --
Gain from change in mortality assumptions................. -- -- 47.0
Loss on cession of disability income business............. -- -- (53.9)
Restructuring costs....................................... -- (9.0) --
Other items............................................... -- (0.8) (2.8)
-------- -------- --------
Income before taxes and minority interest................... $ 381.0 $ 308.6 $ 351.4
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998 1999 1998
- ------------- --------- --------- ------------ ------------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
<S> <C> <C> <C> <C>
Risk Management............................... $ 542.0 $ 6,216.8 $ 6.0 $ 167.5
Asset Accumulation
Allmerica Financial Services................ 23,410.7 19,407.3 1,213.1 993.1
Allmerica Asset Management.................. 1,381.1 1,810.9 0.4 0.6
--------- --------- --------- ---------
Subtotal................................ 24,791.8 21,218.2 1,213.5 993.7
Corporate................................... -- 29.6 -- --
--------- --------- --------- ---------
Total..................................... $25,333.8 $27,464.6 $ 1,219.5 $ 1,161.2
========= ========= ========= =========
</TABLE>
16. LEASE COMMITMENTS
Rental expenses for operating leases, including those related to the
discontinued operations of the Company, amounted to $22.2 million, $34.9 million
and $33.6 million in 1999, 1998 and 1997, respectively. These expenses relate
primarily to building leases of the Company. At December 31, 1999, future
minimum rental payments under non-cancelable operating leases were approximately
$39.9 million, payable as follows: 2000 - $14.1 million; 2001 -- $12.7 million;
2002 -- $8.1 million; 2003 -- $3.6 million, and $1.4 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 2000.
F-39
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REINSURANCE
In the normal course of business, the Company seeks to reduce the losses 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 Statement of Financial
Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short
Duration and Long Duration Contracts.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated insurer (See Note 5).
Prior to the AFC corporate reorganization, the Company was subject to
concentration of risk with respect to this reinsurance agreement, which
represented 10% or more of the Company's reinsurance business. Net premiums
earned and losses and loss adjustment expenses ceded under this agreement in
1999 were $21.9 million and $35.0 million, respectively. In addition, 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"). Prior to the AFC corporate reorganization, both CAR and MCCA
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company ceded 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 1999, 1998 and 1997 were
$20.4 million and $21.4 million, $34.3 million and $38.1 million, and $32.3
million and $28.2 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1999, 1998 and 1997 of $1.8
million and $30.6 million, $3.7 million and $18.0 million, and $9.8 million and
$(0.8) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
F-40
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................... $ 53.5 $ 51.4 $ 55.9
Assumed................................................... 0.7 0.7 0.6
Ceded..................................................... (50.0) (47.8) (29.1)
-------- -------- --------
Net premiums................................................ $ 4.2 $ 4.3 $ 27.4
======== ======== ========
Property and casualty premiums written:
Direct.................................................... $1,089.0 $1,970.4 $2,068.5
Assumed................................................... 27.3 58.8 103.1
Ceded..................................................... (135.4) (74.1) (179.8)
-------- -------- --------
Net premiums................................................ $ 980.9 $1,955.1 $1,991.8
======== ======== ========
Property and casualty premiums earned:
Direct.................................................... $1,047.3 $1,966.8 $2,046.1
Assumed................................................... 30.3 64.5 102.0
Ceded..................................................... (127.3) (66.1) (195.1)
-------- -------- --------
Net premiums................................................ $ 950.3 $1,965.2 $1,953.0
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 391.9 $ 359.5 $ 397.4
Assumed................................................... 0.1 0.3 0.4
Ceded..................................................... (39.2) (49.5) (79.4)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses.................................................. $ 352.8 $ 310.3 $ 318.4
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................... $ 805.6 $1,588.2 $1,464.9
Assumed................................................... 25.9 62.7 101.2
Ceded..................................................... (128.0) (158.2) (120.6)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses.................................................. $ 703.5 $1,492.7 $1,445.5
======== ======== ========
</TABLE>
F-41
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $1,161.2 $ 965.5 $ 822.7
Acquisition expenses deferred............................... 419.2 638.2 614.3
Amortized to expense during the year........................ (240.9) (449.6) (472.6)
Adjustment for discontinued operations...................... 3.4 ( 0.2) --
Adjustment to equity during the year........................ 39.3 7.3 (11.1)
Adjustment due to distribution of subsidiaries.............. (162.7) -- --
Adjustment for cession of disability income insurance....... -- -- (38.6)
Adjustment for revision of universal and variable universal
life insurance mortality assumptions...................... -- -- 50.8
-------- -------- --------
Balance at end of year...................................... $1,219.5 $1,161.2 $ 965.5
======== ======== ========
</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.
19. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. Changes
in prior estimates are recorded in results of operations in the year such
changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$601.3 million and $568.0 million at December 31, 1999 and 1998, respectively.
Accident and health claim liabilities were re-estimated for all prior years and
were increased by $51.2 million and $14.6 million in 1999 and 1998,
respectively. The increase in 1999 resulted from the Company's reserve
strengthening primarily in the EBS and reinsurance pool business. The 1998
increase also resulted from the Company's reserve strengthening, primarily in
the assumed reinsurance and stop loss only business.
F-42
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
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) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,597.3 $2,615.4 $2,744.1
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year.......... 795.6 1,609.0 1,564.1
Decrease in provision for insured events of prior years... (96.1) (127.2) (127.9)
-------- -------- --------
Total incurred losses and LAE............................... 699.5 1,481.8 1,436.2
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................... 342.1 871.9 775.1
Losses and LAE attributable to insured events of prior
years................................................... 424.2 643.0 732.1
-------- -------- --------
Total payments 766.3 1,514.9 1,507.2
Change in reinsurance recoverable on unpaid losses.......... 44.3 15.0 (50.2)
Distribution of subsidiaries................................ (2,574.8) -- --
Other (1)................................................... -- -- (7.5)
-------- -------- --------
Reserve for losses and LAE, end of year..................... $ -- $2,597.3 $2,615.4
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the reserves have been re-estimated for all prior
accident years and were decreased by $96.1 million, $127.2 million and $127.9
million in 1999, 1998 and 1997, respectively, reflecting increased favorable
development on reserves for both losses and loss adjustment expenses.
Favorable development on prior years' loss reserves was $52.0 million, $58.9
million, and $87.2 million prior to the AFC corporate reorganization in 1999 and
for the years ended December 31, 1998 and 1997, respectively. Favorable
development on prior year's loss adjustment expense reserves was $44.1 million,
$68.3 million, and $40.7 million prior to the AFC corporate reorganization in
1999 and for the years ended December 31, 1998 and 1997, respectively. The
increase in favorable development 1998 is primarily attributable to claims
process improvement initiatives taken by the Company. The Company has lowered
claim settlement costs through increased utilization of in-house attorneys and
consolidation of claim offices.
This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.
Due to the nature of the business written by the Risk Management segment, the
exposure to environmental liabilities is relatively small and therefore its
reserves are relatively small compared to other types of liabilities. Due to the
AFC corporate reorganization, the Company had no exposure for this item at
December 31, 1999. Loss and LAE reserves related to environmental damage and
toxic tort liability, included in the reserve for losses and LAE, were $49.9
million and $53.1 million, net of reinsurance of $14.2 million and $15.7 million
in 1998 and 1997, respectively. The Company does not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Company may be
required to defend such claims. The Company estimated its ultimate liability for
these claims based upon currently known facts, reasonable assumptions where the
facts are not known,
F-43
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current law and methodologies currently available. Although these claims are not
significant, their existence gives rise to uncertainty and is discussed because
of the possibility, however remote, that they may become significant. The
Company believes that, notwithstanding the evolution of case law expanding
liability in environmental claims, recorded reserves related to these claims are
adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
20. MINORITY INTEREST
As a result of the Company's divestiture of certain of its subsidiaries
including its 84.5% ownership of the outstanding shares of the common stock of
Allmerica P&C effective July 1, 1999, there is no minority interest reflected on
the Consolidated Balance Sheets as of December 31, 1999. In prior years, the
Company's interest in Allmerica P&C was represented by ownership of 70.0% and
65.8% of the outstanding shares of common stock at December 31, 1998 and 1997,
respectively. Earnings and shareholder's equity attributable to minority
shareholders are included in minority interest in the consolidated financial
statements through the period ended June 30, 1999 and for the years ended
December 31, 1998 and 1997.
21. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement. The court granted preliminary approval of
the settlement on December 4, 1998. On May 19, 1999, the court issued an order
certifying the class for settlement purposes and granting final approval of the
settlement agreement. FAFLIC recognized a $31.0 million pre-tax expense during
the third quarter of 1998 related to this litigation. Although the Company
believes that this expense reflects appropriate recognition of its obligation
under the settlement, this estimate assumes the availability of insurance
coverage for certain claims, and the estimate may be revised based on the amount
of reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
However,
F-44
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
22. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, 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. In 1999, 49 out of 50
states have adopted the National Association of Insurance Commissioners proposed
Codification, which provides for uniform statutory accounting principles. These
principles are effective January 1, 2001. The Company is currently assessing the
impact that the adoption of Codification will have on its statutory results of
operations and financial position.
Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies........................... $322.6 $ 180.7 $ 190.3
Life and Health Companies................................. 239.0 86.4 191.2
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies (See Note 3).............. $-- $1,269.3 $1,279.6
Life and Health Companies................................. 590.1 1,164.1 1,221.3
</TABLE>
F-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and the Contractowners of the Separate Account VA-K 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
constituting the Separate Account VA-K of First Allmerica Financial Life
Insurance Company at December 31, 1999, 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 accounting principles
generally accepted in the United States. These financial statements are the
responsibility of First Allmerica Financial Life Insurance Company; 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 auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999 by correspondence with the Funds, provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 9999
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 31,666,387 $ 7,482,662 $ 12,444,661
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 ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... 188,078 - -
--------------- --------------- ---------------
Total assets .......................................................... 31,854,465 7,482,662 12,444,661
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - 3,249
--------------- --------------- ---------------
Net assets ............................................................. $ 31,854,465 $ 7,482,662 $12,441,412
--------------- --------------- ---------------
--------------- --------------- ---------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 31,854,465 $ 7,482,662 $ 12,441,412
--------------- --------------- ---------------
--------------- --------------- ---------------
Units outstanding, December 31, 1999 ....................................... 10,700,441 5,686,038 10,043,976
Net asset value per unit, December 31, 1999 ................................ $ 2.976930 $ 1.315971 $ 1.238694
<CAPTION>
SELECT
EQUITY INDEX GOVERNMENT BOND AGGRESSIVE GROWTH
--------------- --------------- -----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 37,628,197 $ 5,177,193 $ 30,195,322
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 ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
--------------- --------------- -----------------
Total assets .......................................................... 37,628,197 5,177,193 30,195,322
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... 75,965 - -
--------------- --------------- -----------------
Net assets ............................................................. $ 37,552,232 $ 5,177,193 $ 30,195,322
--------------- --------------- -----------------
--------------- --------------- -----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 37,552,232 $ 5,177,193 $ 30,195,322
--------------- --------------- -----------------
--------------- --------------- -----------------
Units outstanding, December 31, 1999 ....................................... 11,440,299 4,117,854 11,108,225
Net asset value per unit, December 31, 1999 ................................ $ 3.282452 $ 1.257255 $ 2.718285
<CAPTION>
SELECT GROWTH SELECT VALUE
SELECT GROWTH AND INCOME OPPORTUNITY
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 40,381,292 $ 22,998,632 $ 14,229,174
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 ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
--------------- --------------- ---------------
Total assets .......................................................... 40,381,292 22,998,632 14,229,174
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - 75,512 -
--------------- --------------- ---------------
Net assets ............................................................. $ 40,381,292 $ 22,923,120 $ 14,229,174
--------------- --------------- ---------------
--------------- --------------- ---------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 40,381,292 $ 22,923,120 $ 14,229,174
--------------- --------------- ---------------
--------------- --------------- ---------------
Units outstanding, December 31, 1999 ....................................... 11,455,113 8,957,758 8,309,201
Net asset value per unit, December 31, 1999 ................................ $ 3.525176 $ 2.559024 $ 1.712460
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
December 31, 9999
<TABLE>
<CAPTION>
SELECT DGPF
INTERNATIONAL SELECT CAPITAL INTERNATIONAL
EQUITY APPRECIATION EQUITY
----------------- ------------------ ----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ 22,588,494 $ 15,467,194 $ -
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 ................... - - 7,844,338
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
---------------- ---------------- -----------------
Total assets .......................................................... 22,588,494 15,467,194 7,844,338
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... 3 - 2
Net assets ............................................................. $ 22,588,491 15,467,194 7,844,336
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 22,588,491 $ 15,467,194 $ 7,844,336
---------------- ----------------- ----------------
---------------- ----------------- ----------------
Units outstanding, December 31, 1999 ....................................... 10,840,734 6,678,146 4,559,804
Net asset value per unit, December 31, 1999 ................................ $ 2.083668 $ 2.316091 $ 1.7203236091
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP
HIGH INCOME EQUITY-INCOME GROWTH
----------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. 23,300,730 41,823,565 60,703,679
Investment in shares of T. Rowe Price International Series, Inc. ........... - - -
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
---------------- ---------------- ----------------
Total assets .......................................................... 23,300,730 41,823,565 60,703,679
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
---------------- ---------------- ----------------
Net assets ............................................................. $ 23,300,730 $ 41,823,565 $ 60,703,679
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 23,300,730 $ 41,823,565 $ 60,703,679
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Units outstanding, December 31, 1999 ....................................... 15,019,986 17,835,666 16,527,943
Net asset value per unit, December 31, 1999 ................................ $ 1.551315 $ 2.344940 $ 3.672791
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
-------------- ------------------ ---------------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica Investment Trust ........................ $ - $ - $ -
Investments in shares of Fidelity Variable Insurance Products Funds (VIP) .. 9,725,194 8,748,250 -
Investment in shares of T. Rowe Price International Series, Inc. ........... - - 10,889,577
Investment in shares of Delaware Group Premium Fund, Inc ................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ...................................................... - - -
-------------- ------------------ ---------------------
Total assets .......................................................... 9,725,194 8,748,250 10,889,577
LIABILITIES:
Payable to First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
-------------- ------------------ ---------------------
Net assets ............................................................. $ 9,725,194 $ 8,748,250 $ 10,889,577
-------------- ------------------ ---------------------
-------------- ------------------ ---------------------
Net asset distribution by category:
Variable annuity contracts ............................................... $ 9,725,194 $ 8,748,250 $ 10,889,577
-------------- ------------------ ---------------------
-------------- ------------------ ---------------------
Units outstanding, December 31, 1999 ....................................... 4,796,337 4,613,840 5,937,367
Net asset value per unit, December 31, 1999 ................................ $ 2.027630 $ 1.896089 $ 1.834075
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 165,095 $ 460,500 $ 598,236 $ 284,297
------------- ------------ ------------ ------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 323,203 91,695 147,935 373,833
Administrative expense fees. . . . . . . . . . . . . . . . . 52,614 14,927 24,082 60,857
------------- ------------ ------------ ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 375,817 106,622 172,017 434,690
------------- ------------ ------------ ------------
Net investment income (loss) . . . . . . . . . . . . . . . (210,722) 353,878 426,219 (150,393)
------------- ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 2,354,633 5,800 - 45,159
Net realized gain (loss) from sales of investments . . . . . 314,692 (11,579) - 294,331
------------- ------------ ------------ ------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 2,669,325 (5,779) - 339,490
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 3,944,336 (523,111) - 5,088,920
------------- ------------ ------------ ------------
Net realized and unrealized gain (loss) . . . . . . . . . 6,613,661 (528,890) - 5,428,410
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from operations . . $ 6,402,939 $ (175,012) $ 426,219 $5,278,017
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
<CAPTION>
SELECT SELECT GROWTH
GOVERNMENT BOND AGGRESSIVE GROWTH SELECT GROWTH AND INCOME
--------------- ----------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,146 $ - $ 15,054 $ 214,299
--------------- ----------------- ------------- -------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 57,267 286,970 367,811 240,871
Administrative expense fees. . . . . . . . . . . . . . . . . 9,322 46,716 59,876 39,211
--------------- ----------------- ------------- -------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 66,589 333,686 427,687 280,082
--------------- ----------------- ------------- -------------
Net investment income (loss) . . . . . . . . . . . . . . . 200,557 (333,686) (412,633) (65,783)
--------------- ----------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . - - 956,687 1,417,591
Net realized gain (loss) from sales of investments . . . . . (25,022) 348,108 242,691 166,282
--------------- ----------------- ------------- -------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . (25,022) 348,108 1,199,378 1,583,873
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (219,399) 7,883,902 7,400,373 1,439,837
--------------- ----------------- ------------- -------------
Net realized and unrealized gain (loss) . . . . . . . . . (244,421) 8,232,010 8,599,751 3,023,710
--------------- ----------------- ------------- -------------
Net increase (decrease) in net assets from operations . . $ (43,864) $ 7,898,324 $ 8,187,118 $ 2,957,927
--------------- ----------------- ------------- -------------
--------------- ----------------- ------------- -------------
<CAPTION>
SELECT VALUE
OPPORTUNITY
-------------
<S> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 77
-------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 168,326
Administrative expense fees. . . . . . . . . . . . . . . . . 27,402
-------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 195,728
-------------
Net investment income (loss) . . . . . . . . . . . . . . . (195,651)
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 770,979
Net realized gain (loss) from sales of investments . . . . . (19,671)
-------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 751,308
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (1,364,169)
-------------
Net realized and unrealized gain (loss) . . . . . . . . . (612,861)
-------------
Net increase (decrease) in net assets from operations . . $ (808,512)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF OPERATIONS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT DGPF
INTERNATIONAL SELECT CAPITAL INTERNATIONAL FIDELITY VIP
EQUITY APPRECIATION EQUITY HIGH INCOME
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ 136,850 $1,886,309
------------- -------------- ------------- ------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 223,269 155,151 85,251 277,658
Administrative expense fees. . . . . . . . . . . . . . . . . 36,347 25,257 13,879 45,201
------------- -------------- ------------- ------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 259,616 180,408 99,130 322,859
------------- -------------- ------------- ------------
Net investment income (loss) . . . . . . . . . . . . . . . (259,616) (180,408) 37,720 1,563,450
------------- -------------- ------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . - 18,801 9,995 70,516
Net realized gain (loss) from sales of investments . . . . . 233,508 73,953 85,179 (255,991)
------------- -------------- ------------- ------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 233,508 92,754 95,174 (185,475)
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 5,024,680 2,949,396 776,394 (29,248)
------------- -------------- ------------- ------------
Net realized and unrealized gain (loss) . . . . . . . . . 5,258,188 3,042,150 871,568 (214,723)
------------- -------------- ------------- ------------
Net increase (decrease) in net assets from operations . . $ 4,998,572 $ 2,861,742 $ 909,288 $1,348,727
------------- -------------- ------------- ------------
------------- -------------- ------------- ------------
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP FIDELITY VIP II
EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER
------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 541,437 $ 64,545 $ 98,590 $ 206,350
------------- -------------- ------------ ---------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 500,740 571,004 89,844 89,813
Administrative expense fees. . . . . . . . . . . . . . . . . 81,516 92,955 14,626 14,621
------------- -------------- ------------ ---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 582,256 663,959 104,470 104,434
------------- -------------- ------------ ---------------
Net investment income (loss) . . . . . . . . . . . . . . . (40,819) (599,414) (5,880) 101,916
------------- -------------- ------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 1,196,860 4,058,271 159,017 261,376
Net realized gain (loss) from sales of investments . . . . . 518,090 423,817 166,845 43,434
------------- -------------- ------------ ---------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 1,714,950 4,482,088 325,862 304,810
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . (29,350) 10,852,568 2,373,555 284,089
------------- -------------- ------------ ---------------
Net realized and unrealized gain (loss) . . . . . . . . . 1,685,600 15,334,656 2,699,417 588,899
------------- -------------- ------------ ---------------
Net increase (decrease) in net assets from operations . . $ 1,644,781 $ 14,735,242 $2,693,537 $ 690,815
------------- -------------- ------------ ---------------
------------- -------------- ------------ ---------------
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
-------------------
<S> <C>
INVESTMENT INCOME:
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,305
-------------------
EXPENSES :
Mortality and expense risk fees. . . . . . . . . . . . . . . 108,177
Administrative expense fees. . . . . . . . . . . . . . . . . 17,611
-------------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . 125,788
-------------------
Net investment income (loss) . . . . . . . . . . . . . . . (86,483)
-------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsors. . . . . 123,530
Net realized gain (loss) from sales of investments . . . . . 127,661
-------------------
Net realized gain (loss) . . . . . . . . . . . . . . . . . 251,191
Net unrealized gain (loss) . . . . . . . . . . . . . . . . . 2,415,777
-------------------
Net realized and unrealized gain (loss) . . . . . . . . . 2,666,968
-------------------
Net increase (decrease) in net assets from operations . . $ 2,580,485
-------------------
-------------------
</TABLE>
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (210,722) $ (60,681) $ 353,878 $ 284,315
Net realized gain (loss). . . . . . . . . . . . . . . . 2,669,325 227,744 (5,779) 22,115
Net unrealized gain (loss). . . . . . . . . . . . . . . 3,944,336 2,783,753 (523,111) 69,734
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 6,402,939 2,950,816 (175,012) 376,164
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 1,252,999 1,295,185 359,462 477,719
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (987,135) (854,008) (308,427) (278,536)
Contract benefits . . . . . . . . . . . . . . . . . . . . (216,420) (139,181) - -
Contract charges. . . . . . . . . . . . . . . . . . . . . (6,798) (5,051) (949) (805)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,506,045 3,331,381 653,869 1,501,451
Other transfers from (to) the General Account . . . . . . 1,358,025 267,895 (3,653) (45,851)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 3,906,716 3,896,221 700,302 1,653,978
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 10,309,655 6,847,037 525,290 2,030,142
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 21,544,810 14,697,773 6,957,372 4,927,230
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 31,854,465 $ 21,544,810 $ 7,482,662 $ 6,957,372
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
MONEY MARKET EQUITY INDEX
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 426,219 $ 412,863 $ (150,393) $ (38,931)
Net realized gain (loss). . . . . . . . . . . . . . . . - - 339,490 783,712
Net unrealized gain (loss). . . . . . . . . . . . . . . - - 5,088,920 3,420,684
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 426,219 412,863 5,278,017 4,165,465
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 41,248,758 42,956,520 2,053,314 1,870,086
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (663,576) (1,527,192) (1,285,807) (1,165,798)
Contract benefits . . . . . . . . . . . . . . . . . . . . (163,706) (7,305) (317,893) (196,777)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,910) (2,579) (6,761) (4,591)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . (38,919,763) (43,621,528) 6,865,573 5,748,639
Other transfers from (to) the General Account . . . . . . 141,135 2,251,241 1,513,207 548,442
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,639,938 49,157 8,821,633 6,800,001
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 2,066,157 462,020 14,099,650 10,965,466
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 10,375,255 9,913,235 23,452,582 12,487,116
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 12,441,412 $ 10,375,255 $ 37,552,232 $ 23,452,582
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
GOVERNMENT BOND
YEAR ENDED DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 200,557 $ 114,541
Net realized gain (loss). . . . . . . . . . . . . . . . (25,022) 18,037
Net unrealized gain (loss). . . . . . . . . . . . . . . (219,399) 22,198
--------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . (43,864) 154,776
--------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 377,457 341,848
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (121,601) (183,152)
Contract benefits . . . . . . . . . . . . . . . . . . . . (2,353) (230)
Contract charges. . . . . . . . . . . . . . . . . . . . . (695) (486)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,653,622 946,095
Other transfers from (to) the General Account . . . . . . (999) 24,821
--------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,905,431 1,128,896
--------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 1,861,567 1,283,672
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 3,315,626 2,031,954
--------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 5,177,193 $ 3,315,626
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SELECT
AGGRESSIVE GROWTH SELECT GROWTH
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (333,686) $ (248,987) $ (412,633) $ (223,375)
Net realized gain (loss). . . . . . . . . . . . . . . . 348,108 120,729 1,199,378 343,553
Net unrealized gain (loss). . . . . . . . . . . . . . . 7,883,902 1,626,872 7,400,373 4,813,123
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 7,898,324 1,498,614 8,187,118 4,933,301
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 1,341,167 1,667,973 2,185,824 1,762,877
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (1,018,716) (1,107,960) (1,027,454) (1,154,143)
Contract benefits . . . . . . . . . . . . . . . . . . . . (157,606) (5,407) (66,619) (46,068)
Contract charges. . . . . . . . . . . . . . . . . . . . . (7,973) (6,478) (9,601) (5,919)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,002,025 3,440,969 6,544,402 5,348,619
Other transfers from (to) the General Account . . . . . . 684,379 461,145 1,449,947 743,351
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,843,276 4,450,242 9,076,499 6,648,717
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 9,741,600 5,948,856 17,263,617 11,582,018
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 20,453,722 14,504,866 23,117,675 11,535,657
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 30,195,322 $ 20,453,722 $ 40,381,292 $ 23,117,675
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
SELECT GROWTH SELECT VALUE
AND INCOME OPPORTUNITY
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (65,783) $ (24,404) $ (195,651) $ (54,898)
Net realized gain (loss). . . . . . . . . . . . . . . . 1,583,873 185,469 751,308 67,905
Net unrealized gain (loss). . . . . . . . . . . . . . . 1,439,837 1,752,366 (1,364,169) 319,879
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,957,927 1,913,431 (808,512) 332,886
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 887,196 916,420 807,164 1,013,793
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (698,848) (709,978) (578,815) (592,743)
Contract benefits . . . . . . . . . . . . . . . . . . . . (239,854) (158,824) (70,078) (6,487)
Contract charges. . . . . . . . . . . . . . . . . . . . . (4,329) (3,598) (4,406) (3,938)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,882,328 2,191,454 853,303 2,413,513
Other transfers from (to) the General Account . . . . . . 653,591 641,774 823,362 408,183
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 3,480,084 2,877,248 1,830,530 3,232,321
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 6,438,011 4,790,679 1,022,018 3,565,207
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 16,485,109 11,694,430 13,207,156 9,641,949
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 22,923,120 $ 16,485,109 $ 14,229,174 $ 13,207,156
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
SELECT INTERNATIONAL SELECT CAPITAL
EQUITY APPRECIATION
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (259,616) $ (1,682) $ (180,408) $ (134,524)
Net realized gain (loss). . . . . . . . . . . . . . . . 233,508 92,023 92,754 1,842,555
Net unrealized gain (loss). . . . . . . . . . . . . . . 5,024,680 1,717,818 2,949,396 (486,273)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 4,998,572 1,808,159 2,861,742 1,221,758
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 938,996 911,710 806,871 977,644
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (598,035) (543,238) (408,501) (481,265)
Contract benefits . . . . . . . . . . . . . . . . . . . . (103,902) (35,297) (73,268) (6,055)
Contract charges. . . . . . . . . . . . . . . . . . . . . (4,551) (4,110) (3,766) (3,180)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 1,043,370 1,774,816 844,374 676,351
Other transfers from (to) the General Account . . . . . . 722,884 388,199 291,915 83,210
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 1,998,762 2,492,080 1,457,625 1,246,705
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 6,997,334 4,300,239 4,319,367 2,468,463
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 15,591,157 11,290,918 11,147,827 8,679,364
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 22,588,491 $ 15,591,157 $ 15,467,194 $ 11,147,827
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
DGPF FIDELITY VIP
INTERNATIONAL EQUITY HIGH INCOME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ 37,720 $ 97,218 $ 1,563,450 $ 834,606
Net realized gain (loss). . . . . . . . . . . . . . . . 95,174 37,951 (185,475) 658,212
Net unrealized gain (loss). . . . . . . . . . . . . . . 776,394 277,546 (29,248) (2,709,154)
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 909,288 412,715 1,348,727 (1,216,336)
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 367,188 450,397 1,076,323 2,062,177
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (323,376) (251,355) (1,108,186) (987,162)
Contract benefits . . . . . . . . . . . . . . . . . . . . (75,382) - (80,940) (107,858)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,042) (1,772) (4,678) (4,164)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 460,977 1,017,275 924,886 5,202,627
Other transfers from (to) the General Account . . . . . . 252,896 99,261 472,556 607,069
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 680,261 1,313,806 1,279,961 6,772,689
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 1,589,549 1,726,521 2,628,688 5,556,353
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 6,254,787 4,528,266 20,672,042 15,115,689
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 7,844,336 $ 6,254,787 $ 23,300,730 $ 20,672,042
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT VA-K
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP
EQUITY-INCOME GROWTH
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (40,819) $ (71,964) $ (599,414) $ (282,421)
Net realized gain (loss). . . . . . . . . . . . . . . . 1,714,950 1,679,271 4,482,088 3,404,903
Net unrealized gain (loss). . . . . . . . . . . . . . . (29,350) 1,360,035 10,852,568 6,094,613
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 1,644,781 2,967,342 14,735,242 9,217,095
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 2,283,854 2,398,189 3,005,646 2,265,258
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (1,561,021) (1,518,197) (1,926,189) (1,842,522)
Contract benefits . . . . . . . . . . . . . . . . . . . . (372,120) (137,044) (334,648) (153,105)
Contract charges. . . . . . . . . . . . . . . . . . . . . (11,244) (10,250) (13,812) (11,095)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 2,505,465 5,061,840 8,245,102 2,328,047
Other transfers from (to) the General Account . . . . . . 1,280,927 935,806 1,647,348 713,595
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 4,125,861 6,730,344 10,623,447 3,300,178
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 5,770,642 9,697,686 25,358,689 12,517,273
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 36,052,923 26,355,237 35,344,990 22,827,717
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 41,823,565 $ 36,052,923 $ 60,703,679 $ 35,344,990
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
FIDELITY VIP FIDELITY VIP II
OVERSEAS ASSET MANAGER
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (5,880) $ 11,939 $ 101,916 $ 75,632
Net realized gain (loss). . . . . . . . . . . . . . . . 325,862 318,370 304,810 515,185
Net unrealized gain (loss). . . . . . . . . . . . . . . 2,373,555 200,255 284,089 92,247
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,693,537 530,564 690,815 683,064
--------------- --------------- --------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 414,849 436,787 537,213 447,933
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (327,147) (334,149) (414,012) (551,001)
Contract benefits . . . . . . . . . . . . . . . . . . . . (25,172) (27,009) (32,731) (68,728)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,345) (2,070) (1,840) (1,417)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . 528,915 833,047 1,419,160 701,410
Other transfers from (to) the General Account . . . . . . 156,409 175,177 464,372 102,018
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 745,509 1,081,783 1,972,162 630,215
--------------- --------------- --------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 3,439,046 1,612,347 2,662,977 1,313,279
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 6,286,148 4,673,801 6,085,273 4,771,994
--------------- --------------- --------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 9,725,194 $ 6,286,148 $ 8,748,250 $ 6,085,273
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
<CAPTION>
T. ROWE PRICE
INTERNATIONAL STOCK
YEAR ENDED DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss). . . . . . . . . . . . . . $ (86,483) $ (6,236)
Net realized gain (loss). . . . . . . . . . . . . . . . 251,191 75,474
Net unrealized gain (loss). . . . . . . . . . . . . . . 2,415,777 794,299
--------------- ---------------
Net increase (decrease) in net assets from
operations . . . . . . . . . . . . . . . . . . . . . . 2,580,485 863,537
--------------- ---------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments . . . . . . . . . . . . . . . . . . 425,683 476,174
Withdrawals . . . . . . . . . . . . . . . . . . . . . . . (207,845) (231,411)
Contract benefits . . . . . . . . . . . . . . . . . . . . (102,701) (13,764)
Contract charges. . . . . . . . . . . . . . . . . . . . . (2,157) (1,792)
Transfers between sub-accounts (including fixed
account), net. . . . . . . . . . . . . . . . . . . . . . (13,653) 1,103,994
Other transfers from (to) the General Account . . . . . . 294,802 174,146
--------------- ---------------
Net increase (decrease) in net assets from contract
transactions . . . . . . . . . . . . . . . . . . . . . . 394,129 1,507,347
--------------- ---------------
Net increase (decrease) in net assets . . . . . . . . . . 2,974,614 2,370,884
NET ASSETS:
Beginning of year . . . . . . . . . . . . . . . . . . . . 7,914,963 5,544,079
--------------- ---------------
End of year . . . . . . . . . . . . . . . . . . . . . . . $ 10,889,577 $ 7,914,963
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Separate Account VA-K, which funds the Allmerica Advantage, ExecAnnuity Plus
and Allmerica Immediate Advantage variable annuity contracts, in addition to
other contracts (the Delaware Medallion variable annuity 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 and twenty Sub-Accounts under the
Allmerica Immediate Advantage variable annuity contracts. Each Sub-Account
invests exclusively in a corresponding investment portfolio of Allmerica
Investment Trust (the Trust) managed by Allmerica Financial Investment
Management Services, Inc. (AFIMS), an indirect 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
(DGPF) managed by Delaware International Advisers Ltd.; or of the T. Rowe Price
International Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming
International, Inc. The Trust, Fidelity VIP, Fidelity VIP II, DGPF, and T. Rowe
Price (the Funds) are open-end, management investment companies registered under
the 1940 Act.
Effective May 1, 2000, AIT Investment Grade Income Fund will be renamed
Select Investment Grade Income Fund and AIT Growth Fund will be renamed Core
Equity Fund.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS - Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Realized gains and losses
on securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of the
Funds at net asset value.
FEDERAL INCOME TAXES - The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. 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.
SA-9
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
-------------------- -------------- -------------- -----------
<S> <C> <C> <C>
Growth . . . . . . . . . . . . . . . . . . . . . . 9,563,995 $ 24,918,919 $ 3.311
Investment Grade Income . . . . . . . . . . . . . . 7,119,564 7,820,753 1.051
Money Market . . . . . . . . . . . . . . . . . . . 12,444,661 12,444,661 1.000
Equity Index. . . . . . . . . . . . . . . . . . . . 9,268,029 27,182,985 4.060
Government Bond . . . . . . . . . . . . . . . . . . 5,120,863 5,367,144 1.011
Select Aggressive Growth . . . . . . . . . . . . . 8,852,337 18,974,244 3.411
Select Growth . . . . . . . . . . . . . . . . . . . 13,244,110 26,686,731 3.049
Select Growth and Income. . . . . . . . . . . . . . 11,897,895 18,647,029 1.933
Select Value Opportunity. . . . . . . . . . . . . . 9,355,144 14,597,670 1.521
Select International Equity . . . . . . . . . . . . 11,121,858 15,206,169 2.031
Select Capital Appreciation . . . . . . . . . . . . 7,533,947 11,724,744 2.053
DGPF International Equity . . . . . . . . . . . . . 421,059 6,393,416 18.630
Fidelity VIP High Income . . . . . . . . . . . . . 2,060,188 24,328,238 11.310
Fidelity VIP Equity-Income . . . . . . . . . . . . 1,626,743 35,043,958 25.710
Fidelity VIP Growth . . . . . . . . . . . . . . . . 1,105,110 38,840,482 54.930
Fidelity VIP Overseas . . . . . . . . . . . . . . . 354,417 6,671,145 27.440
Fidelity VIP II Asset Manager . . . . . . . . . . . 468,573 7,634,435 18.670
T. Rowe Price International Stock . . . . . . . . . 571,932 7,547,860 19.040
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum to Allmerica Advantage,
ExecAnnuity Plus and to Allmerica Immediate Advantage 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 of Allmerica Advantage,
ExecAnnuity Plus and Allmerica Immediate Advantage 0.20% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
For contracts issued on Form A3018-94 (ExecAnnuity Plus), a contract fee is
deducted on the contract anniversary 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 contract anniversary 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) issued to and maintained by
the trustee of a 401(k) plan.
Allmerica Investments, Inc., (Allmerica Investments), an indirect
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. Allmerica Advantage and ExecAnnuity Plus
contracts have a contingent deferred sales charge and no deduction is made for
sales charges at the time of the sale.
SA-10
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------- ---------------------------------
UNITS AMOUNT UNITS AMOUNT
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Growth
Issuance of Units . . . . . . . . . . . . . . . 2,838,227 $ 7,105,831 3,196,609 $ 6,772,868
Redemption of Units . . . . . . . . . . . . . . (1,362,213) (3,199,115) (1,373,701) (2,876,647)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,476,014 $ 3,906,716 1,822,908 $ 3,896,221
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Investment Grade Income
Issuance of Units . . . . . . . . . . . . . . . 1,668,246 $ 2,226,512 2,044,414 $ 2,696,090
Redemption of Units . . . . . . . . . . . . . . (1,141,863) (1,526,210) (773,878) (1,042,112)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 526,383 $ 700,302 1,270,536 $ 1,653,978
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Money Market
Issuance of Units . . . . . . . . . . . . . . . 45,985,028 $ 50,757,480 48,203,810 $ 54,962,039
Redemption of Units . . . . . . . . . . . . . . (44,623,695) (49,117,542) (48,148,881) (54,912,882)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,361,333 $ 1,639,938 54,929 $ 49,157
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Equity Index
Issuance of Units . . . . . . . . . . . . . . . 4,377,991 $ 12,478,466 4,063,578 $ 9,923,583
Redemption of Units . . . . . . . . . . . . . . (1,416,195) (3,656,833) (1,295,473) (3,123,582)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 2,961,796 $ 8,821,633 2,768,105 $ 6,800,001
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Government Bond
Issuance of Units . . . . . . . . . . . . . . . 3,481,100 $ 4,068,069 2,440,242 $ 3,015,884
Redemption of Units . . . . . . . . . . . . . . (1,968,201) (2,162,638) (1,529,683) (1,886,988)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,512,899 $ 1,905,431 910,559 $ 1,128,896
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Aggressive Growth
Issuance of Units . . . . . . . . . . . . . . . 2,754,461 $ 5,755,614 3,742,763 $ 7,274,206
Redemption of Units . . . . . . . . . . . . . . (1,928,576) (3,912,338) (1,407,342) (2,823,964)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 825,885 $ 1,843,276 2,335,421 $ 4,450,242
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Growth
Issuance of Units . . . . . . . . . . . . . . . 4,449,518 $ 12,858,990 4,160,290 $ 9,729,097
Redemption of Units . . . . . . . . . . . . . . (1,383,502) (3,782,491) (1,360,001) (3,080,380)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 3,066,016 $ 9,076,499 2,800,289 $ 6,648,717
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Growth and Income
Issuance of Units . . . . . . . . . . . . . . . 2,419,585 $ 5,776,930 2,568,312 $ 4,993,792
Redemption of Units . . . . . . . . . . . . . . (980,376) (2,296,846) (1,170,883) (2,116,544)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,439,209 $ 3,480,084 1,397,429 $ 2,877,248
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Value Opportunity
Issuance of Units . . . . . . . . . . . . . . . 2,585,542 $ 4,303,678 2,771,415 $ 5,006,786
Redemption of Units . . . . . . . . . . . . . . (1,519,807) (2,473,148) (994,406) (1,774,465)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,065,735 $ 1,830,530 1,777,009 $ 3,232,321
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
SA-11
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------- ---------------------------------
UNITS AMOUNT UNITS AMOUNT
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Select International Equity
Issuance of Units . . . . . . . . . . . . . . . 2,901,922 $ 4,637,861 2,894,703 $ 4,527,204
Redemption of Units . . . . . . . . . . . . . . (1,774,034) (2,639,099) (1,258,209) (2,035,124)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,127,888 $ 1,998,762 1,636,494 $ 2,492,080
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Select Capital Appreciation
Issuance of Units . . . . . . . . . . . . . . . 1,668,178 $ 3,161,299 1,891,659 $ 3,122,674
Redemption of Units . . . . . . . . . . . . . . (936,701) (1,703,674) (1,142,204) (1,875,969)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 731,477 $ 1,457,625 749,455 $ 1,246,705
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
DGPF International Equity
Issuance of Units . . . . . . . . . . . . . . . 1,442,035 $ 1,822,469 1,486,205 $ 2,175,924
Redemption of Units . . . . . . . . . . . . . . (1,030,011) (1,142,208) (604,270) (862,118)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 412,024 $ 680,261 881,935 $ 1,313,806
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP High Income
Issuance of Units . . . . . . . . . . . . . . . 5,073,951 $ 7,695,969 6,929,705 $ 10,678,702
Redemption of Units . . . . . . . . . . . . . . (4,257,220) (6,416,008) (2,520,698) (3,906,013)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 816,731 $ 1,279,961 4,409,007 $ 6,772,689
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Equity-Income
Issuance of Units . . . . . . . . . . . . . . . 4,637,345 $ 10,608,146 5,589,831 $ 11,872,225
Redemption of Units . . . . . . . . . . . . . . (2,912,701) (6,482,285) (2,438,089) (5,141,881)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,724,644 $ 4,125,861 3,151,742 $ 6,730,344
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Growth
Issuance of Units . . . . . . . . . . . . . . . 5,332,578 $ 16,144,378 3,232,147 $ 7,273,604
Redemption of Units . . . . . . . . . . . . . . (1,839,285) (5,520,931) (1,772,972) (3,973,426)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 3,493,293 $ 10,623,447 1,459,175 $ 3,300,178
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP Overseas
Issuance of Units . . . . . . . . . . . . . . . 1,511,089 $ 2,442,012 1,414,651 $ 1,993,759
Redemption of Units . . . . . . . . . . . . . . (1,072,506) (1,696,503) (657,938) (911,976)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 438,583 $ 745,509 756,713 $ 1,081,783
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
Fidelity VIP II Asset Manager
Issuance of Units . . . . . . . . . . . . . . . 1,723,766 $ 2,984,705 1,093,306 $ 1,742,931
Redemption of Units . . . . . . . . . . . . . . (623,602) (1,012,543) (704,485) (1,112,716)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 1,100,164 $ 1,972,162 388,821 $ 630,215
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
T. Rowe Price International Stock
Issuance of Units . . . . . . . . . . . . . . . 1,268,569 $ 1,791,489 1,891,293 $ 2,454,236
Redemption of Units . . . . . . . . . . . . . . (1,001,312) (1,397,360) (756,997) (946,889)
---------------- ---------------- ------------- ----------------
Net increase (decrease) . . . . . . . . . . . 267,257 $ 394,129 1,134,296 $ 1,507,347
---------------- ---------------- ------------- ----------------
---------------- ---------------- ------------- ----------------
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT VA-K
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that 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 shares of the Funds by Separate
Account VA-K during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
-------------------- -------------- --------------
<S> <C> <C>
Growth . . . . . . . . . . . . . . . . . . . $ 7,440,215 $ 1,859,502
Investment Grade Income. . . . . . . . . . . 2,167,164 1,107,184
Money Market . . . . . . . . . . . . . . . . 29,732,493 27,663,120
Equity Index . . . . . . . . . . . . . . . . 10,065,420 1,234,110
Government Bond. . . . . . . . . . . . . . . 3,952,169 1,846,181
Select Aggressive Growth . . . . . . . . . . 3,077,841 1,568,251
Select Growth . . . . . . . . . . . . . . . 10,606,061 985,508
Select Growth and Income . . . . . . . . . . 5,923,944 984,048
Select Value Opportunity . . . . . . . . . . 3,494,767 1,088,909
Select International Equity. . . . . . . . . 2,921,317 1,182,168
Select Capital Appreciation. . . . . . . . . 1,989,362 693,344
DGPF International Equity. . . . . . . . . . 1,425,526 697,548
Fidelity VIP High Income . . . . . . . . . . 7,052,384 4,138,457
Fidelity VIP Equity-Income . . . . . . . . . 8,326,912 3,045,010
Fidelity VIP Growth. . . . . . . . . . . . . 15,675,402 1,593,098
Fidelity VIP Overseas. . . . . . . . . . . . 2,032,652 1,134,006
Fidelity VIP II Asset Manager. . . . . . . . 2,914,612 579,158
T. Rowe Price International Stock. . . . . . 1,290,960 859,784
-------------- --------------
Totals . . . . . . . . . . . . . . . . . . $120,089,201 $ 52,259,386
-------------- --------------
-------------- --------------
</TABLE>
NOTE 8 - PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-13
<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 was previously filed on
April 24, 1998 in Registration Statement No.
33-71052/811-8114, Post-Effective Amendment No. 9, and is
incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the registrant NOT pursuant
to a trust indenture or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services Agreement was
previously filed on April 24, 1998 in Registration
Statement No. 33-71052/811-8114, Post-Effective
Amendment No. 9, and is incorporated by reference
herein.
(b) Sales Agreements were previously filed on April 24,
1998 in Registration Statement No. 33-71052/811-8114,
Post-Effective Amendment No. 9, and is incorporated by
reference herein.
(c) General Agent's Agreement was previously filed on
April 24, 1998 in Registration Statement
No. 33-71052/811-8114, Post-Effective Amendment No. 9,
and is incorporated by reference herein.
(d) IVA Commission Schedule was previously filed on
June 29, 1999 in Registrant's initial Registration
Statement No. 333-81859, 811-8114 and is incorporated
by reference herein. Career Agent Agreement was
previously filed on April 24, 1998 in Registration
Statement No. 33-71052/811-8114, Post-Effective
Amendment No. 9, and is incorporated by reference
herein.
(e) Registered Representative's Agreement was previously
filed on April 24, 1998 in Registration Statement
No. 33-71052/811-8114, Post-Effective Amendment No. 9,
and is incorporated by reference herein.
<PAGE>
(f) Form of First Union IVA Commission Schedule is filed
herewith.
(g) Form of First Union Distribution Agreement is filed
herewith.
(h) Form of Selling Group Agreement is filed herewith.
EXHIBIT 4 Contract Form A3029-99 was previously filed on October 14,
1999 in Pre-Effective Amendment No. 1 of Registration
Statement No. 333-81861/811-6293 and is incorporated by
reference herein.
EXHIBIT 5(A) Application Form 10999 was previously filed on June 29, 1999
in Registrant's initial Registration Statement
No. 333-81861/811-6293 and is incorporated by reference
herein.
EXHIBIT 5(B) Application Form 11591NY is filed herewith.
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 Registration Statement No.
33-71052/811-8114, Post-Effective Amendment No. 4, and are
incorporated by reference herein. The Depositor's Revised
Bylaws were previously filed on April 30, 1996 in
Registration Statement No. 33-71052/811-8114, 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 Registration Statement
No. 33-71052/811-8114, Post-Effective 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 Registration Statement
No. 33-71052/811-8114, 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 Registration
Statement No. 33-71052/811-8114, Post-Effective
Amendment No. 8, and is incorporated by reference
herein.
(d) T. Rowe Price Service Agreement was previously filed
on April 24, 1998 in Registration Statement
No. 33-71052/811-8114, Post-Effective Amendment No. 9,
and is incorporated by reference herein.
(e) BFDS Agreements for lockbox and mailroom services were
previously filed on April 24, 1998 in Registration
Statement No. 33-71052/811-8114, Post-Effective
Amendment No. 9, and is incorporated by reference
herein.
(f) Directors' Power of Attorney is filed herewith.
(g) Form of Service Agreement with Templeton Funds Annuity
Company is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
<PAGE>
EXHIBIT 12 None.
EXHIBIT 13 Schedule for Computation of Performance Quotations was
previously filed on October 14, 1999 in Pre-Effective
Amendment No. 1 of Registration Statement No.
333-81861/811-6293 and is incorporated by reference herein.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement with Allmerica Investment Trust
dated March 22, 2000 was previously filed in April 2000
in Post-Effective Amendment No. 11 of Registration
Statement No. 33-71052/811-8114, and is incorporated
by reference herein.
(b) Amendment dated March 29, 2000 and Amendment dated
November 13, 1998 to the Variable Products Fund
Participation Agreement were previously filed in
April 2000 in Post-Effective Amendment No. 11 of
Registration Statement No. 33-71052/811-8114, and is
incorporated by reference herein. Participation
Agreement, as amended, with Variable Insurance
Products Fund was previously filed on April 24, 1998
in Registration Statement No. 33-71052/811-8114,
Post-Effective Amendment No. 9, and is incorporated
by reference herein.
(c) Amendment dated March 29, 2000 and Amendment dated
October 4, 1999 to the Variable Products Fund II
Participation Agreement were previously filed in
April 2000 in Post-Effective Amendment No. 11 of
Registration Statement No. 33-71052/811-8114, and is
incorporated by reference herein. Participation
Agreement, as amended, with Variable Insurance
Products Fund II was previously filed on April 24,
1998 in Registration Statement No. 33-71052/811-8114,
Post-Effective Amendment No. 9, and is incorporated
by reference herein.
(d) Form of Amendment was previously filed in April 2000
in Post-Effective Amendment No. 12 of Registration
Statement No. 33-71054/811-8114, and is incorporated
by reference herein. Form of Participation Agreement
with Delaware Group Premium Fund, Inc. was previously
filed on April 24, 1998 in Registration Statement
No. 33-71052/811-8114, Post-Effective Amendment No. 9,
and is incorporated by reference herein.
(e) Participation Agreement with T. Rowe Price
International Series, Inc. was previously filed on
April 24, 1998 in Registration Statement
No. 33-71052/811-8114, Post-Effective Amendment No. 9,
and is incorporated by reference herein.
(f) Form of Amendment to AIM Participation Agreement
was previously filed in April2000 in Post-Effective
Amendment No. 12 of Registration Statement No.
33-71054/811-8114, and is incorporated by reference
herein. Participation Agreement with AIM Variable
Insurance Funds, Inc. was previously filed on
August 27, 1998 in Post-Effective Amendment No. 2
of Registration Statement No. 333-16929/811-7747,
and is incorporated by reference herein.
(g) Participation Agreement with Alger was previously
filed in April 2000 in Post-Effective Amendment No. 14
of Registration Statement No. 333-10285/811-7769,
<PAGE>
and is incorporated by reference herein.
(h) Form of Dreyfus Participation Agreement is filed
herewith.
(i) Form of Evergreen Participation Agreement is filed
herewith.
(j) Form of Federated Participation Agreement is filed
herewith.
(k) Form of Participation Agreement with Franklin
Templeton was previously filed in April 2000 in
Post-Effective Amendment No. 27 of Registration
Statement No. 33-71054/811-8114, and is incorporated
by reference herein.
(l) Form of MFS Participation Agreement is filed herewith.
(m) Form of Oppenheimer Participation Agreement is filed
herewith.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The Principal business address of all the following Directors and Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant
Director and Vice President Secretary (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998) of
Vice President and First Allmerica
Corporate Controller
Mark R. Colborn Director (since 2000) and Vice President (since 1992) of First
Director and Vice President Allmerica
Mary Eldridge Secretary (since 1999) of Allmerica Financial; Secretary (since
Secretary 1999) of Allmerica Investments, Inc.; and Secretary (since 1999) of
Allmerica Financial Investment Management Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First Allmerica
Director, Vice President and (since 2000); Vice President (1999) of Promos Hotel Corporation;
General Counsel Vice President & Deputy General Counsel (1998-1999) of Legg Mason,
Inc.; Vice President and Deputy General Counsel (1995-1998) of USF&G
Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice
Director, Vice President and President (since 1991) of First Allmerica; Vice President (since
<PAGE>
Chief Investment Officer 1998) of Allmerica Financial Investment Management Services, Inc.;
and President (since 1995) and Director (since 1996) of Allmerica
Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and President
Director (since 1996) of The Hanover Insurance Company; and Vice President
(1993 to 1996) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director (since 1992),
Director President (since 1994) and Chief Executive Officer (since 1996) of
Citizens Insurance Company of America
Mark C. McGivney Vice President (since 1997) and Treasurer (since 2000) of First
Vice President and Treasurer Allmerica; Associate, Investment Banking (1996 -1997) of Merrill
Lynch & Co.; Associate, Investment Banking (1995) of Salomon
Brothers, Inc.; Treasurer (since 2000) of Allmerica Investments,
Inc., Allmerica Asset Management, Inc. and Allmerica Financial
Investment Management Services, Inc.
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of
Director, President and Chief First Allmerica
Executive Officer
Edward J. Parry, III Director and Chief Financial Officer (since 1996), Vice President
Director, Vice President, (since 1993), and Treasurer (1993 - 2000) of First Allmerica
Chief Financial Officer
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; President (since 1995) of Allmerica Financial Life
Insurance and Annuity Company; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since 1998) of Allmerica
Financial Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica;
Director and Vice President Director (since 1998) of The Hanover Insurance Company; Chief
Executive Officer (1996 to 1998) of Travelers Property & Casualty;
Senior Vice President (1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; Director (since 1991) of Allmerica Investments, Inc.; and
Director (since 1991) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | | |
________________________________________________________________________________________________________________________________
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Financial Allmerica, Allmerica First Allmerica AFC Capital Allmerica First Sterling
Asset Profiles, Inc. Inc. Funding Financial Life Trust I Services Limited
Management, Inc. Corp. Insurance Corporation
Company
Massachusetts California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| | |
| ___________________________________________________________ ________________
| | | | |
| 100% 99.2% 100% 100%
| Advantage Allmerica Allmerica First Sterling
| Insurance Trust Financial Life Reinsurance
| Network, Inc. Company, N.A. Insurance and Company
| Annuity Company Limited
|
| Delaware Federally Chartered Delaware Bermuda
| |
|_________________________________________________________________________________________________________________________
| | | | | | | | | |
| 100% 100% 100% 100% 100% 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial Investments Investments Investments Investments Investments
| Inc. Management Investment Services Insurance Insurance Insurance Insurance Insurance
| Company, Inc. Management Insurance Agency Inc. Agency of Agency Inc. Agency Inc. Agency Inc.
| Services, Inc. Agency, Inc. of Alabama Florida Inc. of Georgia of Kentucky of Mississippi
|
|Massachusetts Massachusetts Massachusetts Massachusetts Alabama Florida Georgia Kentucky Mississippi
|
________________________________________________________________
| | | |
100% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica
Property Management Benefits, Inc. Asset
& Casualty Services, Inc. Management,
Companies, Inc. Limited
Delaware Delaware Florida Bermuda
|
________________________________________________
| | |
100% 100% 100%
The Hanover Allmerica Citizens
Insurance Financial Insurance
Company Insurance Company
Brokers, Inc. of Illinois
New Hampshire Massachusetts Illinois
|
________________________________________________________________________________________________________________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts Allmerica AMGRO
Financial Plus American Insurance Corporation Bay Insurance Financial Inc.
Benefit Insurance Insurance Management Company Alliance
Insurance Agency, Inc. Company Company, Inc. Insurance
Company Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire New Hampshire Massachusetts
| |
________________________________________________ ________________
| | | |
100% 100% 100% 100%
Citizens Citizens Citizens Lloyds Credit
Insurance Insurance Insurance Corporation
Company Company Company
of Ohio of America of the
Midwest
Ohio Michigan Indiana Massachusetts
|
_________________
|
100%
Citizens
Management
Inc.
Michigan
- ----------------- ----------------- -----------------
Allmerica Greendale AAM
Equity Special Equity Fund
Index Pool Placements
Fund
Massachusetts Massachusetts Massachusetts
- -------- Grantor Trusts established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
--------------- ----------------
Allmerica Allmerica
Investment Trust Securities
Trust
Massachusetts Massachusetts
- -------- Affiliated Management Investment Companies
...............
Hanover Lloyd's
Insurance
Company
Texas
- -------- Affiliated Lloyd's plan company, controlled by Underwriters
for the benefit of The Hanover Insurance Company
----------------- -----------------
AAM Growth AAM High Yield
& Income Fund, L.L.C.
Fund L.P.
Delaware Massachusetts
________ L.P. or L.L.C. established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
</TABLE>
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P 440 Lincoln Street Limited Partnership
Worcester MA 01653
Advantage Insurance Network Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident health
and Annuity Company (formerly known Worcester MA 01653 insurance, annuities, variable
as SMA Life Assurance Company annuities and variable life insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle for
Worcester MA 01653 commercial paper
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. (formerly Worcester MA 01653
known as Allmerica Institutional Services, Inc.
and 440 Financial Group of
Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investments Insurance Agency Inc. of 200 Southbridge Parkway Insurance Agency
Alabama Suite 400
Birmingham, AL 35209
Allmerica Investments Insurance Agency of 14211 Commerce Way Insurance Agency
Florida, Inc. Miami Lakes, FL 33016
Allmerica Investment Insurance Agency Inc. of 1455 Lincoln Parkway Insurance Agency
Georgia Suite 300
Atlanta, GA 30346
Allmerica Investment Insurance Agency Inc. of Barkley Bldg-Suite 105 Insurance Agency
Kentucky 12700 Shelbyville Road
Louisiana, KY 40423
Allmerica Investments Insurance Agency Inc. of 631 Lakeland East Drive Insurance Agency
Mississippi Flowood, MS 39208
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the 3950 Priority Way Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity, accident
Company (formerly State Mutual Life Worcester MA 01653 and health insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover Lloyd's
Company, Inc. Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance Company Hanover Lloyd's Insurance Multi-line property and casualty
Company insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 2000, there were 6,617 Contact holders of qualified Contracts
and 1,903 Contract holders 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:
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, VEL Account III, Separate Account
SPL-D, Separate Account IMO, Select Account III, Inheiritage
Account, Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H, VA-K,
VA-P, Allmerica Select Separate Account II, Group VEL Account,
Separate
<PAGE>
Account KG, Separate Account KGC, Fulcrum Separate Account, Fulcrum
Variable Life Separate Account, Separate Account FUVUL, and
Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate
Account KGC, Fulcrum Separate Account, and Allmerica Select
Separate Account of First Allmerica Financial Life Insurance
Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is: 440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
<S> <C>
Margaret L. Abbott Vice President
Emil J. Aberizk, Jr Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Michael J. Brodeur Vice President Operations
Mark R. Colborn Vice President
Claudia J. Eckels Vice President
Mary M. Eldridge Secretary/Clerk
Philip L. Heffernan Vice President
J. Kendall Huber Director
Mark C. McGivney Treasurer
William F. Monroe, Jr. President, Director and Chief Executive
Officer
David J. Mueller Vice President, Chief Financial Officer,
Financial Operations Principal and Controller
Stephen Parker Vice President and Director
Richard M. Reilly Director and Chairman of the Board
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
</TABLE>
<PAGE>
(c) As indicated in Part B (Statement of Additional Information) in
response to Item 20(c), there were no commissions retained by
Allmerica Investments, Inc., the principal underwriter of the
Contracts, for sales of variable contracts funded by the Registrant in
1999. No other commissions or compensation was received by the
principal underwriter, directly or indirectly, from the Registrant
during the Registrant's last fiscal year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for the
Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) The Registrant hereby undertakes to file a post-effective amendment
to this registration statement as frequently as is necessary to
ensure that the audited financial statements in the registration
statement are never more than 16 months old for so long as payments
under the variable annuity contracts may be accepted.
(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 and any financial statements promptly upon written or
oral request, according to the requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement
or otherwise, Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses
incurred or paid by a Director, Officer or Controlling Person of
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Director, Officer or Controlling
Person in connection with the securities being registered, Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be
governed by the final adjudication of such issue.
(e) The Company hereby represents that the aggregate fees and charges
under the Policies are reasonable in relation to the services
rendered, expenses expected to be incurred, and risks assumed by the
Company.
<PAGE>
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 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 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
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 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 Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 26th day of April,
2000.
SEPARATE ACCOUNT VA-K OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Mary Eldridge
------------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller April 26, 2000
- -------------------------
Warren E. Barnes
Edward J. Parry* Director, Vice President and Chief Financial
- ------------------------- Officer
Richard M. Reilly* Director and Vice President
- -------------------------
John F. O'Brien* Director, President and Chief Executive Officer
- -------------------------
Bruce C. Anderson* Director and Vice President
- -------------------------
Mark R. Colborn* Director and Vice President
- -------------------------
John P. Kavanaugh* Director, Vice President and Chief Investment
- ------------------------- Officer
J. Kendall Huber* Director, Vice President and General Counsel
- -------------------------
J. Barry May* Director
- -------------------------
James R. Mcauliffe* Director
- -------------------------
Robert P. Restrepo, Jr.* Director and Vice President
- -------------------------
Eric A. Simonsen* Director and Vice President
- -------------------------
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 2, 2000 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- -----------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-81859)
<PAGE>
EXHIBIT TABLE
Exhibit 3(f) Form of First Union IVA Commission Schedule
Exhibit 3(g) Form of First Union Distribution Agreement
Exhibit 3(h) Form of Selling Group Agreement
Exhibit 5(b) Application Form
Exhibit 8(f) Directors' Power of Attorney
Exhibit 8(g) Form of Service Agreement with Templeton Funds Annuity Company
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(h) Form of Dreyfus Participation Agreement
Exhibit 15(i) Form of Evergreen Participation Agreement
Exhibit 15(j) Form of Federated Participation Agreement
Exhibit 15(l) Form of MFS Participation Agreement
Exhibit 15(m) Form of Oppenheimer Participation Agreement
<PAGE>
May 1, 2000
AMENDMENT TO THE DISTRIBUTION AGREEMENT
- -------------------------------------------------------------------------------
The following is added to Schedule 6:
SCHEDULE 6
COMPENSATION SCHEDULE
VARIABLE IMMEDIATE ANNUITY CONTRACT
- -----------------------------------
Compensation paid on the single premium*:
For annuity benefit periods of:
10 or more years: 7.00%
9 years: 6.00%
8 years: 5.00%
7 years: 4.00%
6 years: 3.00%
5 years: 2.00%
*when sold in conjunction with a life insurance product, the Option A life
commission rate applicable to that product is used.
The following is added to Schedule 2:
SCHEDULE 2
VARIABLE PRODUCTS
- -------------------------------------------------------------------------------
PRODUCT POLICY/CERTIFICATE DESCRIPTION EXPENSE ALLOWANCE
NUMBER
- -------------------------------------------------------------------------------
TBD A3029-99 Variable Immediate Annuity 0.00%
- -------------------------------------------------------------------------------
EFFECTIVE DATE - This Amendment shall be effective on June 1, 2000, upon
execution of the Signature Page referencing this Amendment by all parties.
4-00-38
<PAGE>
DISTRIBUTION AGREEMENT
By and Between
Allmerica Financial Life Insurance and Annuity Company
First Allmerica Financial Life Insurance Company
Allmerica Investments, Inc.
and
First Union Securities, Inc.
<PAGE>
TABLE OF CONTENTS
SECTION PAGE NO.
Additional Definitions ...............................................2
Distribution Activities - Authority ..................................3
Distribution Activities - Appointment ................................4
Distribution Activities - Duties .....................................4
Limitations on Authority .............................................5
Selling Group Agreements .............................................6
Payment of Expenses .................................................6
Forms, Applications, and Licensing....................................7
Marketing Materials ..................................................8
The Distributor's Compensation .......................................9
Representations and Warranties ......................................10
Indemnification .....................................................11
Records .............................................................16
Investigations and Proceedings ......................................16
Term and Termination ................................................17
Rights Upon Termination .............................................18
Independent Contractor ..............................................19
Notices .............................................................19
Arbitration .........................................................20
Confidentiality .....................................................20
Severability ........................................................21
Choice of Law .......................................................22
No Waiver ...........................................................22
Agreement Non-Assignable ............................................22
Schedules ...........................................................22
Headings ............................................................22
Entire Agreement ....................................................22
<PAGE>
DISTRIBUTION AGREEMENT
AGREEMENT made as of the ____________ day of _________________ 2000, by and
between Allmerica Financial Life Insurance and Annuity Company, a Delaware
insurance company ("AFLIAC"), First Allmerica Financial Life Insurance Company,
a Massachusetts insurance company ("FAFLIC" and, together with AFLIAC,
collectively, the "Insurance Companies"), Allmerica Investments, Inc., a
Massachusetts corporation (the "Underwriter") and First Union Securities, Inc.,
a Delaware corporation (the "Distributor"), on its own behalf and on behalf of
the individuals and entities listed on Schedule 1 to this Agreement (the
"Distributor Agency Affiliates"), as such Schedule may be amended from time to
time in accordance with this Agreement.
RECITALS:
WHEREAS, the Insurance Companies propose to issue certain variable annuity
contracts and variable life insurance policies; and
WHEREAS, certain of the variable annuity contracts and variable life insurance
policies to be issued by the Insurance Companies (the "Private Placements") may
be offered and sold in reliance upon exemptions from the registration
requirements of the Securities Act of 1933 (the "1933 Act") and the Investment
Company Act of 1940 (the "1940 Act"), while certain other variable annuity
contracts and variable life insurance policies to be issued by the Insurance
Companies may be offered and sold pursuant to Registration Statements (the
"Registered Products") and their related Prospectuses filed with and declared
effective by the Securities and Exchange Commission (the "Commission") under the
provisions of the 1933 Act and the 1940 Act (collectively, the "Private
Placements" and the "Registered Products" are referred to as the "Variable
Products") (Variable Products are identified in Schedule 2 to this Agreement, as
such Schedule may be amended from time to time); and
WHEREAS, the Distributor is registered as a broker-dealer with the Commission
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") that engages in the distribution of variable annuity contracts and
variable life insurance products; and
WHEREAS, the Insurance Companies and the Underwriter desire to retain the
Distributor to distribute the Variable Products through registered
broker-dealers ("Broker-Dealers") and their registered representatives
("Representatives"); and
WHEREAS, the Distributor desires to be retained by the Insurance Companies and
the Underwriter to distribute the Variable Products on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties hereto agree as follows:
<PAGE>
1. ADDITIONAL DEFINITIONS
(a) AFFILIATE -- With respect to a person, any other person
controlling, controlled by, or under common control with, such
person.
(b) APPLICATIONS -- The forms used by a prospective purchaser to
apply for a variable life insurance policy or a variable
annuity contract.
(c) CONTRACTS -- The variable annuity contracts set forth in
Schedule 2 to this Agreement, as such Schedule may be amended
from time to time in accordance with this Agreement.
(d) FUNDS -- The funds set forth in Schedule 4 to this Agreement,
as such Schedule may be amended from time to time in
accordance with this Agreement, through which benefits
provided by the Variable Products are to be funded.
(e) FUND PROSPECTUS -- At any time while this Agreement is in
effect, the prospectus and statement of additional information
for each Fund most recently filed with the Commission pursuant
to Rule 497 under the 1933 Act.
(f) FUND REGISTRATION STATEMENT -- At any time while this
Agreement is in effect, the currently effective registration
statement filed with the Commission under the 1933 Act, or
currently effective post-effective amendment thereto, for
shares of each Fund.
(g) POLICIES -- The variable life insurance policies set forth in
Schedule 2 to this Agreement, as such Schedule may be amended
from time to time in accordance with this Agreement.
(h) PORTFOLIOS -- The underlying Fund portfolios, set forth in
Schedule 4 to this Agreement, as such Schedule may be amended
from time to time in accordance with this Agreement.
(i) PREMIUM -- A payment made under a Policy by an applicant or
purchaser.
(j) PRIVATE PLACEMENT GUIDELINES -- The guidelines set forth in
Schedule 3 to this Agreement, as such Schedule may be amended
from time to time in accordance with this Agreement.
(k) PRIVATE PLACEMENT MEMORANDUM -- The document through which the
Insurance Companies offer Private Placements. (For purposes of
Section 12 of this Agreement, however, the term "any Private
Placement Memorandum" means any document which is or at any
time was a Private Placement Memorandum within the meaning of
this Section 1(k)).
2
<PAGE>
(l) PRIVATE PLACEMENTS -- Contracts and Policies being offered and
sold in reliance upon exemptions from the registration
requirements of the 1933 Act and the 1940 Act for non-public
offerings.
(m) PROSPECTUS -- The prospectus, if any, included within a
Registration Statement or, if more recent, the prospectus
filed pursuant to Rule 497 under the 1933 Act. (For purposes
of Section 12 of this Agreement, however, the term "any
Prospectus" means any document which is or at any time was a
Prospectus within the meaning of this Section 1(m)).
(n) PURCHASE PAYMENT -- A payment made under a Contract by an
applicant or purchaser.
(o) REGISTRATION STATEMENT -- At any time while this Agreement is
in effect, each currently effective registration statement, or
currently effective post-effective amendment thereto, relating
to the Contracts or Policies, including financial statements
included in, and all exhibits to, that registration statement
or post-effective amendment. (For purposes of Section 12 of
this Agreement, however, the term "Registration Statement"
means any document which is or at any time was a Registration
Statement within the meaning of this Section 1(o)).
(p) REGULATIONS -- The rules and regulations promulgated by the
Commission under the 1933 Act, the 1934 Act and the 1940 Act
as in effect at the time this Agreement is executed or
thereafter promulgated.
(q) VARIABLE ACCOUNTS -- Separate accounts established pursuant to
Delaware state insurance law (in the case of AFLIAC) or
Massachusetts state insurance law (in the case of FAFLIC)
supporting the Variable Products specified in Schedule 2 as in
effect at the time this Agreement is executed, or as such
Schedule may be amended from time to time in accordance with
this Agreement.
2. DISTRIBUTION ACTIVITIES -- AUTHORITY
(a) The Insurance Companies and the Underwriter authorize the
Distributor, and the Distributor accepts the authority, to act
as a distributor of the Variable Products, subject to any
applicable requirements of the 1933 Act and the 1940 Act.
The Insurance Companies hereby authorize the Distributor to
recommend to the Insurance Companies persons that may be
authorized to engage in solicitation activities with respect
to the Variable Products, including the recruitment and
appointment of Broker-Dealers and Representatives who, in
turn, may be authorized to engage in solicitation activities
involving the solicitation of Applications, Premiums and
Purchase Payments directly from prospective purchasers.
3
<PAGE>
The Insurance Companies shall have the right to reject any
such recommendation, but shall not do so unreasonably, and
shall notify the Distributor of any such rejection.
(b) The Distributor shall enter into separate written "Selling
Group Agreements" with Broker-Dealers for distribution of the
Variable Products. These Selling Group Agreements will be in a
form mutually agreeable to the parties to this Agreement. The
standard form of Selling Group Agreement to be used on the
effective date of this Agreement is set forth in Schedule 5 to
this Agreement.
(c) Nothing in this Agreement precludes additional mutually
agreeable distribution and compensation arrangements among the
parties to this Agreement, including ones that may have
compensation arrangements that reward the Insurance Companies
for identifying and recruiting new Broker-Dealers to sell the
Variable Products, for identifying potential purchasers of the
Variable Products, or for providing superior support under
this Agreement.
3. DISTRIBUTION ACTIVITIES -- APPOINTMENT
(a) Where required by applicable state insurance law, the
Insurance Companies hereby appoint the Distributor as their
agent under that state insurance law to represent the
Insurance Companies in the distribution activities
contemplated by this Agreement. The Insurance Companies and
the Underwriter hereby authorize the Distributor under
applicable securities laws to engage in the activities
contemplated by this Agreement relating to the distribution of
the Variable Products.
(b) In states where the Distributor is not licensed as an
insurance agent and applicable state insurance law requires
that the Distributor be so licensed, the Insurance Companies
hereby appoint each Distributor Agency Affiliate listed on
Schedule 1 to this Agreement (as that Schedule may be amended
from time to time by the Distributor when required by
applicable state insurance law to reflect changes in the
licensing status of the Distributor or the Distributor Agency
Affiliates) as their agent under applicable state insurance
laws to represent the Insurance Companies in the distribution
activities contemplated by this Agreement.
4. DISTRIBUTION ACTIVITIES -- DUTIES
(a) The Distributor shall use its best efforts to market the
Variable Products through Broker-Dealers and Representatives
in accordance with the terms and conditions of this
Agreement, subject to applicable material market and
regulatory conditions.
In addition, the Distributor (both on its own behalf and on
behalf of the Distributor Agency Affiliates) undertakes to use
its best efforts to recruit Broker-
4
<PAGE>
Dealers in accordance with Section 3 of this Agreement,
consistent with market conditions and in compliance with
its responsibilities under the federal securities laws
and NASD rules and regulations.
(b) The Distributor shall assist and provide information to
Broker-Dealers and their Representatives in connection with
the sale and servicing of Variable Products.
(c) Under no circumstances shall the Insurance Companies or the
Underwriter be responsible under this Agreement for any
failure by Broker-Dealers or their Representatives to comply
with applicable law.
(d) Under no circumstances shall the Distributor be responsible
under this Agreement for any failure by Broker-Dealers or
their Representatives to comply with applicable law.
Notwithstanding the foregoing, the Distributor agrees to
indemnify the Insurance Companies and the Underwriter for any
such failure to comply with applicable law, as provided in
Section 12(a)(1)(viii) of this Agreement.
(e) Under no circumstances shall the Distributor be responsible
under this Agreement for any failure by the Insurance
Companies or the Underwriter to comply with applicable law.
(f) Under no circumstances shall the Insurance Companies or the
Underwriter be responsible under this Agreement for any
failure by the Distributor to comply with applicable law.
5. LIMITATIONS ON AUTHORITY
(a) The Distributor shall not have the authority, and shall not
grant authority to Broker-Dealers or their Representatives, on
behalf of the Insurance Companies:
(1) to make, alter or discharge any Variable Product or
other contract entered into pursuant to a Variable
Product;
(2) to waive any Variable Product forfeiture provision;
(3) to extend the time of paying any Purchase Payments,
or Premiums due under the Variable Products; and
(4) to receive any monies, Purchase Payments or
Premiums (except for the sole purpose of forwarding
monies, Purchase Payments or Premiums to the
appropriate Insurance Company).
(b) The Distributor shall not expend, nor contract for the
expenditure of, funds of the Insurance Companies.
5
<PAGE>
(c) The Distributor shall not possess or exercise any authority on
behalf of the Insurance Companies other than that expressly
conferred on the Distributor by this Agreement.
6. SELLING GROUP AGREEMENTS
(a) The Distributor shall not enter into any Selling Group
Agreement with a Broker-Dealer relating to the distribution of
any Variable Product, unless that Selling Group Agreement (i)
is substantially identical to the form of Selling Group
Agreement mutually agreed to by the parties to this Agreement
(the standard form of Selling Group Agreement in use on the
effective date of this Agreement is set forth in Schedule 5
hereto) or (ii) is approved by the appropriate Insurance
Company, provided that the approval of the Insurance Company
shall be deemed to have been given if no written objection to
the Selling Group Agreement has been delivered by the
Insurance Company to the Distributor within five (5) business
days after being provided by facsimile or express courier with
a copy of the proposed Selling Group Agreement.
(b) The Distributor shall provide to the appropriate Insurance
Company a copy of each Selling Group Agreement entered into by
the Distributor and a Broker-Dealer within five (5) business
days following execution thereof.
(c) The Insurance Companies agree to appoint Representatives of
Broker-Dealers as life insurance agents of the Insurance
Companies to the extent that such Representatives satisfy the
licensing and qualification requirements of applicable state
insurance laws, as well as the Insurance Companies' own
standards applicable to life insurance agents. The Insurance
Companies reserve the right, which right shall not be
exercised unreasonably, to refuse to appoint any
Representative as their life insurance agent. The Insurance
Companies reserve the right to terminate immediately the
appointment of any Representative as their life insurance
agent if such Representative fails to maintain his or her
registration, license or qualifications under federal and
state securities laws, as well as applicable state insurance
laws, is subject to disciplinary action by any governmental
authority or self-regulatory organization, fails to meet
minimum sales requirements established from time to time by
the Insurance Companies, or fails, in the reasonable view of
the Insurance Companies, to satisfy appropriate industry
standards. The Insurance Companies shall promptly notify the
Distributor and the Broker-Dealer with which the
Representative is affiliated of their intent to terminate a
Representative and the reasons for such termination.
(d) As outlined in the Selling Group Agreement, the Broker-Dealer
will pay the initial and renewal fees for agent appointments
by the respective company of the Broker-Dealers and
Broker-Dealer Representatives.
7. PAYMENT OF EXPENSES
Expenses will be paid in accordance with Schedule 7 to this Agreement.
6
<PAGE>
8. FORMS, APPLICATIONS, AND LICENSING
(a) The Insurance Companies, or their agent, shall forward to the
Distributor, Applications, other administrative forms, and any
amendments or supplements to the foregoing, necessary to carry
out the Distributor's distribution authority and
responsibilities with respect to the Variable Products.
(b) The Insurance Companies shall obtain all requisite regulatory
approvals of the Variable Products and shall comply with all
applicable laws, rules, regulations and orders of any
governmental authority relating to the issuance or sale of the
Variable Products.
(c) Subject to any Addendum to the Selling Group Agreement for
netting commissions, all Premiums and Purchase Payments paid
by check or money order that are collected by the Distributor
or any Broker-Dealer or Representative shall be remitted
promptly, and in any event not later than two business days,
in full, together with Applications, forms, and any other
required documentation, to the appropriate Insurance Company.
Checks or money orders in payment of Premiums and Purchase
Payments shall be drawn to the order of AFLIAC or FAFLIC, as
appropriate. If any Premium or Purchase Payment is held at any
time by the Distributor, Broker-Dealers, Representatives,
agents, or any affiliates, the Distributor, the
Broker-Dealers, the Representatives, the agents or the
affiliates shall hold that Premium or Purchase Payment in a
fiduciary capacity. All Premiums and Purchase Payments whether
by check, money order or wire, shall be the property of the
appropriate Insurance Company.
(d) The Distributor acknowledges that the Insurance Companies
shall have the unconditional right to reject, in whole or in
part, any Application. The Insurance Companies shall return
any monies received by them or from an applicant or purchaser
whose Application has been rejected. The Insurance Companies
shall notify the Distributor in writing one business day prior
to taking any action to return any such monies, which notice
shall identify, if applicable, the Representative who
submitted the rejected Application.
(e) If a purchaser rescinds a Variable Product or exercises its
"free look right" under a Variable Product, any refund of
Premiums or Purchase Payments due as provided in that Variable
Product, shall be made by the issuing Insurance Company to the
purchaser. The Insurance Companies shall notify the
Distributor in writing one business day prior to taking any
action to refund any such Premiums or Purchase Payments, which
notice shall identify, if applicable the Broker-Dealer or the
Representative through which the Variable Product had been
purchased.
If a purchaser rescinds a Variable Product or exercises its
"free look right" under a
7
<PAGE>
Variable Product, the Distributor will pay to AFLIAC or
FAFLIC, whichever is the issuing Insurance Company, within
five (5) business days of a written request for repayment, the
amount of any commission or other compensation the Distributor
or a Distributor Agency affiliate received on the Premiums or
Purchase Payments returned.
(f) The Distributor agrees to maintain all registrations,
licenses, and qualifications under federal and state
securities laws that are applicable to its activities and
those of its registered representatives in connection with the
performance of this Agreement. The Distributor also agrees to
maintain all registrations, licenses, and qualifications under
state insurance laws that are applicable to the activities of
the Distributor, the Distributor Agency Affiliates and their
agents and registered representatives in performing this
Agreement.
(g) The Distributor agrees to notify the Insurance Companies
within three (3) business days of obtaining actual knowledge
of any changes in the registrations, licenses, or
qualifications of the Distributor, the Distributor Agency
Affiliates, or the agents or registered representatives of the
Distributor or Distributor Agency Affiliates that would
adversely affect its performance of this Agreement.
(h) The Insurance Companies agree to obtain and maintain all
registrations, licenses, qualifications and approvals under
federal securities laws and state blue sky and insurance laws
in connection with qualifying the Variable Products for sale.
(i) The Insurance Companies agree to notify the Distributor within
three (3) business days of obtaining actual knowledge of any
changes in the registrations, licenses, qualifications, or
approvals of the Variable Products that would adversely affect
the offering of the Variable Products.
9. MARKETING MATERIALS
Prior to use with any member of the public, the Distributor shall
provide to the Insurance Companies copies of all promotional, sales and
advertising material developed by the Distributor for the Insurance
Companies' review and written approval. Upon receipt of such material
from the Distributor, the Insurance Companies shall be given a
reasonable amount of time to complete their review. The Insurance
Companies will respond on a prompt and timely basis in approving any
such material. Failure to respond shall not relieve the Distributor of
the obligation to obtain the prior written approval of the Insurance
Companies.
The Insurance Companies shall be responsible for filing, as required,
all promotional, sales or advertising material related to the Variable
Products with the NASD and any federal and state securities,
governmental or regulatory agencies. The Insurance Companies shall also
be responsible for filing, as required, such material with any state
insurance department.
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10. THE DISTRIBUTOR'S COMPENSATION
(a) In consideration for the services rendered by the Distributor
pursuant to this Agreement, the Insurance Companies, as agent
for the Underwriter, shall pay the Distributor the
compensation set forth in Schedule 6 to this Agreement.
Schedule 6 and/or Schedule 2 may be modified at any time, and
from time to time, by adding or deleting Policies or Contracts
and changing the compensation payable for those Policies and
Contracts, provided that any such modifications are mutually
agreed upon by both the Insurance Companies and the
Distributor, in writing, and signed by both parties. Any such
modification shall apply only to Policies and Contracts
applied for after the effective date of each such
modification.
(b) In the event a Variable Product terminates within twelve (12)
months of the date of issue, the Insurance Companies reserve
the right to recover: (1) one hundred percent (100%) of the
compensation paid to the Distributor respecting the sale of
the Variable Product if that Variable Product terminates for
reasons other than death during the first twelve (12) months
following issue; (2) seventy five percent (75%) of the
compensation paid to the Distributor if a Variable Product
terminates for reasons other than death during the second
twelve (12) months following issue; (3) fifty percent (50%) of
the compensation paid to the Distributor if a Variable Product
terminates for reasons other than death during the third
twelve (12) months following issue; (4) twenty five percent
(25%) of the compensation paid to the Distributor if a
Variable Product terminates for reasons other than death
during the fourth twelve (12) months following issue; and (5)
nothing from the Distributor (i.e., no charge back) if the
Variable Product terminates thereafter. However,
notwithstanding any other provision of this Agreement, if
termination of a Variable Product at any time is due to the
willful or negligent wrongful actions or representations of
the Distributor, a Broker-Dealer or any Representative, the
Insurance Companies reserve the right to recover one hundred
percent (100%) of the compensation paid to the Distributor
respecting the sale of the Variable Product.
In the event a Variable Product owner makes a withdrawal from
or partially surrenders a Variable Product within forty-eight
(48) months following its date of issue, the charge back rules
described in the first paragraph of this Section 10(b) shall
apply, except that the amount of the charge back shall be
pro-rated. Any such pro-rated charge back shall be determined
in accordance with the following formula:
Charge Back = Charge Back Percentage* x Withdrawal Amount
-----------------
Variable Product
Cash Value**
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*100% year one; 75% year two; 50% year three; 25% year four
**determined as of the date of the withdrawal
With respect to any other Variable Product terminations or
withdrawals, the Insurance Companies shall have no right to
recover any portion of the compensation paid to the
Distributor. In no event shall the Insurance Companies have
the right to recover any portion of any compensation received
by the Distributor as a basis point charge against investment
values under the Policies and Contracts. The Insurance
Companies shall have the right to set off any amounts owed by
the Distributor under this Section 10(b) against any amounts
owed by the Insurance Companies to the Distributor.
11. REPRESENTATIONS AND WARRANTIES
(a) BY THE DISTRIBUTOR
The Distributor represents and warrants to, and covenants
with, the Insurance Companies as follows:
(1) The Distributor has taken all actions necessary,
including without limitation, those necessary under
its articles of incorporation, by-laws and applicable
state corporate law, to authorize the execution,
delivery and performance of this Agreement and all
transactions contemplated hereunder.
(2) Prior to the sale of any Variable Product hereunder,
the Distributor will be, and shall thereafter remain
during the term of this Agreement, registered as a
broker-dealer under the 1934 Act, a member in good
standing of the NASD, and duly registered under
applicable state securities laws.
(3) Prior to the sale of any Variable Product hereunder,
the Distributor will be, and shall thereafter remain
during the term of this Agreement, in compliance with
the eligibility requirements for certain affiliated
persons and underwriters found in Section 9(a) of the
1940 Act.
(4) Prior to the sale of any Variable Product hereunder,
the Distributor and each Distributor Agency Affiliate
and their employees, agents and registered
representatives will have all necessary state
insurance licenses and other regulatory approvals to
perform the services required by this Agreement and
the Distributor will notify the Insurance Companies
and the Underwriter within three business days of
obtaining actual knowledge of any change in the
status of such licenses or regulatory approvals.
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(5) While this Agreement remains in force and at any time
following termination of this Agreement for any
reason, the Distributor and the Distributor Agency
Affiliates agree that they will not take any action
designed or calculated to result in the transfer,
exchange or replacement of any Policy or Contract.
(b) BY THE INSURANCE COMPANIES AND THE UNDERWRITER
The Insurance Companies and the Underwriter represent and
warrant to, and covenant with, the Distributor, as follows:
(1) All necessary regulatory approvals and licenses from
any state or federal governmental body having
jurisdiction over the Insurance Companies, the
Underwriter or the Variable Products have been
obtained, and the Insurance Companies will notify the
Distributor within one business day of obtaining
actual knowledge of any change in the status of any
approvals or licenses related to the marketing, sale
or distribution of the Variable Products.
(2) The Insurance Companies and the Underwriter have
taken all actions necessary including, without
limitation, those necessary under their articles of
incorporation, bylaws and applicable state corporate
law, to authorize the execution, delivery and
performance of this Agreement and all transactions
contemplated hereunder.
(3) The Insurance Companies and the Underwriter are and
shall remain during the term of this Agreement in
compliance with the eligibility requirements for
certain affiliated persons and underwriters found in
Section 9(a) of the 1940 Act.
12. INDEMNIFICATION
(a) BY THE DISTRIBUTOR
(1) The Distributor agrees to indemnify and hold harmless
the Insurance Companies, each Affiliate of the
Insurance Companies and the Underwriter and each of
their directors, officers, employees or agents and
each person, if any, who controls the Insurance
Companies or the Underwriter within the meaning of
the federal securities laws (collectively, the
"Indemnified Parties" for purposes of this Section 12
(a)) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement
with the written consent of the Distributor) 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
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offer or sale of the Variable Products or the
operation of the Variable Accounts and:
(i) arise out of, or are based upon,
violation(s) by the Distributor of federal
or state securities law(s) or regulation(s),
applicable banking law(s) or regulation(s),
insurance law(s) or regulation(s) or any
rule or requirement of the NASD; or
(ii) arise out of, or are based upon, any
tortious conduct (including oral or written
misrepresentation), or any unlawful sales
practices concerning the Variable Products
by the Distributor; or
(iii) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a
material fact or omission or alleged
omission to state 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, contained in any advertising,
sales literature, or other promotional
material designed, developed, and produced
by the Distributor and used by it in the
distribution of the Variable Products;
PROVIDED THAT the Distributor shall not be
liable in any such case to the extent that
such losses, claims, damages, liabilities or
expenses arises out of, or are based upon,
an untrue statement or alleged untrue
statement or omission or alleged omission
made in reliance upon information furnished
in writing to the Distributor by the
Insurance Companies or the Underwriter
specifically for use in the preparation of
any such promotional material; or
(iv) arise out of, or are based upon, claims by
Broker-Dealers, Representatives or
employees, agents or registered
representatives of the Distributor for
commissions or other compensation or
remuneration of any type; or
(v) arise as a result of any failure on the part
of the Distributor, a Broker-Dealer or a
Representative to submit Premiums, Purchase
Payments, or Applications to the Insurance
Companies, or to submit the correct amount
of a Premium or Purchase Payment, on a
timely basis and in accordance with this
Agreement, subject to applicable law; or
(vi) arise as a result of any failure on the part
of the Distributor, a Broker-Dealer or a
Representative to deliver the Variable
Products to purchasers thereof on a timely
basis; PROVIDED THAT the Distributor shall
not be liable in any such case to the extent
that
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<PAGE>
such losses, claims, damages, liabilities or
expenses arise as a result of any failure on
the part of the issuing Insurance Company to
perform its obligations under this Agreement
on a timely basis; or
(vii) arise as a result of a material breach by
the Distributor of any provisions of this
Agreement; or
(viii) arise as a result of actions of a
Broker-Dealer or its Representatives;
as limited by and in accordance with the provisions
of Sections 12(a)(2) and 12 (a)(3) hereof.
(2) The Distributor shall not be liable under this
indemnification provision with respect to any losses,
claims, damages, liabilities or litigation ("Losses"
for purposes of this Section 12 (a)(2)) incurred or
assessed against an Indemnified Party that may arise
from any Indemnified Party's willful misfeasance or
bad faith. The Distributor's liability for Losses in
the event of its breach of this Agreement shall be
limited to that portion of Losses caused by its
breach, and the Distributor shall not be liable for
that portion of Losses caused by breach of this
Agreement by an Indemnified Party or from any act or
omission by an Indemnified Party.
(3) The Distributor shall not be liable under this
indemnification provision with respect to any claim
made against an Indemnified Party unless that
Indemnified Party shall have notified the Distributor
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
that Indemnified Party (or after the Indemnified
Party shall have received notice of such service on
any designated agent). Notwithstanding the foregoing,
the failure of any Indemnified Party to give notice
as provided herein shall not relieve the Distributor
of its obligations hereunder except to the extent
that the Distributor has been prejudiced by such
failure to give notice. In addition, any failure by
the Indemnified Party to notify the Distributor of
any such claim shall not relieve the Distributor from
any liability which it may have to the Indemnified
Party against whom the action is brought otherwise
than on account of this indemnification provision. In
case any such action is brought against the
Indemnified Parties, the Distributor shall be
entitled to participate, at its own expense, in the
defense of the action. The Distributor also shall be
entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action;
PROVIDED, HOWEVER, that if the Indemnified Party
shall have reasonably concluded that there may be
defenses available to it which are different from or
additional to those available to the Distributor, the
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Distributor shall not have the right to assume said
defense, but shall pay the costs and expenses thereof
(except that in no event shall the Distributor be
liable for the fees and expenses of more than one
counsel for Indemnified Parties in connection with
any one action or separate but similar or related
actions in the same jurisdiction arising out of the
same general allegations or circumstances). After
notice from the Distributor to the Indemnified Party
of the Distributor's election to assume the defense
thereof, and in the absence of such a reasonable
conclusion that there may be different or additional
defenses available to the Indemnified Party, the
Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it, and the
Distributor will not be liable to that party under
this Agreement for any legal or other expenses
subsequently incurred by the party independently in
connection with the defense thereof other than
reasonable costs of investigation.
(4) The Indemnified Parties will notify the Distributor
within a reasonable time, not to exceed five (5)
business days, of the receipt of service of process
in any litigation or proceedings against them in
connection with the offer or sale of the Variable
Products or the operation of the Variable Accounts.
(b) BY THE INSURANCE COMPANIES AND THE UNDERWRITER
(1) The Insurance Companies and the Underwriter agree,
jointly and severally, to indemnify and hold harmless
the Distributor and each director, officer, employee
or agent of the Distributor, and each person, if any,
who controls the Distributor within the meaning of
the federal securities laws (collectively, the
"Indemnified Parties" for purposes of this Section
12(b)) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement
with the written consent of the Insurance Companies
and the Underwriter) 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
offer or sale of the Variable Products or the
operation of the Variable Accounts and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of a
material fact or omission or alleged
omission to state 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, contained in any: (A)
Registration Statement or Prospectus; (B)
blue-sky application or other document
executed by the Insurance Companies
specifically for the purpose of exempting
the Private Placements from, or qualifying
any or all of the Registered
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Products for sale under, the securities laws
of any jurisdiction; or (C) information
furnished in writing to the Distributor
specifically for the purpose of being
included in any advertising, sales
literature, or other promotional material to
be used in connection with the distribution
of the Variable Products; PROVIDED THAT
neither the Insurance Companies nor the
Underwriter shall be liable in any such case
to the extent that such losses, claims,
damages, liabilities or expenses arise out
of, or are based upon, an untrue statement
or alleged untrue statement or omission or
alleged omission made in reliance upon
information furnished in writing to the
Insurance Companies by the Distributor
specifically for use in the preparation of
any such document, application, or
promotional material; or
(ii) result because of the provisions of any
Variable Product or because of any material
breach by the Insurance Companies or the
Underwriter of any provision of this
Agreement or of any Variable Product or
which result from any wrongful activities of
the Insurance Companies' or the
Underwriter's officers, directors, employees
or agents or their wrongful failure to take
any action in connection with the sale,
processing or administration of the Variable
Products including, without limitation,
obtaining auditors' reports, computing
accurate separate account and/or underlying
fund performance data, preparation and
timely filing and delivery, as required, of
annual and semiannual reports and reports on
Form NSAR and the timely payment of all
state and federal registration fees; as
limited by and in accordance with the
provisions of Sections 12 (b)(1) and 12
(b)(2) hereof.
(2) Neither the Insurance Companies nor the Underwriter
shall be liable under this indemnification provision
with respect to any losses, claims, damages,
liabilities or litigation ("Losses" for purposes of
this Section 12 (b)(2)) incurred or assessed against
an Indemnified Party that may arise from any
Indemnified Party's willful misfeasance or bad faith.
The Insurance Companies' and the Underwriter's
liability for Losses in the event of its (or their)
breach of this Agreement shall be limited to that
portion of Losses caused by its (or their) breach,
and that party shall not be liable for that portion
of Losses caused by breach of this Agreement by an
Indemnified Party or from any act or omission by an
Indemnified Party.
(3) The Insurance Companies and the Underwriter shall not
be liable under this indemnification provision with
respect to any claim made against an Indemnified
Party unless the Indemnified Party shall have
notified the Insurance Companies and the Underwriter
in writing within a reasonable time after receiving
the summons or other first legal process giving
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information of the nature of the claim against the
Indemnified Party (a "Claim"). Notwithstanding the
foregoing, the failure of any Indemnified Party to
give notice as provided herein shall not relieve the
Insurance Companies or the Underwriter of their
obligations hereunder except to the extent that they
have been prejudiced by the failure of the
Indemnified Party to give notice. In addition, any
failure by the Indemnified Party to notify the
Insurance Companies or the Underwriter of any Claim
shall not relieve the Insurance Companies or the
Underwriter from any liability which they may have to
the Indemnified Party against whom the action is
brought otherwise than on account of this
indemnification provision. In case any Claim is
brought against the Indemnified Parties, the
Insurance Companies and the Underwriter shall be
entitled to participate, at their own expense, in the
defense of the Claim. The Insurance Companies and the
Underwriter also shall be entitled to assume the
defense thereof, with counsel satisfactory to the
party named in the Claim. After notice to the
Indemnified Party of the Insurance Companies' and the
Underwriter's election to assume a defense to a
Claim, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it,
and neither the Insurance Companies nor the
Underwriter will be liable to the Indemnified Party
under this Agreement for any legal or other expenses
subsequently incurred by the Indemnified Party
independently in connection with the defense of a
Claim other than the reasonable costs of
investigation.
13. RECORDS
The parties to this Agreement shall maintain such accounts, books and
records and other documents as are required to be maintained under
applicable laws and regulations and shall preserve such accounts, books
and records, and other documents for the periods prescribed by such
laws and regulations. Each party shall have the right to inspect and
audit the accounts, books and records and other documents of the other
party that pertain to the Variable Products during normal business
hours upon reasonable written notice to the other party. Any party
requesting such an audit shall bear the expense of the audit, including
the reasonable costs (other than overhead costs or costs for time spent
on audit-related matters by officers, directors, or employees of the
other party) borne by the other party in connection with the audit.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement shall notify each other promptly of any
insurance or securities regulatory investigation, administrative or
judicial proceeding, or material complaint arising in connection with
the offer or the sale of the Variable Products. The parties shall
cooperate fully in the resolution of any insurance or securities
investigation, administrative or judicial proceeding, or material
complaint.
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15. TERM AND TERMINATION
(a) TERM -- This Agreement shall be effective from the date hereof
through December 31, 2002, which term shall automatically be
extended for a period of three (3) years unless this Agreement
is sooner terminated in accordance with the termination
provisions in Section 15(b) of this Agreement.
(b) TERMINATION -- No party hereto may terminate this Agreement
except as expressly provided in this Section 15(b).
(1) The Insurance Companies and the Underwriter (as one
party) or the Distributor may terminate this
Agreement effective at the close of business on
December 31, 2002 upon written notice delivered to
the other party not less than 30 nor more than 60
days prior to such date, which notice shall specify
that it is being given pursuant to this Section
15(b)(1).
(2) A party (the "Terminating Party") may terminate this
Agreement for cause if:
(i) another party (the "Breaching Party")
materially breaches this Agreement,
(ii) the Terminating Party has delivered to the
Breaching Party a notice specifying the
nature of the breach and that this notice is
being given pursuant to this Section
15(b)(2), and
(iii) the Breaching Party has not cured the breach
within 30 days after the delivery of the
notice.
(3) A Terminating Party may terminate this Agreement
immediately for cause:
(i) in the event of the voluntary institution by
the Distributor of bankruptcy proceedings or
the voluntary institution by an Insurance
Company of insolvency or rehabilitation
proceedings under any state insurance laws
or regulations (each an "Insolvent Party"),
or
(ii) in the event of a formal order or written
finding by a court of competent jurisdiction
that the Insolvent Party is bankrupt or
insolvent, there is a degradation of the
Insolvent Party's reputation that would
materially impair the ability of the
Insolvent Party to carry out its obligations
under this Agreement, or
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(iii) if the Commission institutes a formal cease
and desist order or proceeding prohibiting
the offer of the sale of the Variable
Products or the operation of a Variable
Account, or a governmental or regulatory
authority of a state or other jurisdiction
institutes a formal order or proceeding
prohibiting the offer or the sale of the
Variable Products or the operation of a
Variable Account; PROVIDED, that this
Agreement will be terminated only with
respect to the particular state or
jurisdiction issuing such order or
proceeding, or
(iv) if the Commission, the NASD, or any other
government authority or self-regulatory
organization revokes or suspends the
registration or license of the Distributor,
or the Distributor's ability to do business
is so materially impaired, in the reasonable
view of the Insurance Companies or the
Underwriter, that it could not perform its
obligations under this Agreement, or
(v) if a state insurance commissioner suspends
or revokes an Insurance Company's ability to
do business or the Insurance Company's
ability to do business is so materially
impaired, in the reasonable view of the
Distributor, that it could not perform its
obligations under this Agreement.
(c) SOLICITATION AFTER TERMINATION -- After termination of this
Agreement for any reason, the Distributor and the Distributor
Agency Affiliates agree that they will not take any action
designed or calculated to result in the transfer, exchange or
replacement of any Policy or Contract.
(d) SURVIVAL -- The provisions of Sections 11, 12, 16, 19 and 20
(Representations and Warranties, Indemnification, Rights Upon
Termination, Arbitration, and Confidentiality, respectively)
shall survive the termination of this Agreement.
16. RIGHTS UPON TERMINATION
(a) In no event will any further compensation be paid to the
Distributor should the Insurance Companies or the Underwriter
terminate this Agreement for cause pursuant to Section
15(b)(2) or Section 15(b)(3).
(b) As of the date of termination, the Insurance Companies shall
have the right to set off against any monies they owe the
Distributor any amounts owed by the Distributor to an
Insurance Company. In the event that the amounts owed by the
Distributor exceed the amounts owed by the Insurance
Companies, the difference shall become immediately due and
payable by the Distributor.
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(c) In the event that either party does not pay within 45 days
after resolution of the net amount payable, then the net
amount owed will accrue interest, compounded daily, at the
fluctuating prime interest rate charged by The Chase Manhattan
Bank, N.A., plus two percent (2%).
(d) If the Insurance Companies and the Underwriter terminate this
Agreement pursuant to Section 15(b)(1), the Insurance
Companies shall continue to:
(1) pay the Distributor the compensation set forth in
Schedule 6 to this Agreement; and
(2) offer all of the Variable Products then identified on
Schedule 2 to this Agreement for a period of one (1)
year from the date of termination of this Agreement,
during which period of time (i) the Insurance
Companies shall employ at least the same level of
effort in offering and supporting the Variable
Products as they did before the termination of this
Agreement and (ii) the terms of this Agreement shall
remain in full force and effect as though the
Agreement had not been terminated. The parties
further agree that such compensation shall only be
based on the Variable Products that have not lapsed
or been surrendered, due to 1035 exchanges or other
means, whether such lapse or surrender occurred
before or after the termination date.
(e) If the Distributor terminates this Agreement pursuant to
Section 15(b)(1), the Insurance Companies shall continue to
pay the Distributor the compensation set forth in Schedule 6
to this Agreement. The parties further agree that such
compensation shall only be based on the Variable Products that
have not lapsed or been surrendered, due to 1035 exchanges or
other means, whether such lapse or surrender occurred before
or after the termination date.
17. INDEPENDENT CONTRACTOR
The Distributor shall act as an independent contractor in the
performance of its duties and obligations under this Agreement and
nothing herein contained shall constitute the Distributor,
Broker-Dealers, Representatives or employees or officers of the
Distributor or Broker-Dealers as employees of AFLIAC, FAFLIC or the
Underwriter in connection with the distribution of the Variable
Products.
18. NOTICES
Any notice required or permitted under this Agreement shall be
delivered personally or sent by facsimile or by registered or certified
mail, return receipt requested, with all postage prepaid:
(a) TO THE DISTRIBUTOR:
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First Union Securities, Inc.
Attention: David Hebner
Fax: (704)374-3105
(b) TO THE INSURANCE COMPANIES:
First Allmerica Financial Life Insurance Company
Attention: Guy Sullivan
Fax: (508) 854-2193
(C) TO ALLMERICA INVESTMENTS, INC.:
Attention: David J. Mueller
Fax: (508) 855-6641
A party may change its address or fax number for the delivery of
notices by delivering a written notice to the other party at its last
specified address. All notices shall be effective upon delivery;
PROVIDED that any notice sent by facsimile shall be deemed ineffective
unless a copy of the notice is also delivered personally or sent by
express courier or mail for delivery on the same or next business day.
19. ARBITRATION
Any dispute between the Distributor and an Insurance Company or between
the Distributor and the Underwriter arising under or relating to this
Agreement shall be settled by compulsory arbitration before a single
arbitrator experienced in the insurance industry in accordance with the
Commercial Arbitration Rules then in force of the American Arbitration
Association. The arbitration shall take place in Charlotte, North
Carolina unless some other location is mutually agreed upon by the
parties in dispute. Each party shall bear its own costs and expenses in
any such arbitration, except that the expenses of the arbitrators'
services shall be divided equally between the Distributor and the other
party to the dispute (either one or both of the Insurance Companies
and/or the Underwriter).
20. CONFIDENTIALITY
(a) GENERALLY. Each party will hold the other party's Confidential
Information (as defined below) in confidence and will
safeguard it as provided herein. The party receiving
Confidential Information will not, directly or indirectly,
report, publish, distribute, disclose, or otherwise
disseminate the Confidential Information, or any portion
thereof, to any third party including its Affiliates, and will
not use the Confidential Information, or any portion thereof,
for the benefit of itself or any third party including its
Affiliates or for any purpose, except only as necessary to
perform its duties and exercise its rights hereunder,
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or as expressly authorized in writing by the party who owns
such Confidential Information. Disclosure of Confidential
Information internally by a recipient will be limited to those
of its and its Affiliates' officers, directors, employees, and
agents on a "need to know" basis who must have access to the
Confidential Information to enable such party to perform its
duties and exercise its rights hereunder. In order to
safeguard the Confidential Information, each party shall (i)
inform each recipient of the Confidential Information of the
confidential nature thereof and of the requirements of this
Agreement, (ii) direct such recipients to comply with the
terms of this Agreement, and (iii) exercise any other
precautions necessary to prevent any improper use or
disclosure of Confidential Information.
(b) DEFINITION. "Confidential Information" shall mean: (i)
information regarding a party's or such party's Affiliates',
financial condition, information systems, business operations,
plans and strategies, products or services, customers and
prospective customers, and marketing and distribution plans,
methods and techniques; (ii) information that is marked
"confidential", "proprietary" or in like words, or that is
summarized in writing as being confidential prior to or
promptly after disclosure to the other party; (iii) any and
all related research; and (iv) any and all designs, ideas,
concepts, and technology embodied therein. Confidential
Information of the Distributor or its Affiliates that is to be
kept confidential by the Insurance Companies shall also
include: (v) any information regarding the pricing strategies
of each Broker-Dealer; (vi) specific marketing and training
materials of each Broker-Dealer; and (vii) any information of
the Distributor or its Affiliates in any form whatsoever that
is covered by a patent issued by the United States Patent and
Trademark Office.
Information is not considered confidential or proprietary if
such information: (1) is or becomes generally available to the
public other than as a result of disclosure by the recipient;
(2) was available to or already known by the recipient on a
non-confidential basis prior to its receipt from the party
claiming confidentiality; (3) is developed by the recipient
independently of any information or data acquired from the
party claiming confidentiality; or (4) is, or is required to
be, disclosed pursuant to a court order or the requirement of
any federal or state regulatory, judicial, or government
authority.
(c) REMEDIES. Each party acknowledges and agrees that monetary
damages would not be a sufficient or adequate remedy for a
breach or anticipated breach of this Section and that, in
addition to any other legal or equitable remedies which may be
available, each party shall be entitled to specific
performance and injunctive relief for any breach or
anticipated breach of this Section.
(d) SURVIVAL. The provisions of this Section shall survive the
expiration or other termination of this Agreement.
21. SEVERABILITY
21
<PAGE>
If any provision of this Agreement is held to be unenforceable or
invalid, that provision shall be severed from this Agreement and the
remainder of this Agreement shall remain in full force and effect.
22. CHOICE OF LAW
This Agreement and any disputes, actions or other proceedings arising
under or relating to it shall be governed by law of the State of North
Carolina without regard to its principles of conflicts of law.
23. NO WAIVER
No failure or delay on the part of any party hereto in exercising any
power or right under this Agreement shall operate as a waiver thereof,
nor shall any single or partial exercise of such power or right
preclude any other or further exercise thereof or the exercise of any
other power or right. No waiver by any party of any provision of this
Agreement, nor of any breach or default, shall be effective unless in
writing and signed by the party against whom such waiver is to be
enforced.
24. AGREEMENT NON-ASSIGNABLE
Any assignment of this Agreement in whole or in part by a party without
the prior written consent of the other parties thereto shall be void
and shall vest no rights in the assignee.
25. SCHEDULES
The Schedules to this Agreement are a part of this Agreement as if set
forth in full herein. With the exception of Schedule 6, all other
schedules attached to this agreement may be revised by the Insurance
Companies and the Underwriter, subject to review by the Distributor.
26. HEADINGS
The headings herein are for the purpose of convenience only and have no
legal force, meaning or effect.
27. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes all prior and
contemporaneous agreements (other than on matters related to
confidentiality), understandings, negotiations and discussions, whether
oral or written, of the parties and there are no warranties,
representations and/or
22
<PAGE>
agreements between the parties in conjunction with the subject matter
hereof except as set forth in this Agreement. This Agreement, including
any Schedule hereto, may be amended or modified only by written
instrument, executed by duly authorized officers of the parties.
23
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have caused it to be executed
as of the date first above written.
FIRST UNION SECURITIES, INC.
By:__________________________
Name:_______________________
Title:________________________
Date:________________________
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
By:__________________________
Name:_______________________
Title:________________________
Date:________________________
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
By:__________________________
Name:_______________________
Title:________________________
Date:________________________
ALLMERICA INVESTMENTS, INC.
By:__________________________
Name:_______________________
Title:________________________
Date:________________________
24
<PAGE>
SCHEDULE 1
DISTRIBUTOR AGENCY AFFILIATES
[TO BE ADDED]
<PAGE>
SCHEDULE 2
VARIABLE PRODUCTS
<TABLE>
<CAPTION>
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
PRODUCT POLICY/CERTIFICATE NUMBER DESCRIPTION EXPENSE ALLOWANCE
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
ValuPlus Assurance 1036-99 Registered Retail VUL .50%*
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
</TABLE>
*Once the total Premiums and Purchase Payments received since the effective date
of this Agreement exceed $100 million, the .5% is replaced with .35%. Such
decreased percentage shall be pro-rated for the year the $100 million threshold
is first achieved.
<PAGE>
SCHEDULE 3
PRIVATE PLACEMENT GUIDELINES
The Insurance Companies rely on exemptions under the 1933 Act and the 1940 Act
in the issuance of certain of their variable annuity contracts and variable life
insurance policies. Reliance on these exemptions generally depends upon the
number and identity of the purchasers, the number of securities offered, the
size of the offering, the manner of the offering, and whether the securities are
being purchased only for investment purposes (and not for the purpose of
distributing or reselling them).
SECTION 3(c)(7)
Section 3(c)(7) exempts from the registration requirements of the 1940 Act
certain companies owned exclusively by an unlimited number of "qualified
purchasers", as defined in amended Section 2(a)(51) of the 1940 Act. Section
2(a)(51) establishes asset tests for four categories of "qualified purchasers":
(1) a natural person who owns at least $5 million in investments; (2) a family
investment vehicle that owns at least $5 million in investments; (3) a trust
whose trustees and settlers are qualified persons, provided that the trust was
not formed for the purpose of investing in the Section 3(c)(7) company; and (4)
any other person who owns and invests on a discretionary basis, for itself or
other qualified purchasers, at least $25 million in "investments."
In order to preserve their right to rely on Section 3(c)(7) of the 1940 Act, the
Insurance Companies require, and the Distributor shall require, through any
Sales Agreements entered into pursuant to Section 2(b) of this Agreement that
each Broker-Dealer require each prospective purchaser to represent and warrant
(in response to a questionnaire) that it owns sufficient "investment securities"
(as defined in Rule 2a 51-1 under the 1940 Act) to meet the financial
requirements and otherwise meet the requirements of the appropriate definition
of "qualified purchaser" in Section 2(a)(51) of the 1940 Act.
In addition, if the Private Placement will be used by a corporation to assist it
in funding its obligation to employees under a non-funded deferred compensation
plan, the Insurance Companies therefore, will impose certain additional
conditions on the purchase and will request additional information from the
purchaser in order to insure compliance with Section 3(c)(7). These additional
requirements also are designed to insure that the employer is and remains the
sole beneficial owner of the Private Placement for purposes of the 1940 Act.
SECTION 3(c)(1)
Certain of the Variable Accounts for the Private Placements are not registered
under the 1940 Act in reliance on Section 3(c)(1) of the 1940 Act. Section
3(c)(1) exempts from the registration requirements of the 1940 Act certain
companies who are issuers whose outstanding securities (other than short-term
paper) are beneficially owned by not more than one hundred persons and which are
not making and do not presently propose to make a public offering of their
securities.
<PAGE>
In order to preserve their right to rely on Section 3(c)(1) of the 1940 Act, the
Insurance Companies require, and the Distributor shall require, through any
Sales Agreements entered into pursuant to Section 2(b) of this Agreement that
each Broker-Dealer require its Representatives to comply with the requirements
of a non-public offering and monitor the number of prospective purchasers to
whom offers of sales have been made.
REGULATION D - RULE 501
With respect to the Private Placements, each prospective purchaser must also be
qualified as an "accredited investor" or otherwise be a "suitable investor,"
prior to offering the Private Placements to that prospective purchaser. An
"accredited investor" is: (a) a natural person, (i) whose individual net worth,
or joint net worth with the person's spouse, at the time of purchase exceeds
$1,000,000; or (ii) who has had individual income in excess of $200,000 in each
of the two (2) most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and who reasonably expects an income
in excess of such amounts in the current year; (b) a bank or savings and loan
association, whether acting in an individual or fiduciary capacity; (c) a
registered broker or dealer; (d) an insurance company; (e) a registered
investment company; (f) a Small Business Investment Company; (g) any plan
established by a state or municipal agency or government for the benefit of its
employees, with total assets in excess of $5,000,000; (h) certain employee
benefit plans (within the meaning of ERISA) with total assets in excess of
$5,000,000; (i) a private business development company; (j) a charitable
organization, corporation, business trust, any trust whose purchase is directed
by a person with knowledge and experience in financial and business matters, or
partnerships, not formed to acquire the securities offered, with total assets in
excess of $5,000,000; or (k) an entity in which all of the equity owners are
accredited investors.
Because resales of securities acquired in a private offering generally are
prohibited (with the exception of offerings pursuant to Rule 144A of the 1933
Act, which expressly permits resales to certain institutional investors),
Representatives must ensure that each prospective purchaser understands the
long-term nature of the Private Placement investment, does not intend to resell
the investment and is financially able to retain the securities purchased.
<PAGE>
SCHEDULE 4
AVAILABLE FUNDS AND FUND
PORTFOLIOS
[TO BE ADDED]
<PAGE>
SCHEDULE 5
STANDARD FORM OF SALES AGREEMENT
[The draft "Selling Group Agreement" funished by First Union Securities, Inc.
is currently being reviewed by Allmerica Financial's Legal Department.
Once the form has been agreed to, it will be set forth on this Schedule 5]
<PAGE>
March 16, 2000
SCHEDULE 6
COMPENSATION SCHEDULE
ValuPlus Assurance (Retail VUL Product)
Single Life - Simplified Issue and Fully Underwritten
Premium received in years 1-4: 8.50%
Premium received in years 5-10: 4.00%
Premium received in years 11+: 2.00%
ADJUSTMENT OF COMPENSATION:
The compensation may be adjusted, either up or down, as a result of the annual
review of the actual mix of business by the Insurance Companies.
The actual results will be compared to a target return.
If results are better than the target, to the extent allowed by law:
First year commissions will be increased retroactively to share in 50% of
the Excess. Commissions will be capped at 15%.
If results are worse than the target, to the extent allowed by law:
The difference will be neutralized by:
First, reduce any of the revenue sharing in excess of 15 bps
Second, reduce, retroactively, first year compensation.
For any variable product, the Insurance Company may elect, from time to time, to
make advances of compensation to the Distributor. Any such advance shall be
deemed a loan, payable upon demand, and secured by a first lien (security
interest) upon compensation payable by the Insurance Company to the Distributor,
without he necessity of execution of any further document, and Insurance Company
shall be entitled to set off amounts owed to it by Distributor against any
amounts owed to Distributor by the Insurance Company.
<PAGE>
SCHEDULE 7
PAYMENT OF EXPENSES
(a) The Distributor will pay the following costs and expenses
related to its distribution and other services contemplated by
this Agreement:
(i) all commissions and other compensation payable to
Broker-Dealers and their Representatives, related to
the sale and servicing of the Variable Products, as
provided in the Selling Group Agreement between the
Distributor and the Broker-Dealer;
(ii) the compensation, if any, of the Distributor's
employees, agents and registered representatives;
(iii) expenses associated with the licensing and
appointment, if any, and training of the
Distributor's employees, agents and representatives
involved in the distribution activities contemplated
by this Agreement;
(iv) the cost and expense of the mailing of any
promotional and advertising material and marketing
kits in connection with the distribution of the
Policies and Contracts;
(v) fulfillment of marketing materials and forms (not
including Applications and other insurance forms) to
Broker-Dealers;
(vi) any additions, inserts, or packaging enhancements to
the Insurance Companies' basic "Welcome Package";
(vii) expenses associated with telecommunications with the
Insurance Companies at the sites of the Distributor
or the Distributor Agency Affiliates, including site
installations and purchases, leases or rentals of
modems, terminals and other hardware, and lease line
telephone charges; and
(viii) any other expenses incurred by the Distributor or the
Distributor Agency Affiliates, except those set forth
in Section (b) of this Schedule and except as
provided in Section (c) of this Schedule, for the
purpose of carrying out the obligations of the
Distributor hereunder.
<PAGE>
(b) The Insurance Companies will pay all costs and expenses in
connection with:
(i) the preparation and filing with appropriate
governmental or regulatory agencies of the
Registration Statements and each preliminary
Prospectus and definitive Prospectus;
(ii) the preparation and issuance of the Policies and
Contracts, including the Companies' basic "Welcome
Package" (any additions, inserts, or packaging
enhancements to the Companies' "Welcome Package"
shall be at the expense of the Distributor, as set
forth in Section (a)(vi) above);
(iii) any authorization, registration, qualification or
approval of the Policies and Contracts required under
the securities, blue-sky laws or insurance laws of
any state;
(iv) registration fees for the Policies and Contracts
payable to the Commission, the NASD or any other
governmental or regulatory agency;
(v) the mailing of Prospectuses and any supplements
thereto, as required by federal securities laws, and
periodic reports relating to the Variable Accounts to
Policy and Contract owners;
(vi) the preparation and printing of administrative forms
utilized in connection with the distribution of the
Policies and Contracts, including but not limited to
the form of Application;
(vii) the preparation of Policies and Contract owner lists
for the purposes of proxy solicitations;
(viii) compensation payable to the Distributor, as provided
in Section 10 of this Agreement, and
(ix) any other expenses related to the distribution of
Policies and contracts except those set forth in
Section (a) of this Schedule and except as provided
in Sections (c) and (d) of this Schedule.
(c) Subject to an Annual Accounting (described below), the
Insurance Companies will pay for reasonable expenses as
determined by the Insurance Companies for the following:
(i) the costs and expenses for design, development and
printing of (1) marketing kits and Variable Product
Prospectus covers in a design which is agreed upon by
the Insurance Companies and the Distributor, which
meet regulatory requirements as determined by the
Insurance Companies,
<PAGE>
and which are provided to the Insurance Companies in
a camera-ready format, and (2) promotional and
advertising materials;
(ii) to the extent not paid by a Fund, the cost and
expense for design, development and printing of the
Fund Prospectuses and semi-annual and annual reports;
(iii) the cost and expense of printing Variable Product
Prospectuses, which Prospectuses will each contain a
copy of each Fund Prospectus;
(iv) the cost and expense for design, development and
printing of Policy and Contract semi-annual and
annual reports; and
(v) any other marketing expenses incurred by the
Distributor or the Distributor Agency Affiliates,
except as provided in Section (a) of this Schedule
and except those set forth in Section (b) of this
Schedule, including, but not limited to, the costs
and expenses associated with conferences relating to
the Variable Contracts and Policies.
On each anniversary of the effective date of this Agreement,
the Insurance Companies will perform an Annual Accounting and
determine "X" and "Y", described below:
X is an amount equal to the expenses for items c(i) through
(v) above paid or incurred by the Insurance Companies during
last 12 months, and
Y is an amount equal to the product of the applicable Expense
Allowance (identified in Schedule 2 to this Agreement) and the
total Premiums and Purchase Payments received and accepted for
each Variable Contract or Policy in the last 12 months.
To the extent X exceeds Y, the Distributor shall reimburse the
Insurance Companies for such excess. To the extent Y exceeds
X, the Insurance Companies shall reimburse the Distributor for
such excess. All reimbursements must be paid within one (1)
month of the date the reimbursement amount is determined.
(d) The Insurance Companies alone shall be responsible for and
bear the cost of administration of the Contracts following
their issuance, including all Policy and Contract owner
service and communication activities, but the Distributor
shall be responsible for answering inquiries from
Broker-Dealers or Representatives regarding the investment
performance of the Policies and Contracts, as permitted by
applicable law.
<PAGE>
(e) The Insurance Companies, as agent for the Underwriter, will be
responsible for and bear the cost of confirming to each
applicant for and owner of a Policy or Contract in accordance
with Rule 10b-10 under the 1934 Act their acceptance of
Premiums and Purchase Payments and such other transactions as
are required by Rule 10b-10 or administrative interpretations
thereunder and in accordance with Release 8389 under the 1934
Act.
<PAGE>
AMENDMENT #1 TO THE
DISTRIBUTION AGREEMENT
- --------------------------------------------------------------------------------
Notwithstanding any provision of the Distribution Agreement effective, February
1, 2000, by and between Allmerica Financial Life Insurance and Annuity Company,
a Delaware insurance company ("AFLIAC"), First Allmerica Financial Life
Insurance Company, a Massachusetts insurance company ("FAFLIC" and, together
with AFLIAC, collectively, the "Insurance Companies"), Allmerica Investments,
Inc., a Massachusetts corporation (the "Underwriter") and First Union
Securities, Inc., a Delaware corporation (the "Distributor"), on its own behalf
and on behalf of the individuals and entities listed on Schedule 1 to this
Agreement (the "Distributor Agency Affiliates"), as such Schedule may be amended
from time to time, such Distribution Agreement is amended as set forth below:
1. DEFINITIONS
The following definitions are added to Section 1 of the Distribution Agreement
entitled "Additional Definitions:"
BROKER-DEALERS - Broker-dealers registered with the Securities and Exchange
Commission ("SEC") under the 1934 Act that are members of the National
Association of Securities Dealers, Inc. ("NASD") or entities that are
excluded from the definitions of "broker" or "dealer" pursuant to the
"bank" exclusion under Section 3(a)(4) and Section 3(a)(5) of the 1934 Act.
Notwithstanding the fact that a bank is not a Broker-Dealer, a bank that is
exempt from registration with the SEC under the 1934 Act but is otherwise
permitted to sell the Contracts and Policies until May 12, 2001 will be
treated and defined as a Broker-Dealer for the purpose of this Agreement
until May 12, 2001.
REPRESENTATIVES - Individuals affiliated with a Broker-Dealer who are
licensed as life insurance agents in those jurisdictions in which
applications for the sale of the Contracts and Policies are to be solicited
and who are also duly registered with the NASD in compliance with the 1934
Act. Notwithstanding the fact that Bank employees may not be
Representatives, bank employees who are licensed as life insurance agents
in those jurisdictions in which applications for the sale of the Contracts
and Policies are to be solicited and who are authorized to sell until May
12, 2001, will be treated and defined as Representatives for the purpose of
this Agreement until May 12, 2001.
1
<PAGE>
2. EXCLUSIVITY
The following provision is added to the Distribution Agreement:
EXCLUSIVITY IN DISTRIBUTION OF VARIABLE PRODUCTS
The Insurance Companies grant the exclusive right to distribute the
Contracts and Policies to the Distributor, the rights and obligations of
which are set forth in this Agreement. The Insurance Companies further
agree that the Distributor shall have the exclusive authority to enter into
Selling Group Agreements with appropriately licensed, qualified or approved
Broker-Dealers.
Notwithstanding the foregoing, the Distributor understands and agrees that
the exclusive distribution rights granted hereunder shall apply only to
Contracts and Policies that are funded in whole or in part with Funds
sponsored by the Distributor or by any of its affiliates. As a result, the
Distributor understands and agrees that AFLIAC Policy form 1036-99 or any
other Contract or Policy form that may be added to Schedule 2 is not
subject to the exclusive distribution rights granted to the Distributor
hereunder in situations where AFLIAC or FAFLIC utilizes any such Contract
or Policy form with funds other than funds sponsored by the Distributor or
any of its affiliates.
3. NETTING COMMISSION
The following provision is added to the Distribution Agreement:
NETTING COMMISSIONS
The Distributor shall be entitled to deduct from payments it receives for
certain Contracts and Policies such commissions to which it may be entitled
under the terms of the Distribution Agreement and Schedule(s) attached
thereto, subject to the following terms and conditions.
SECTION 1 - POLICIES TO WHICH NETTING COMMISSIONS PROVISION APPLIES
Unless the Insurance Companies otherwise agree in writing, the Contracts
and Policies to which this provision applies include the following:
2
<PAGE>
- Form 1036-99, but only in situations where the simplified underwriting
process is utilized.
SECTION 2 - AMOUNTS DEDUCTIBLE
Amounts which the Distributor shall be entitled to deduct pursuant to this
provision shall include only the up-front portion of any compensation due,
and shall not include trail amounts earned or to be earned, if any.
SECTION 3 - PROCEDURES
The Distributor agrees to adhere to and continue to follow procedures for
administration of Netting Commissions, as established and updated by the
Insurance Companies from time to time.
SECTION 4 - EFFECT ON PRICING
The Distributor shall accept from the client as the full initial purchase
payment for the Contracts and Policies to which this provision applies,
neither more nor less than the exact amount of the initial purchase payment
stated in the application or enrollment form signed by the Contract or
Policy owner/applicant.
SECTION 5 - CHANGES TO COMMISSION NETTING SCHEDULE
Any change to this provision will become effective as to any applications
or enrollment forms received by the Insurance Companies on or after the
later of (a) the date specified in a new or revised Addendum, or (b) the
tenth (10) day after the date of mailing of the new or revised Addendum to
the Distributor.
SECTION 6 - CONSIDERATION
The Distributor's continued deduction and retention of compensation under
this provision shall signify acceptance of and shall be the consideration
for changes to the section of this Addendum which addresses netting.
3
<PAGE>
SECTION 7 - COMMISSION REFUNDS
Any commission refunds specified in the Distribution Agreement shall be
paid to the appropriate Insurance Company within 10 days of receipt of a
request for repayment.
SECTION 8 - OFFSET
The Insurance Companies shall be entitled to offset any indebtedness of the
Distributor under this provision against any other moneys owed to the
Distributor by the Insurance Companies.
SECTION 9 - COSTS OF COLLECTION
The Distributor shall pay any costs of collection, including attorneys=
fees, court costs and costs of investigation, associated with the
collection of any overdue receivables under this provision. Prior to
incurring any such additional costs of collection, the Insurance Companies
shall terminate this provision and make written demand for such overdue
amounts. Such written demand shall be mailed to the Distributor at its last
known address as shown on the records of the Insurance Companies.
4. TERMINATION
The Insurance Companies reserve the right to terminate this Addendum at any
time, with or without cause. Termination of this Addendum does not necessarily
terminate the Distribution Agreement.
(a) If the Insurance Companies terminate this Addendum without cause, the
Distributor shall be entitled to ten (10) days= written notice of such
termination during the first year the Distribution Agreement is in
force
4
<PAGE>
and to thirty (30) days= written notice of any such termination to
occur thereafter.
(b) If the Insurance Companies terminate this Addendum for cause, such
termination shall be effective immediately without prior notice, and
all amounts owed by the Distributor to the Insurance Companies shall
become immediately due and payable.
(c) Cause for immediate termination of this Addendum shall include, but
not be limited to:
(i) breach of any provision of this Addendum or the Distribution
Agreement by the Distributor; or
(ii) the Distributor's insolvency, bankruptcy, or evidence of
insolvency.
5. CAPTIONS
Captions are used for informational purposes only and no caption shall be
construed to affect the substance of any provision of this Addendum.
6. ENTIRE CONTRACT
The Distribution Agreement, as modified by this Addendum, contains the entire
Contract between the parties. The Distribution Agreement, as modified by this
Addendum, replaces all previous agreements between the parties 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
5
<PAGE>
written, relating to or purporting to relate to the relationship of the parties
is hereby rendered null and void.
7. WAIVER
Waiver by the Insurance Companies of any conditions or terms of this Addendum
shall not be considered to be a subsequent waiver of such conditions or terms.
8. EFFECTIVE DATE
This Addendum shall be effective ___________________, upon execution of all
parties hereto.
IN WITNESS WHEREOF, the parties to this Agreement have caused it to be executed
as of the date first above written.
FIRST UNION SECURITIES, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Date:
---------------------------
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Date:
---------------------------
6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Date:
---------------------------
ALLMERICA INVESTMENTS, INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Date:
---------------------------
7
<PAGE>
May 1, 2000
AMENDMENT TO THE DISTRIBUTION AGREEMENT
- -------------------------------------------------------------------------------
The following is added to Schedule 6:
SCHEDULE 6
COMPENSATION SCHEDULE
VARIABLE IMMEDIATE ANNUITY CONTRACT
- -----------------------------------
Compensation paid on the single premium*:
For annuity benefit periods of:
10 or more years: 7.00%
9 years: 6.00%
8 years: 5.00%
7 years: 4.00%
6 years: 3.00%
5 years: 2.00%
*when sold in conjunction with a life insurance product, the Option A life
commission rate applicable to that product is used.
The following is added to Schedule 2:
SCHEDULE 2
VARIABLE PRODUCTS
- -------------------------------------------------------------------------------
PRODUCT POLICY/CERTIFICATE DESCRIPTION EXPENSE ALLOWANCE
NUMBER
- -------------------------------------------------------------------------------
TBD A3029-99 Variable Immediate Annuity 0.00%
- -------------------------------------------------------------------------------
EFFECTIVE DATE - This Amendment shall be effective on June 1, 2000, upon
execution of the Signature Page referencing this Amendment by all parties.
4-00-38
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
SELLING GROUP AGREEMENT
THIS AGREEMENT ("Agreement") is made as of ___________, 2000 by and
between First Union Securities Inc., a Delaware corporation ("FUSI"), and the
undersigned broker-dealer ("Broker-Dealer").
DEFINITIONS:
BROKER-DEALERS - broker-dealers registered with the Securities and Exchange
Commission ("SEC") under the 1934 Act that are members of the National
Association of Securities Dealers, Inc. ("NASD") or entities that are excluded
from the definitions of "broker" or "dealer" pursuant to the "bank" exclusion
under Sections 3(a)(4) and Sections 3(a)(5) of the 1934 Act. Notwithstanding the
fact that a bank is not a Broker-Dealer, a bank that is exempt from registration
with the SEC under the 1934 Act but is otherwise permitted to sell the Products
until May 12, 2001 will be treated and defined as a Broker-Dealer for the
purposes of this Agreement until May 12, 2001.
INSURANCE COMPANY(IES) - All Products will be issued by Allmerica Financial Life
Insurance and Annuity Company for non-New York sales and First Allmerica
Financial Life Insurance Company - for NewYork sales (herein collectively
referred to as the "Insurance Companies"). The Principal Office of the Insurance
Companies is located at 440 Lincoln Street, Worcester, Massachusetts 01653.
1
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
PRODUCTS - The variable annuity contracts and variable life insurance policies
of the Insurance Companies identified on the Schedule of Products, attached
hereto, or on a supplement to such Schedule of Products. Certain products are
anticipated to be registered under the 1933 Act and other products will not be
registered in reliance on exemptions under the 1933 Act and the 1940 Act.
REPRESENTATIVES - Individuals affiliated with a Broker-Dealer who are licensed
as life insurance agents in those jurisdictions in which applications for the
sale of the Products are to be solicited and who are also duly registered with
the NASD in compliance with the 1934 Act. Notwithstanding the fact that Bank
employees may not be Representatives, Bank employees who are licensed as life
insurance agents in those jurisdictions in which applications for the sale of
the Products are to be solicited and who are authorized to sell until May 12,
2001, will be treated and defined as Representatives for the purpose of this
Agreement until May 12, 2001.
PROSPECTUS - The prospectuses for the Products which are registered under the
1933 Act. Notwithstanding the fact that a private placement memorandum is not a
Prospectus, the private placement memorandums for the Products, which are not
registered in reliance on exemptions under the 1933 Act and the 1940 Act, will
be treated and defined as a Prospectus.
1933 ACT - The Securities Act of 1933, as amended.
2
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
1934 ACT - The Securities Exchange Act of 1934, as amended.
RECITALS:
A. FUSI, pursuant to the provisions of a distribution agreement (the
"Distribution Agreement") between FUSI and the Insurance Companies, acts as a
distributor of the Products.
B. FUSI desires that the Broker-Dealer distribute the Products in those
jurisdictions in which the Broker-Dealer, FUSI, the Insurance Company and the
Products are appropriately licensed, qualified or approved, as the case may be,
and the Broker-Dealer desires to sell the Products, through its agents in such
jurisdictions, on the terms and conditions set forth hereinafter.
C. The Insurance Company, pursuant to the Distribution Agreement, has
authorized FUSI to recommend broker-dealers, including the Broker-Dealer, for
appointment by the Insurance Company to engage in the distribution activities
contemplated by this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants hereinafter set forth, the parties agree as follows:
1. AUTHORITY TO SELL PRODUCTS.
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1.1 GENERAL. FUSI, subject to the terms and conditions contained
herein, hereby authorizes the Broker-Dealer, as an independent contractor, on a
non-exclusive basis, to offer and sell the Products. The Broker-Dealer hereby
agrees to use its best efforts to sell the Products.
1.2 COMPENSATION/EXPENSES. Except as otherwise provided herein, the
Broker-Dealer shall be entitled to commissions with respect to sales of the
Products made by the Broker-Dealer and its Representatives, in accordance with
the Schedule of Commissions attached to this Agreement, as such Schedule may be
amended from time to time. FUSI reserves the right to amend the Schedule of
Commissions at any time and from time to time. PROVIDED, HOWEVER, that any such
amendment shall apply only to Products applied for after the effective date of
each such amendment. All commissions shall be payable by FUSI. As a result, the
Broker-Dealer understands and agrees that the Insurance Company shall not be
responsible for payment of any compensation due and payable to the Broker-Dealer
hereunder, and that FUSI is solely responsible for the payment of all such
compensation. The Broker-Dealer shall be responsible for the payment of all
expenses incurred by the Broker-Dealer in connection with this Agreement and the
performance of its obligations, and the exercise of its rights hereunder.
2. REPRESENTATIONS AND WARRANTIES.
The Broker-Dealer represents and warrants to, and covenants with, FUSI
that:
(a) the Broker-Dealer (i) is a member in good standing of
the National Association of Securities Dealers, Inc. (the "NASD"), (ii) is duly
registered as a broker-dealer with
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the Securities and Exchange Commission ("SEC") under the Securities Exchange Act
of 1934, as amended (the "1934 Act"), and registered in each state or other
jurisdiction in which the Broker-Dealer is required to be registered in order to
sell the Products, (iii) is licensed and appointed to sell the Products under
the insurance laws of each state or other jurisdiction in which the
Broker-Dealer is required to be licensed and appointed in order to sell the
Products, and (iv) otherwise maintains in effect all governmental and other
registrations, licenses and permits necessary for it to carry out its
obligations, and the transactions contemplated hereunder (the "Required
Registrations");
(b) the Broker-Dealer is in compliance, in all material respects,
with all applicable federal and state securities laws and regulations, the
requirements of the NASD and any applicable securities exchanges of which it is
a member and all codes of conduct and codes of ethics applicable to its
activities (collectively, the "Regulations");
(c) the Broker-Dealer is a corporation duly organized and in good
standing under the law of its jurisdiction of organization and is qualified to
do business as a corporation in those states or jurisdictions where it is, or
will be, doing business pursuant to this Agreement; and
(d) this Agreement and the transactions contemplated hereby
(i) have been duly approved by all required corporate action on the part of the
Broker-Dealer and (ii) do not
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conflict with any law, regulation, court order or agreement to which the
Broker-Dealer is subject or the Broker-Dealer's properties are bound.
3. COVENANTS OF THE BROKER-DEALER.
3.1 SALE OF PRODUCTS. The Broker-Dealer agrees that (a) offers and
sales of the Products will be made only through the use of a then current
prospectus which is a part of a registration statement which is then effective
under the 1933 Act (each a "Prospectus"), (b) a Prospectus relating to the
Product in question will be delivered prior to, or concurrently with any sales
presentation or other offer of such Product, (c) no oral or written statements
will be made by or on behalf of the Broker-Dealer to a prospective purchaser of
a Product other than statements identical to, or based solely on information set
forth in the Prospectus, and (d) in connection with offers and sales of the
Products, the Broker-Dealer will at all times comply with the Regulations and
offer and sell the Products only in those jurisdictions, and in the manner in
which the Products may be lawfully sold.
3.2 REPRESENTATIONS AND WARRANTIES TRUE, ETC. At all times during the
term hereof the representations and warranties of the Broker-Dealer contained in
Section 2, above, shall be true.
3.3 REPRESENTATIVES. The Broker-Dealer may recommend persons
associated with it who are duly licensed and qualified under applicable law and
regulations to act in the offer or sale of the Products (the "Representatives")
for appointment as insurance agents of the Insurance Company, PROVIDED that such
person: (a) has not been subject to any civil, administrative or criminal
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actions or sanctions by, or entered into any settlement agreements with, any
governmental or quasi-governmental regulatory authority or self regulatory
organization, (b) has not been precluded or restricted for any period of time by
any entity from selling any securities, insurance products or other products of
such entity, (c) otherwise is qualified to offer and sell the Products, (d)
agrees in writing (i) to comply with all of the obligations of the Broker-Dealer
and the Representatives hereunder, (ii) not to make any recommendation to an
applicant or prospective purchaser to purchase a Product without having
reasonable grounds to believe that the purchase of the Product is suitable for
the prospective purchaser, (iii) to report promptly in writing to the Insurance
Company and FUSI all customer or regulatory complaints or inquiries with respect
to such Representative, whether written or oral, and to assist the Insurance
Company and FUSI in resolving any complaint to the satisfaction of all parties
involved, (e) possesses all Required Registrations and agrees to maintain in
force during the term hereof all Required Registrations, and (f) agrees that
prior to soliciting Products on behalf of the Insurance Company that he/she must
be appointed as an insurance agent of the Insurance Company. The Broker-Dealer
is authorized, except as hereinafter specifically provided, to cause the
Representatives to offer and sell the Products in the states and jurisdictions
in which the Products, the Broker-Dealer and such Representatives are
registered, licensed and appointed or otherwise appropriately qualified. The
Broker-Dealer shall be solely responsible for the supervision of the
Representatives and shall enforce written supervisory procedures to assure
strict compliance with NASD rules and applicable rules and regulations under the
1934 Act, and other applicable
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federal and state statutes and regulations. The Broker-Dealer agrees to provide
to the Representatives instructions sufficient to provide them with information
needed to offer and sell the Products in compliance with this Agreement and the
Regulations. The Broker-Dealer shall direct the sales activities of the
Representatives and shall be solely responsible for the conduct of the
Representatives in the offer and sale of the Products.
3.4 NO AUTHORITY TO MODIFY, ETC. The Broker-Dealer acknowledges and
agrees that neither the Broker-Dealer nor any of the Representatives shall have
the authority, on behalf of FUSI or the Insurance Company or otherwise, to (a)
modify any of the terms of the Products, including, but not limited to, any
forfeiture provisions thereof, or (b) extend the time of payment of any premiums
with respect to a Product. The Broker-Dealer acknowledges that neither the
Broker-Dealer nor any Representative may receive any premiums or other funds
from applicants for, or purchasers of the Products (except for the sole purpose
of forwarding such funds to the Insurance Company). If the Broker-Dealer or a
Representative inadvertently receives any funds from applicants for, or
purchasers of, the Products they shall hold such funds in a fiduciary capacity
on behalf of the Insurance Company and promptly submit them to the Insurance
Company.
3.5 REJECTION OF PRODUCT APPLICATIONS, ETC. The Broker-Dealer
acknowledges and agrees that (a) the Insurance Company, in its sole discretion,
may reject any application for a Product submitted to it by the Broker-Dealer or
any of the Representatives, (b) nothing herein contained shall constitute the
Broker-Dealer or any of its Representatives as employees of FUSI or the
Insurance
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Company, and (c) the Schedule of Products may be amended by FUSI at its sole
discretion from time to time to add other Products distributed by FUSI pursuant
to the Distribution Agreement or other distribution agreements with the
Insurance Company, or to delete Products therefrom.
3.6 ACCESS TO INFORMATION. The Broker-Dealer shall give FUSI and the
Insurance Company full access upon reasonable advance notice during the
Broker-Dealer's normal business hours to all information in the possession or
control of the Broker-Dealer or any Representative relating to, arising out of
or in connection with the offer and sale of Products pursuant to this Agreement,
and shall be required to provide to FUSI and the Insurance Company copies of any
documents relating thereto within ten (10) days after a written request
therefor. The Broker-Dealer shall be entitled to reimbursement of the expenses
it incurs in connection with providing documents to FUSI or the Insurance
Company, as required by the preceding sentence.
3.7 BASIS FOR RECOMMENDATIONS. The Broker-Dealer shall be solely
responsible for the approval of suitability determinations for the purchase of
any Product or the selection of any investment option thereunder, in compliance
with the Regulations and shall appropriately supervise the Representatives in
determining client suitability. The Broker-Dealer, through the Representatives
or otherwise, shall not make any recommendations to a prospective purchaser to
purchase a Product without having reasonable grounds to believe that the
purchase of that Product is suitable for such prospective purchaser. Among other
things, a determination of suitability shall
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be based on information supplied to a Representative after a reasonable inquiry
concerning the prospective purchaser's insurance and investment objectives,
financial situation and needs.
3.8 NO MISREPRESENTATIONS; DISCLOSURE. The Broker-Dealer, through the
Representatives or otherwise, shall not (a) make any misrepresentation of a
material fact with respect to the Products or omit to state a material fact
necessary to make statements made with respect to a Product in light of the
circumstances in which they were made, not misleading or (b) otherwise engage in
any deceptive or misleading practice or activity in connection with the offer
and the sale of the Products. The Broker-Dealer, through the Representatives or
otherwise, shall not: (a) give any oral information or make any representations
or statements in connection with the offer or sale of a Product that is not the
same as, or based solely on the then current version provided by FUSI or the
Insurance Company of the registration statement, Prospectus or statement of
additional information, as the case may be, relating to the such Product, or (b)
provide prospective purchasers of the Products or otherwise utilize in
connection with the offer of sale of the Products any advertising materials,
sales literature, signage or other promotional material, written, electronic,
graphic or audio visual materials other than materials supplied by, or approved
in writing in advance, by FUSI or the Insurance Company (the "Disclosure
Material"). The Broker-Dealer shall not modify in any way any Disclosure
Material which has been approved for use by the Broker-Dealer by FUSI or the
Insurance Company. The Broker-Dealer shall immediately cease using, and shall
cause the Representatives to immediately cease using, any Disclosure Material
previously approved
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by FUSI or the Insurance Company upon receipt of an oral or written instruction
to do so by FUSI or the Insurance Company. FUSI agrees to follow-up in writing
within three business days any such oral instruction from FUSI or the Insurance
Company to discontinue such use. The Broker-Dealer will maintain complete
records indicating the manner and extent of distribution of any such Disclosure
Material, and will make such records available to the Insurance Company, FUSI,
state insurance departments, the NASD, the SEC and any other regulatory agency
which has regulatory authority over the Insurance Company or FUSI.
3.9 EXCHANGE OF PRODUCTS. The Broker-Dealer or the Representatives may
solicit exchanges of contracts issued by insurance carriers other than the
Insurance Company or any of its affiliates for Products only when the
Broker-Dealer can demonstrate that the exchange would be beneficial to the
prospective purchaser or class of purchasers, as the case may be, and provided
that the exchange offer is approved in advance by an NASD-licensed principal of
the Broker-Dealer. The Broker-Dealer shall maintain records of the basis for any
determination that an exchange would be beneficial to a prospective purchaser,
including the name of such principal approving the exchange offer. Without the
express written permission of the Insurance Company, neither the Broker-Dealer
nor the Representatives may solicit exchanges of contracts issued by the
Insurance Company or any of its affiliates for Products.
3.10 COMPLAINTS AND INVESTIGATION. The Broker-Dealer shall
report in writing within three (3) business days after the occurrence thereof to
the Insurance Company and FUSI all
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customer complaints or inquiries relating to the offer, sale or ownership of the
Products or made by or on behalf of any prospective purchaser or owner of a
Product, whether written or oral, and shall assist the Insurance Company and
FUSI in resolving those complaints to the satisfaction of such prospective
purchaser, owner, FUSI and the Insurance Company. The Broker-Dealer shall
cooperate fully with FUSI and the Insurance Company in connection with any
governmental or other investigation or proceeding relating to any complaint
related to the Products by any prospective purchaser or owner of the Products.
3.11 NOTICE OF CLAIMS. If any action or proceeding shall be brought
against the Broker-Dealer or any of its Representatives or affiliates relating
to the Products, the Broker-Dealer shall give written notice to FUSI and the
Insurance Company within (3) business days after it receives notice of any such
action or proceeding.
3.12 FIDELITY BOND. The Broker-Dealer represents and warrants that all
directors, officers and employees of the Broker-Dealer (including the
Representative) who have access to funds of the Insurance Company are, and will
continue to be, covered by a blanket fidelity bond including coverage for
larceny, embezzlement and other defalcation, issued by a reputable bonding
company acceptable to the Insurance Company in an amount at least equivalent to
the minimal coverage required under the NASD Rules of Fair Practice, and
endorsed to extend coverage to variable life insurance and variable annuity
transactions. The Broker-Dealer acknowledges that the Insurance Company may
require evidence that such coverage is in force and the Broker-Dealer shall
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promptly give notice to the Insurance Company of any notice of cancellation or
change of coverage. The Broker-Dealer hereby assigns any proceeds received from
the fidelity bond company to the Insurance Company to the extent of the
Insurance Company's loss due to activities covered by such bond. If the payment
to the Insurance Company under the fidelity bond is insufficient to cover the
Insurance Company's loss, the Broker-Dealer will promptly pay the Insurance
Company an amount equal to the balance of such loss on demand. The Broker-Dealer
indemnifies and holds harmless the Insurance Company from any deficiency and
from the cost of collection thereof. The Broker-Dealer agrees to maintain the
fidelity bond coverage described in this Section 3.12 at all times while the
Agreement remains in force.
3.12 Other Broker-Dealers. Subject to the consent of the Insurance
Company, Broker-Dealer may recruit other broker-dealers that are registered
under the 1934 Act to offer and sell the Products provided that: (a) such
broker-dealer enters into an agreement in the form of this Agreement which
agreement is delivered to FUSI for its review, and (b) FUSI has the right, in
its sole discretion, to accept or reject such broker-dealer as authorized to
sell the Products. Any such other broker-dealer which is approved by FUSI to
sell the Products is referred to herein as a "Downstream Broker-Dealer."
Broker-Dealer shall be entitled to receive commissions from a Downstream
Broker-Dealer based on the sales of the Products made by such Downstream
Broker-Dealer upon such arrangements as may be agreed to by Broker-Dealer and
such Downstream Broker-Dealer (the "Downstream Agreement"); provided, however,
that such arrangements are subject to
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review and approval by FUSI in its sole discretion. Broker-Dealer acknowledges
that Broker-Dealer shall not be entitled to any commissions or other
compensation from FUSI or the Insurance Company in connection with the
recruiting, or any activities of a Downstream Broker-Dealer and shall only be
entitled to receive payments in connection with the activities of a Downstream
Broker-Dealer from such Downstream Broker-Dealer pursuant to any arrangement
that may be agreed to between Broker-Dealer and such downstream Broker-Dealer.
Broker-Dealer shall take all reasonable actions to insure that each Downstream
Broker-Dealer complies with the terms of its Downstream Agreement and all laws,
rules and regulations applicable to the Downstream Broker-Dealer in connection
with such Downstream Broker-Dealer's offers and sales of the Products. Any
breach by a Downstream Broker-Dealer of its Downstream Agreement shall be deemed
for all purposes, including, but not limited to, indemnification provided in
Section 9, below, to be a breach by Broker-Dealer of this Agreement. The
Insurance Company reserves the right, in its sole discretion, to terminate a
Downstream Broker-Dealer's authority to sell the Products.
4. REPRESENTATIONS AND WARRANTIES OF FUSI.
(a) FUSI is (i) a member in good standing of the NASD, (ii) duly
registered as a broker-dealer with the SEC under the 1934 Act, and registered in
each state or other jurisdiction in which FUSI is required to be registered in
order to sell the Products and otherwise maintains in effect all Required
Registrations;
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(b) FUSI conducts its operations is in compliance, in all
material respects, with all applicable federal and state securities laws and
regulations, with all applicable state insurance laws, and the requirements of
the NASD and any applicable securities exchanges of which it is a member;
(c) FUSI is a corporation duly organized and in good standing
under the law of its jurisdiction of organization and is qualified to do
business as a corporation in those states or jurisdictions where it is, or will
be, doing business pursuant to this Agreement; and
(d) this Agreement and the transactions contemplated hereby (i)
have been duly approved by all required corporate action on the part of FUSI and
(ii) do not conflict with any law, regulation, court order or agreement to which
FUSI is subject or FUSI's properties are bound.
5. COVENANTS OF FUSI. FUSI covenants with the Broker-Dealer that:
5.1 PRODUCTS. The SEC registered Products, when they are made
available to the Broker-Dealer for offer and sale, will be duly registered under
applicable federal and state securities laws.
5.2 INSURANCE COMPLIANCE. The Products, when they are made
available to the Broker-Dealer for offer and sale, will be in compliance with
applicable state insurance laws.
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5.3 DISCLOSURE. With respect to the Product it purports to
describe, each Prospectus, provided to the Broker-Dealer by FUSI or the
Insurance Company:
(a) will be true, accurate and complete in all material respects;
(b) will not contain any false or misleading statements of
material fact or omit any material fact necessary to make statements contained
therein not misleading in light of the circumstances under which they are made;
and
(c) will fully and adequately disclose all material terms,
conditions, limitations and restrictions with respect to the Products.
5.4 REPRESENTATIONS AND WARRANTIES TRUE, ETC. At all times during the
term hereof, the representations and warranties of FUSI contained in Section 4,
above, shall be true.
5.5 DOCUMENTS. FUSI shall provide the Broker-Dealer with
quantities of Prospectuses reasonably sufficient for the Broker-Dealer to
effectively market the Products.
6. TERM AND TERMINATION OF AGREEMENT
6.1 TERM. Unless sooner terminated pursuant to this Section 6, this
Agreement shall terminate on the earlier to occur of the date of termination of
the Distribution Agreement and the _____ anniversary of the date hereof.
6.2 TERMINATION. This Agreement shall be subject to termination at any
time by the Broker-Dealer or by FUSI, with or without cause, upon the giving of
at least thirty (30) days' written notice to such effect to the other party.
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6.3 EFFECT OF TERMINATION.
(a) In the event this Agreement is terminated, (i) the
Broker-Dealer and the Representatives shall immediately cease to have the right
to offer or sell any of the Products; (ii) the Broker-Dealer shall return
forthwith, upon the request of FUSI or the Insurance Company, all written
materials related to the Products delivered to the Broker-Dealer or the
Representatives by or on behalf of FUSI or the Insurance Company on or before
the date of such termination; (ii) all compensation required to be paid to
Broker-Dealer shall be paid in accordance with the Schedule of Commissions
attached hereto; (iii) all amounts due from the Broker-Dealer to FUSI shall be
immediately due and payable to FUSI, notwithstanding any other terms of such
payments that may have been in effect during the term of this Agreement; and
(iv) the Broker-Dealer shall carry out all residual obligations, if any, which
arose while this Agreement was in effect.
(b) In the event that this Agreement is terminated by FUSI after
a breach by the Broker-Dealer of any of its representations and warranties or
covenants hereunder, then FUSI may offset against any amounts owed to the
Broker-Dealer hereunder an amount equal to (i) the damages, losses and expenses
(including reasonable attorneys' fees) incurred by FUSI as a result of such
breach and (ii) any amount that may be owed by the Broker-Dealer to FUSI under
Section 9, below.
7. CONFIDENTIALITY
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7.1 GENERALLY. Each party will hold the other party's Confidential
Information (as defined below) in confidence and will safeguard such
Confidential Information as provided herein. The party receiving Confidential
Information (a "Recipient") will not, directly or indirectly, report, publish,
distribute, disclose, or otherwise disseminate the Confidential Information, or
any portion thereof, to any individual or entity for any purpose, except as
necessary to perform such Party's duties hereunder, or as expressly authorized
in writing by the party providing the Confidential Information (the "Provider").
Disclosure of Confidential Information internally by the recipient thereof will
be limited to those of its officers, directors, employees and agents who are
required to have access to the Confidential Information to enable the party to
perform its duties hereunder. In order to safeguard Confidential Information,
the Recipient shall (a) inform each party to whom it discloses Confidential
Information of the confidential nature thereof and of the requirements of this
Agreement, (b) direct such recipients to comply with the terms of this
Agreement, and (c) exercise any other precautions reasonably necessary to
prevent any improper disclosure of such Confidential Information.
7.2 DEFINITION. For purposes of the Agreement, "Confidential
Information" shall mean information: (a) regarding the Provider's or any
affiliate of the Provider's financial condition, information systems, business
operations, plans and strategies, products or services, customers or prospective
customers, and marketing and distribution plans, methods and techniques; (b)
that is marked confidential, "proprietary" or in like words, or that is
indicated in writing as being
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confidential prior to or promptly after disclosure to the Recipient; and (c) any
and all research and designs, ideas, concepts, and technology embodied in the
items described in clauses 7.2(a) or (b). Information shall not be deemed to be
Confidential Information hereunder if that information (a) is or becomes
generally available to the public other than as a result of disclosure by the
Recipient; (b) was available to, or already known by the Recipient on a
non-confidential basis prior to its receipt from the Provider; (c) is developed
by the Recipient independently of any information or data acquired from the
Provider; or (d) is disclosed pursuant to a court order or the requirement of
any federal or state regulatory, judicial, or government authority.
7.3 REMEDIES. Each party acknowledges and agrees that monetary damages
would not be a sufficient or adequate remedy for a breach or anticipated breach
of this Section 7 and that, in addition to any other legal or equitable remedies
which may be available, each party shall be entitled to specific performance and
injunctive relief, without the posting of a bond, for any breach or anticipated
breach of this Section.
7.4 SURVIVAL. The provisions of this Section 7 shall survive the
expiration or other termination of this Agreement.
8. MODIFICATION OF AGREEMENT
This Agreement may not be modified in any way unless by written
agreement signed by both of the parties, except for any amendment of the
Schedule of Products pursuant to the terms of Section 3.5 hereof or of the
Schedule of Commissions pursuant to the terms of Section 1.2 hereof,
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which Schedules shall be deemed to be modified upon the giving by FUSI to the
Broker-Dealer of revised versions thereof.
9. INDEMNIFICATION
9.1 GENERAL. The Broker-Dealer will indemnify FUSI, each affiliate of
FUSI (as defined in Rule 405 under the 1933 Act), the Insurance Company, each
affiliate of the Insurance Company (as defined in Rule 405 under the 1933 Act),
and each of their shareholders, officers, directors, employees, agents and
attorneys (each an "Indemnified Party") against, and hold each Indemnified Party
harmless from and in respect of, all losses, damages, costs, (expenses including
reasonable attorneys' fees) judgments, fines, penalties, settlements resulting
from claims, demands, actions, cases, proceedings, suits or investigations
conducted by, or pending before any governmental agency or authority or any
arbitration proceeding based on, arising from, related to or otherwise
attributable to (a) any breach of the representations and warranties of the
Broker-Dealer set forth in this Agreement or (b) any nonfulfillment of any
covenant or agreement on the part of the Broker-Dealer under this Agreement.
9.2 CONDITIONS OF INDEMNIFICATION.
(a) All claims for indemnification under this Agreement shall be
asserted and resolved as provided in this Section 9.2. An Indemnified Party
claiming indemnification under this Agreement shall promptly (i) notify the
Broker-Dealer (in this Section 9, the "INDEMNIFYING
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PARTY") of any third-party claim or claims asserted against the Indemnified
Party (a "THIRD PARTY CLAIM") that could give rise to a right of indemnification
under this Agreement and (ii) transmit to the Indemnifying Party a written
notice ("Claim Notice") describing in reasonable detail the nature of the Third
Party Claim, a copy of all papers served with respect to that claim (if any),
and the basis for the Indemnified Party's request for indemnification under this
Agreement. The failure to promptly deliver a Claim Notice shall not relieve the
Indemnifying Party of its obligations to the Indemnified Party with respect to
the related Third Party Claim, except to the extent that the resulting delay is
materially prejudicial to the defense of that claim. Within fifteen (15) days
after receipt of any Claim Notice (the "Election Period"), the Indemnifying
Party shall notify the Indemnified Party (i) whether the Indemnifying Party
disputes its potential liability to the Indemnified Party under this Section 9
with respect to that Third Party Claim and (ii) if the Indemnifying Party does
not dispute its potential liability to the Indemnified Party with respect to
that Third Party Claim, whether the Indemnifying Party desires, at the sole cost
and expense of the Indemnifying Party, to defend the Indemnified Party against
that Third Party Claim.
(b) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party
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to a final conclusion or settled at the discretion of the Indemnifying Party in
accordance with this Section 9, and the Indemnified Party will furnish the
Indemnifying Party with all information in its possession with respect to that
Third Party Claim and otherwise cooperate with the Indemnifying Party in the
defense of that Third Party Claim; PROVIDED, HOWEVER, that the Indemnifying
Party shall not enter into any settlement with respect to any Third Party Claim
that purports to limit the activities of, or otherwise restrict in any way, any
Indemnified Party or any affiliate of any Indemnified Party without the prior
consent of that Indemnified Party (which consent may be withheld in the sole
discretion of that Indemnified Party). The Indemnified Party may participate in,
but not control, any defense or settlement of any Third Party Claim controlled
by the Indemnifying Party pursuant to this Section 9 and will bear its own costs
and expenses with respect to that participation; PROVIDED, HOWEVER, that if the
named parties to any such action (including any impleaded parties) include both
the Indemnifying Party and the Indemnified Party, and the Indemnified Party has
been advised by counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
Indemnifying Party, then the Indemnified Party may employ separate counsel at
the expense of the Indemnifying Party, and, on its written notification of that
employment, the Indemnifying Party shall not have the right to assume or
continue the defense of such action on behalf of the Indemnified Party.
(c) If the Indemnifying Party (i) within the Election Period (A)
disputes its potential liability to the Indemnified Party under this Section 9,
(B) elects not to defend the
22
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
Indemnified Party as described, above, or (C) fails to notify the Indemnified
Party that the Indemnifying Party elects to defend the Indemnified Party as
provided above, or (ii) elects to defend the Indemnified Party as provided,
above, but fails diligently and promptly to prosecute or settle the Third Party
Claim, then the Indemnified Party shall have the right to defend, at the sole
cost and expense of the Indemnifying Party (if the Indemnified Party is entitled
to indemnification hereunder), the Third Party Claim by all appropriate
proceedings, which proceedings shall be promptly and vigorously prosecuted by
the Indemnified Party to a final conclusion or settled. The Indemnified Party
shall have full control of such defense and proceedings. Notwithstanding the
foregoing, if the Indemnifying Party has delivered a written notice to the
Indemnified Party to the effect that the Indemnifying Party disputes its
potential liability to the Indemnified Party under this Section 9 and if that
dispute is resolved in favor of the Indemnifying Party, the Indemnifying Party
shall not be required to bear the costs and expenses of the Indemnified Party's
defense pursuant to this Section 9, or of the Indemnifying Party's participation
therein at the Indemnified Party's request, and the Indemnified Party shall
reimburse the Indemnifying Party in full for all reasonable costs and expenses
of such participation. The Indemnifying Party may participate in, but not
control, any defense or settlement controlled by the Indemnified Party pursuant
to this Section 9, and the Indemnifying Party shall bear its own costs and
expenses with respect to that participation.
(d) In the event any Indemnified Party should have a claim
against any Indemnifying Party hereunder that does not involve a Third Party
Claim, the Indemnified Party shall
23
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
transmit to the Indemnifying Party a written notice (the "Indemnity Notice")
describing in reasonable detail the nature of the claim, an estimate of the
amount of damages attributable to that claim to the extent feasible (which
estimate shall not be conclusive of the final amount of that claim) and the
basis of the Indemnified Party's request for indemnification under this
Agreement. If the Indemnifying Party does not notify the Indemnified Party
within fifteen (15) days from its receipt of the Indemnity Notice that the
Indemnifying Party disputes the claim specified by the Indemnified Party in the
Indemnity Notice, that claim shall be deemed a liability of the Indemnifying
Party hereunder. If the Indemnifying Party has timely disputed that claim, as
provided above, that dispute shall be resolved by proceedings in an appropriate
court of competent jurisdiction if the parties do not reach a settlement of that
dispute within thirty (30) days after notice of that dispute is given (the
"INDEMNITY NOTICE PERIOD").
(e) Payments of all amounts owing by an Indemnifying Party
pursuant to this Section 9 relating to a Third Party Claim shall be made
within thirty (30) days after the latest of (i) the settlement of that Third
Party Claim, (ii) the expiration of the period for appeal of a final
adjudication of that Third Party Claim and (iii) the expiration of the period
for appeal of a final adjudication of the Indemnifying Party's liability to
the Indemnified Party under this Agreement in respect of that Third Party
Claim. Payments of all amounts owing by an Indemnifying Party with respect to
claims other than Third Party Claims shall be made within thirty (30) days
after the later of the expiration of (i) the Indemnity Notice Period and (ii)
the expiration of the period for appeal
24
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
of a final adjudication of the Indemnifying Party's liability to the
Indemnified Party under this Agreement.
9.3 SURVIVAL. The provisions of this Section 9 shall survive the
expiration or other termination of this Agreement.
10. REMEDIES CUMULATIVE; NON-WAIVER. The rights and remedies of the parties
contained in this Agreement are cumulative and are in addition to any and all
rights and remedies at law or in equity, which the parties hereto are entitled
to under applicable law. Failure of either party to insist upon strict
compliance with any of the conditions of this Agreement shall not be construed
as a waiver of any of the conditions, but the same shall remain in full force
and effect. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provisions, whether or not
similar, nor shall any waiver constitute a continuing waiver.
11. MITIGATION OF LOSSES. In the event of any dispute between an owner
of a Product (a "Disputing Owner") and FUSI, the Insurance Company, the
Broker-Dealer, a Representative or any other party with respect to such
Product, FUSI shall have the right, with prior written notice and
consultation with the Broker-Dealer and the Insurance Company, to take such
action as FUSI may deem necessary to promptly effect a mitigation of damages
or limitation of losses, and without waiving or electing to relinquish any
rights or remedies FUSI may have against the Broker-Dealer, FUSI shall have
the right to settle any such dispute without the prior consent of the
Broker-Dealer
25
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
and without waiving or electing to relinquish any rights or remedies FUSI may
have against the Broker-Dealer.
12. GOVERNING LAW, ETC. This Agreement shall be governed by and construed
in accordance with the laws of North Carolina, without regard to choice of law
provisions, and the venue for all actions or proceedings brought by either party
to this Agreement arising out of or relating to this Agreement shall be in the
state or federal courts, as the case may be, located in Mecklenburg County,
North Carolina (collectively, the "Courts"). The Broker-Dealer hereby
irrevocably waives any objection which the Broker-Dealer now or hereafter may
have to the laying of venue of any action or proceeding arising out of or
relating to this Agreement brought in any of the Courts, and any objection on
the ground that any such action or proceeding in any of the Courts has been
brought in an inconvenient forum. In the event of any litigation between the
parties hereto with respect to this Agreement, the prevailing party therein
shall be entitled to receive from the other party all of such prevailing party's
expenses in connection with such litigation, including, but not limited, to
reasonable attorneys' fees.
13. NOTICES. Any notices or demands given in connection herewith shall be
in writing and deemed given when (i) personally delivered, (ii) sent by
facsimile transmission to a number provided in writing by the addressee and a
confirmation of the transmission is received by the sender or (iii) three (3)
days after being deposited for delivery with a recognized overnight courier,
such as
26
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
FedEx, and addressed or sent, as the case may be, to the address or facsimile
number set forth below or to such other address or facsimile number as such
party may in writing designate:
(a) TO FUSI:
Attention:
(b) TO THE BROKER-DEALER:
Attention:
14. ARBITRATION
14.1 Any disagreement, dispute, claim or controversy arising out of or
relating to this Agreement, performance hereunder or the breach hereof, or
otherwise arising between the Broker-Dealer and FUSI, shall be subject to
mandatory arbitration under the auspices, rules and bylaws of the NASD, to the
full extent applicable and as may be amended from time to time.
14.2 Where the NASD Code of Arbitration Procedure is not applicable,
any dispute between the Broker-Dealer and FUSI arising under or relating to this
Agreement shall be settled by compulsory arbitration before one arbitrator in
accordance with the Commercial Arbitration Rules then in force of the American
Arbitration Association. The arbitration shall take place in North Carolina,
unless the parties agree on another location. The arbitrator shall have no
authority to issue any decision or award for punitive damages or for treble or
any other type of multiple damages, consequential damages, or any compensatory
damages based on a claim of lost profits or similar claim. Each party shall bear
its own costs and expenses incurred by it in any such
27
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
arbitration, except that the parties shall bear the expenses of the arbitrator's
services equally. The provisions of this Section shall survive the expiration or
other termination of this Agreement.
15. ENTIRE AGREEMENT; CERTAIN TERMS. This Agreement, together with the
Schedules hereto, constitutes and contains the entire agreement of the parties
with respect to the matters addressed herein and supersedes any and all prior
negotiations, correspondence, understandings and agreements between the parties
respecting the subject matter hereof. No waiver of any rights under this
Agreement, nor any modification or amendment of this Agreement shall be
effective or enforceable unless in writing and signed by the party to be charged
therewith. When used in this Agreement, the terms "hereof," "herein" and
"hereunder" refer to this Agreement in its entirety, including the Schedules
attached to this Agreement, and not to any particular provisions of this
Agreement, unless otherwise indicated.
16. HEADINGS
The headings 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.
17. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which
together shall be deemed an original, but both of which together shall
constitute one and the same instrument.
28
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
18. SEVERABILITY. It is the intention of the parties hereto that any
provision of this Agreement found to be invalid or unenforceable be reformed
rather than eliminated. If any of the provisions of this Agreement, or any part
thereof, is hereinafter construed to be invalid or unenforceable, the same shall
not affect the remainder of such provision or the other provisions of this
Agreement, which shall be given full effect, without regard to the invalid
portions. In the event that the courts of any one or more jurisdictions shall
hold such provisions wholly or partially unenforceable by reason of the scope
thereof or otherwise, it is the intention of the parties hereto that such
determination not bar or in any way affect the parties' rights provided for
herein in the courts of any other jurisdictions as to breaches or threatened
breaches of such provisions in such other jurisdictions, the above provisions as
they relate to each jurisdiction being, for this purpose, severable into diverse
and independent covenants.
19. ASSIGNMENT Except as specifically set forth herein, the Broker-Dealer
may not assign any of its rights or obligations hereunder without the prior
written approval of FUSI.
29
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first indicated above.
FUSI
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
BROKER-DEALER
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Accepted and Agreed to
[Name of Insurance Company]
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
<TABLE>
<CAPTION>
SCHEDULE OF PRODUCTS
to
First Union Securities, Inc.
SELLING GROUP AGREEMENT
- --------------------------------------------------------------------------------
Policy/Certificate
Product Description Form
- --------------------------------------------------------------------------------
<S> <C> <C>
ValuPlus Assurance Registered Retail 1036-99
Variable Universal Life
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
SCHEDULE OF COMMISSIONS
to
First Union Securities, Inc.
SELLING GROUP AGREEMENT
I. PURPOSE
This Schedule of Commissions ("Schedule") is adopted pursuant to
Section 1.2 of the Selling Group Agreement (the "Agreement") and
governs the determination and payment by FUSI of commissions
("Compensation") to the Broker-Dealer in connection with premium
payments received under the products specified herein.
II. COVERED PRODUCTS
The only products covered by this Schedule ("Covered Products") are the
following:
COVERED PRODUCT POLICY FORM
ValuPlus Assurance 1036-99
III. COMPENSATION
The Compensation to the Broker-Dealer under this Selling Group
Agreement shall be as outlined below:
VABL
Year 1: 6.0%
Years 2-4: 6.0%
Years 5-10: 3.0%
32
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
Years 11+: 1.50%
The foregoing amounts shall be payable by FUSI within five (5) business
days after FUSI receives such amounts from the Insurance Company.
IV. CHARGEBACK OF COMPENSATION
A. The termination of a Covered Product (1) within twelve (12) months
of its date of issue will result in a charge-back of one hundred
percent (100%) of the Compensation paid to the Broker-Dealer respecting
the sale of the Covered Product if the Covered Product terminates for
reasons other than death; (2) seventy-five percent (75%) of the
compensation paid to the Broker-Dealer if a Covered Product terminates
for reasons other than death during the second twelve (12) months
following issue; (3) fifty percent (50%) of the Compensation paid to
the Broker-Dealer if a Covered Product terminates for reasons other
than death during the third twelve (12) months following issue; (4)
twenty five percent (25%) of the Compensation paid to the Broker-Dealer
if a Covered Product terminates for reasons other than death during the
fourth twelve (12) months following issue; and (5) nothing from the
Broker-Dealer (i.e., no charge back) if the Covered Product terminates
thereafter. However, notwithstanding any other provision of the
Agreement, if termination of a Covered Product at any time is due to
the willful or negligent wrongful actions or representations of the
Broker-Dealer or any Representative, FUSI reserves the right to recover
one hundred (100%) of the Compensation paid to the Broker-Dealer
respecting the sale of the Covered Product.
In the event a Covered Product owner makes a withdrawal from or
partially surrenders a Covered Product within forty-eight (48) months
following its date of issue, the charge back rules described in the
preceding paragraph shall apply, except that the amount of the charge
back shall be pro-rated. Any such pro-rated charge back shall be
determined in accordance with the following formula:
Charge Back = Charge Back Percentage* x Withdrawal Amount
-----------------
Covered Product
Cash Value**
*100% year one; 75% year two; 50% year three; 25% year four
**determined as of the date of the withdrawal
33
<PAGE>
ALLMERICA DRAFT
MARCH 16, 2000
B. Compensation charge-backs will be due within 60 days of notification
by FUS. Compensation will be charged back by credit against
Compensation to be paid in the future and/or by requiring cash
repayment to be made by the Broker-Dealer.
V. MODIFICATIONS AND TERMINATION
A. No Compensation shall be paid on Covered Products that are changed
from their original version, either under a policy provision or
otherwise, or on Covered Products that are issued using cash values of
Insurance Company policies, either under a policy provision or
otherwise.
B. Except as otherwise provided in the Agreement, termination of the
Agreement for any reason shall not impair the right of the
Broker-Dealer to receive Compensation accrued and payable on account of
premium received under Covered Products issued on applications procured
by the Broker-Dealer, or by Representatives operating under supervision
of the Broker-Dealer, prior to the termination of the Selling Group
Agreement.
VI. APPLICABILITY
This Schedule supersedes and replaces any and all previous Schedules of
Commissions and Allowances.
34
<PAGE>
<TABLE>
<S> <C>
FIRST ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY
[LOGO] ALLMERICA FINANCIAL-Registered Trademark- "ALLMERICA FINANCIAL"
VALUPLUS ASSURANCE VARIABLE IMMEDIATE ANNUITY APPLICATION 440 Lincoln Street, Worcester, MA 01653
- -----------------------------------------------------------------------------------------------------------------------------------
PLEASE PRINT CLEARLY
- ---------------------------------------------------------------- -----------------------------------------------------------------
1. OWNER JOINT OWNER
- ---------------------------------------------------------------- -----------------------------------------------------------------
Name ___________________________________________________________ Name ____________________________________________________________
First MI Last First MI Last
Address ________________________________________________________ Address ________________________________________________________
City _________________________ State ____________ Zip __________ City _________________________ State ____________ Zip __________
Social Security/Tax ID# ____________________ / / Male / / Female Social Security ____________________________ / / Male / / Female
Daytime Phone ( ) __________ Date of Birth/Trust ___/___/___ Daytime Phone ( ) _____________ Date of Birth ___/___/___
- ---------------------------------------------------------------- -----------------------------------------------------------------
2. ANNUITANT* JOINT ANNUITANT*
- ---------------------------------------------------------------- -----------------------------------------------------------------
Name ___________________________________________________________ Name ____________________________________________________________
First MI Last First MI Last
Social Security # _________________________ / / Male / / Female Social Security # __________________________ / / Male / / Female
Date of Birth ___/___/___ Date of Birth ___/___/___
*Birth Certificate for Annuitant and Joint Annuitant is required.
- -----------------------------------------------------------------------------------------------------------------------------------
3. BENEFICIARY Primary Beneficiary is Always the Surviving Jonit Owner, if any
- -----------------------------------------------------------------------------------------------------------------------------------
1st Contingent(s) Relationship to Owner 2nd Contingent(s) Relationship to Owner
- -----------------------------------------------------------------------------------------------------------------------------------
Relationship to Owner Relationship to Owner
- -----------------------------------------------------------------------------------------------------------------------------------
4. SINGLE PURCHASE PAYMENT
- -----------------------------------------------------------------------------------------------------------------------------------
Single Purchase Payment $___________________________________________________________________________
If multiple checks are received separate certificates may be issued.
- -----------------------------------------------------------------------------------------------------------------------------------
5. TYPE OF PLAN TO BE ISSUED
- -----------------------------------------------------------------------------------------------------------------------------------
/ / Non Qualified / / IRA If IRA, Roth IRA or SEP-IRA this payment is a:
/ / 401(a)* / / Roth IRA* / / Rollover / / Trustee to Trustee Transfer
/ / 401(k)* / / SEP-IRA* / / Conversion
/ / 403(b) TSA*
*Attach required forms Existing Case #________________________
- -----------------------------------------------------------------------------------------------------------------------------------
6. REPLACEMENT
- -----------------------------------------------------------------------------------------------------------------------------------
Will the proposed certificate replace or change an existing annuity or life insurance policy? / / No / / Yes*
If yes, list company name(s) and policy number(s). *Attach required forms
___________________________________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
7. SINGLE PURCHASE PAYMENT ALLOCATION
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED AND VARIABLE MUST EQUAL 100%
How much of your purchase payment would you like allocated to the Fixed Income Option? _________%
How would you like the remainder allocated under the Variable Income Option?
___% AIM V.I. Capital Appreciation Fund ___% Dreyfus Socially Responsible ___% Templeton Asset Strategy Fund
___% AIM V.I. Value Fund Growth Fund ___% Templeton International Securities Fund
___% AIT Money Market Fund ___% Evergreen VA Equity Index Fund ___% MFS Growth with Income Series
___% Alger American Growth Portfolio ___% Evergreen VA Foundation Fund ___% MFS Utilities Series
___% Alger American Small Capitalization ___% Evergreen VA Global Leaders Fund ___% Oppenheimer Main Street Growth &
Portfolio ___% Evergreen VA Small Cap Value Fund Income Fund/VA
___% Alger American Leveraged AllCap Portfolio ___% Federated American Leaders Fund II ___% Oppenheimer Small Cap Growth Fund/VA
___% Dreyfus VIF Appreciation Portfolio ___% Federated High Income Bond Fund II ___% Oppenheimer Strategic Bond Fund/VA
___% Dreyfus VIF Quality Bond Portfolio ___% Federated Prime Money Fund II
11591NY [BAR CODE]
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
8. ANNUITY BENEFIT OPTION
- -----------------------------------------------------------------------------------------------------------------------------------
1. / / Payment for Certain Number of Years: _______________ years (3 - 30)
2. / / Life Annuity
/ / Single Life / / Joint Lives with Survivor Benefit of: / / 100% / / 66 2/3% / / 50%
Payment Guarantee: / / None / / Certain Number of Years: _______________ years (3 - 30) / / Cash Back
3. If Variable Income Option is selected in Section 7 you must choose:
Assumed Investment Return: / / 3% / / 5%
- -----------------------------------------------------------------------------------------------------------------------------------
9. PAYEE
- -----------------------------------------------------------------------------------------------------------------------------------
If annuity payment is to be made to someone other than Owner(s), indicate name and address below.
___________________________________________________________________________________________________________________________________
NOTE: Tax liabilities are the responsibility of the Owner(s).
- -----------------------------------------------------------------------------------------------------------------------------------
10. ANNUITY INCOME DATE
- -----------------------------------------------------------------------------------------------------------------------------------
A. Date of first payment (must be between 30 days and 12 months from issue date) _____ /_____ /_____
(the day must be the 1st through 28th only) month day year
Payment Mode: / / Monthly / / Quarterly / / Semiannually / / Annually
Issue date is the date money is applied to the contract. If no money is submitted at the time of application the payment date
will be 30 days from the date the money is applied to the contract.
B. If Variable Income Option is selected in Section 7:
1. How frequently would you like the amount of your annuity payment to change?
/ / Monthly / / Quarterly / / Semiannually / / Annually
2. The amount of your annuity payment will change for the first time one cycle after the date of first payment.
If you would like it to change sooner please indicate the month. ____________________
- -----------------------------------------------------------------------------------------------------------------------------------
11. AUTOMATIC ACCOUNT REBALANCING (AAR)
- -----------------------------------------------------------------------------------------------------------------------------------
I/We elect Automatic Account Rebalancing of the Variable allocation selected in Section 7 every: / / 1 / / 2 / / 3 / / 6
/ / 12 Months
- -----------------------------------------------------------------------------------------------------------------------------------
12. REMARKS
- -----------------------------------------------------------------------------------------------------------------------------------
___________________________________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
13. SIGNATURES
- -----------------------------------------------------------------------------------------------------------------------------------
I/We represent to the best of my/our knowledge and belief that the statements made in this application are true and complete.
I/We agree to all terms and conditions as shown on this application. It is indicated and agreed that the only statements which
are to be construed as the basis of the certificate are those contained in this application. I/We acknowledge receipt of a current
prospectus describing the certificate applied for. If IRA, Roth IRA, or SEP-IRA application, I/we received a Disclosure Buyer's
Guide. I/WE UNDERSTAND THAT ALL ANNUITY PAYMENTS BASED ON THE VARIABLE INCOME OPTION MAY FLUCTUATE AND ARE NOT GUARANTEED AS TO
DOLLAR AMOUNTS. Annuities are not FDIC insured. Annuities are not obligations of the financial institution. The financial
institution does not guarantee performance by the insurer issuing the annuity. Variable annuities involve investment risk,
including potential loss of principal.
____________________________________________________________________________________________
Signature of Owner Signed at (City and State) Date
[NO-BANK LOGO] [NO-FDIC LOGO]
____________________________________________________________________________________________
Signature of Joint Owner Signed at (City and State) Date
- -----------------------------------------------------------------------------------------------------------------------------------
14. REGISTERED REPRESENTATIVE INFORMATION
- -----------------------------------------------------------------------------------------------------------------------------------
Does the certificate applied for replace an existing annuity or life insurance policy? / / Yes / / No
If yes, attach replacement forms as required.
I CERTIFY THAT (1) THE INFORMATION PROVIDED BY THE OWNER(S) HAS BEEN ACCURATELY RECORDED; (2) A CURRENT PROSPECTUS WAS
DELIVERED; (3) NO WRITTEN SALES MATERIAL OTHER THAN THOSE APPROVED BY THE PRINCIPAL OFFICE WERE USED; AND (4) I HAVE REASONABLE
GROUNDS TO BELIEVE THE PURCHASE OF THE CERTIFICATE APPLIED FOR IS SUITABLE FOR THE OWNER(S).
__________________________________________________________________________________________________________________________________
Signature of Authorized Representative Print Name of Authorized Representative Telephone #
__________________________________________________________________________________________________________________________________
TR Code Social Security # Authorized Representative # Email Address
__________________________________________________________________________________________________________________________________
Name of Broker/Dealer or Bank Branch #
__________________________________________________________________________________________________________________________________
Branch Office Street Address for Contract Delivery City State Zip
11591NY FUIT
</TABLE>
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
J. Kendall Huber, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each
of them singly, our true and lawful attorneys, with full power to them and each
of them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by First Allmerica Financial Life Insurance
Company, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and with any
other regulatory agency or state authority that may so require, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director, President and Chief Executive 4/2/2000
- ------------------------------------- Officer --------
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 4/2/2000
- ------------------------------------- --------
Bruce C. Anderson
/s/ Mark R. Colborn Director and Vice President 4/2/2000
- ------------------------------------- --------
Mark R. Colborn
/s/ John P. Kavanaugh Director, Vice President and 4/2/2000
- ------------------------------------- Chief Investment Officer --------
John P. Kavanaugh
/s/ J. Kendall Huber Director, Vice President and 4/2/2000
- ------------------------------------- General Counsel --------
J. Kendall Huber
/s/ J. Barry May Director 4/2/2000
- ------------------------------------- --------
J. Barry May
/s/ James R. McAuliffe Director 4/2/2000
- ------------------------------------- --------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, and Chief Financial 4/2/2000
- ------------------------------------- Officer --------
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 4/2/2000
- ------------------------------------- --------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 4/2/2000
- ------------------------------------- --------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 4/2/2000
- ------------------------------------- --------
Eric A. Simonsen
</TABLE>
<PAGE>
SERVICE AGREEMENT
THIS AGREEMENT, made as of the 1st day of January, 2000 (the "Effective
Date"), by and between Allmerica Financial Life Insurance and Annuity Company
and First Allmerica Financial Life Insurance Company (hereinafter collectively
referred to as "Allmerica"), having its principal office and place of business
at 440 Lincoln Street, Worcester, MA 01653 ("Principal Office") and Templeton
Funds Annuity Company ("TFAC"), having its principal office and place of
business at 100 Fountain Parkway, St. Petersburg, FL 33716-1205.
RECITALS:
WHEREAS, Allmerica desires to retain TFAC to provide those Consulting &
Call Center Services and limited Administrative Services described in Exhibit A
(collectively, the "Services"), which is attached hereto and made a part hereof,
for its Allmerica Immediate Advantage Variable Annuity contracts ("Contracts");
WHEREAS, TFAC desires to provide the Services for the Contracts;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE I: APPOINTMENT
1.01 RETAINER. Subject to the terms and conditions set forth in this Agreement,
Allmerica hereby retains TFAC to perform the Services.
1.02 ACCEPTANCE. TFAC hereby agrees that on and after the Effective Date, upon
the terms and conditions set forth hereinafter, it will perform the Services.
ARTICLE II: TERM
2.01 Initial Term; Renewal Term. Unless earlier terminated as provided in
Article XIII, this Agreement shall remain in full force and effect for a period
of two (2) years from the Effective Date (the "Initial Term"). This Agreement
shall continue in full force and effect for succeeding 1-year renewal periods
(each such additional 1-year period being a "Renewal Term") until terminated as
herein provided or until a party to this Agreement notifies the other party that
there will not be a Renewal Term three months prior to the date such Renewal
Term would otherwise begin. Notwithstanding any other section of this Agreement,
both parties agree that TFAC shall provide the Administrative Services through
and including March 31, 2000, although TFAC may provide Administrative Services
after March 31, 2000 if otherwise agreed to by the parties in writing upon such
specified terms.
1
<PAGE>
ARTICLE III: DEFINITIONS
3.01 DEFINITIONS. For purposes of this Agreement:
(a) "affiliate" means a person that directly, or indirectly
through one or more intermediaries, controls, is controlled by
or is under common control with another person or beneficially
owns or has the power to vote or direct the vote of
twenty-five percent (25%) or more of any class of voting stock
(or of any form of voting equity interest in the case of a
person that is not a corporation) of such other person. For
purposes of this definition, "control", including the terms
"controlling" or "controlled", means the power to direct or
cause the direction of the management and policies of a
person, directly or indirectly, whether through the ownership
of securities or partnership or other ownership interests, by
contract or otherwise;
(b) "Administrative Services" means those services as defined in
Section I of Exhibit A;
(c) "Consulting & Call Center Services" means those services as
defined in Section II of Exhibit A;
(d) the terms "Contract" and "Contracts" are interchangeable where
appropriate and refer to any Allmerica Immediate Advantage
Variable Annuity, Form A3029-99 and any state variation
thereof, issued during any Term of this Agreement and any
other Allmerica annuity products identified on Schedule 1 to
this Agreement;
(e) "Contract Value" means an amount equal to the present value of
all future annuity payments discounted by the Assumed
Investment Return ("AIR"), for variable income options or
interest rate for fixed income options and the mortality rate
used to determine the annuity payments;
(f) "customer" or "contractholder" means a person who owns an
Allmerica Immediate Advantage Variable Annuity or other
Contract as defined above, issued by Allmerica;
(g) "Effective Date" means January 1, 2000;
(h) "person" means a natural person, corporation, partnership,
association, joint stock company, governmental entity,
business trust, unincorporated organization or other legal
entity;
(i) "Event of Bankruptcy" means either party becomes or is
declared insolvent or bankrupt, is the subject of any
proceedings relating to its liquidation or insolvency, makes
an assignment for the benefit of all or substantially all of
its creditors, or enters into an agreement for the
continuation, extension, or readjustment of all or
substantially all of its obligations;
(j) "Franklin Templeton Funds" means mutual funds for which an
affiliated person of TFAC serves as the investment advisor or
distributor;
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(k) "Reasonable Travel Expenses" shall mean, but not be limited
to, reimbursement for coach class air travel, rental car,
mileage, hotel and meal expenses incurred in providing the
Services; and
(l) "Service Fee" means those fees as defined in Section 4.01.
ARTICLE IV: COMPENSATION
4.01 FEES. Beginning on the Effective Date of this Agreement and during the
Initial Term and each Renewal Term, Allmerica shall pay to TFAC a Service Fee
determined on the last day of each month and payable in arrears by the 15th day
of the subsequent month. The monthly Service Fee will be the greater of (a)
$30,000 plus Reasonable Travel Expenses minus (i) 0.03% multiplied by the total
Contract Value of all Contracts, and (ii) 1/12 of 0.3% of the total assets in
the Franklin Templeton Funds offered in any Allmerica multi-manager products
(see Section 14.10), or (b) 0.03% multiplied by the total Contract Value of all
Contracts.
The total Contract Value for the period of time during which TFAC is providing
the Administrative Services shall be determined solely by TFAC. Thereafter, TFAC
shall calculate the Service Fee and submit any supporting figures and
calculations to Allmerica and Allmerica's actuaries shall review the Service Fee
figure for accuracy.
In addition to the monthly Service Fee described above, Allmerica shall pay TFAC
for any reasonable actuarial fees and reasonable out-of-pocket expenses incurred
in providing Administrative Services under this Agreement and expenses incurred
modifying the TFAC System pursuant to Section 7.05.
Allmerica will pay any unpaid fees incurred to date within 30 days of the date
this Agreement is executed by the parties.
4.02 EXPENSES. Each party shall be responsible for any charges or expenses
incurred in providing the Services or performing its duties under this Agreement
except as otherwise indicated in this Agreement.
4.02 RENEWAL TERM. For each Renewal Term, TFAC shall be entitled to receive the
same fees as for the prior term, unless the parties have agreed upon new fees
and charges in writing. Except as relating to the Administrative Services, TFAC
shall give Allmerica written notice six (6) months prior to the end of any term
hereof if TFAC intends, effective at the start of the next Renewal Term, to
increase its fees or to change the manner of payment for such fees.
ARTICLE V: REPRESENTATIONS AND WARRANTIES OF TFAC
TFAC represents and warrants to Allmerica as follows:
5.01 ORGANIZATION; STANDING. As of the Effective Date, TFAC is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida.
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5.02 AUTHORITY. TFAC has the requisite corporate power and authority to execute
and deliver this Agreement and to provide the Services contemplated hereunder.
No additional corporate action is required to authorize TFAC to execute and
deliver this Agreement or to perform the Services.
5.03 NO VIOLATION. Neither the execution and delivery of this Agreement nor the
provision of the Services will conflict with or violate: (a) any provision of
TFAC's certificate of incorporation or bylaws; (b) any applicable law or
regulation; or (c) the terms of any contract to which TFAC is a party.
5.04 PERSONNEL. With regard to the Consulting & Call Center Services, TFAC
represents and warrants that it has sufficient qualified personnel, equipment,
and suppliers to perform such services in a timely fashion under this Agreement.
ARTICLE VI: REPRESENTATIONS AND WARRANTIES OF ALLMERICA
Allmerica represents and warrants to TFAC as follows:
6.01 ORGANIZATION; STANDING. As of the Effective Date, Allmerica Financial Life
Insurance and Annuity Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. As of the
Effective Date, First Allmerica Financial Life Insurance Company is a
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Massachusetts.
6.02 AUTHORITY; COMPLIANCE. Allmerica has the requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. No additional corporate action or
Broker-Dealer approval is required to authorize Allmerica to execute and deliver
this Agreement or to consummate the transactions contemplated hereby. All data
and other information supplied to TFAC by Allmerica was and will be true and
correct when supplied and Allmerica will promptly update such data and
information in writing to TFAC when it becomes erroneous or misleading.
6.03 NO VIOLATION. Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated herein, conflict with or violate:
(a) any provision of Allmerica's certificates of incorporation or bylaws; (b)
any applicable law or regulation; or (c) the terms of any contract to which
Allmerica is a party.
ARTICLE VII: RESPONSIBILITIES OF TFAC
7.01 GENERAL. TFAC shall perform the Services upon the terms and conditions set
forth herein for the Contracts within the time frames and Service Standards
specified in Exhibit A-1. The Administrative Services may be delegated by TFAC
to an outside actuary who will represent to TFAC that he will maintain his
equipment and systems (such as computer data, software and databases)(equipment
and systems are collectively referred to as the "TFAC System") in good operating
condition. TFAC shall, nevertheless, have the right, at any time, and from time
to time, to alter or modify any system, programs, procedures or facilities used
or employed in performing its duties and obligations hereunder, provided that no
such alteration or modification shall, without the consent of Allmerica which
shall not be unreasonably withheld, materially and adversely change or affect
the operations and procedures of Allmerica in using or employing the TFAC System
hereunder. The parties
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understand and agree that the Administrative Services to be performed by TFAC
are based on a limited volume of Contracts.
7.02 ADDITONAL REQUIREMENTS IN CERTAIN STATES . In those states for which such
is required, TFAC will provide, at Allmerica's expense, a written notice
approved by Allmerica to contractholders advising them of the identity of and
relationship among TFAC, the contractholder and Allmerica, or of whatever other
matters, applicable laws and regulations may from time to time require, provided
in all cases Allmerica so advises TFAC.
7.03 CONSULTING & CALL CENTER SERVICES. For the Service Fees discussed herein,
TFAC shall provide Consulting & Call Center Services to Allmerica concerning
immediate variable annuities, variable product market development, sales
support, Allmerica personnel training, industry standards, product development
and implementation.
7.04 SECURITY. In the performance of the Services, TFAC shall establish and
maintain facilities and procedures, including disaster recovery procedures, for
the safekeeping of Allmerica contracts, applications, forms, and all documents,
reports, records, books, files and other materials relative to this Agreement.
TFAC agrees to make available a description of such facilities and procedures.
TFAC may amend, modify, replace or eliminate any of such facilities or
procedures from time to time provided no such action would, in its reasonable
business judgment, jeopardize the quality and security of its performance of the
Services.
7.05 COMPLIANCE. Provided Allmerica timely informs TFAC of changes in laws or
regulations that affect the administration of the Contracts, TFAC shall, at
Allmerica's expense, within a commercially reasonable period modify the TFAC
System to the extent required in order to assure that its administration of the
Contracts, including the reports, data and output produced in the course of such
administration, remains in compliance with such amended laws and regulations.
TFAC will timely inform Allmerica of the expenses incurred by TFAC in amending
the TFAC System at Allmerica's request.
7.06 LIMITATION. TFAC shall have no authority, nor shall it represent itself as
having such authority, other than as specifically set forth in this Agreement.
Without limiting the generality of the foregoing sentence, TFAC specifically
agrees that it will not do either of the following without the prior written
consent of Allmerica which shall not be unreasonably withheld:
(a) Institute or prosecute any legal proceedings against any third party
(other than any third party who has contracted directly with TFAC) in
connection with any matter pertaining to the Services provided
pursuant to this Agreement or Allmerica's business or accept service
of process, on behalf of Allmerica.
(b) Waive, amend, modify, alter, terminate or change any term, provision
or condition stated in the Contracts or discharge any Contract in the
name of TFAC.
ARTICLE VIII: RESPONSIBILITIES OF ALLMERICA
8.01 GENERAL. Allmerica shall, in a timely fashion, provide TFAC with all
materials and information necessary for the timely and proper administration and
servicing of the Contracts including, but not
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limited to Contract forms, applications, data records, actuarial support,
underlying unit values and mortality rates. Additionally, Allmerica shall
perform certain activities as outlined in Exhibit A hereto.
8.02 COMPLIANCE. To enable TFAC to amend the TFAC System so that its output
complies with all applicable laws and regulations, Allmerica shall promptly
inform TFAC in writing of all changes in such laws or regulations that affect
the Contracts. Allmerica will pay all expenses incurred by TFAC in amending the
TFAC System as requested by Allmerica within ten (10) days of receiving written
notice from TFAC of such expenses.
ARTICLE IX: INDEMNITY
In addition to any rights and remedies available under other provisions of this
Agreement, the parties shall have the following rights and obligations.
9.01 BY ALLMERICA. Except as otherwise expressly provided in this Agreement,
Allmerica shall indemnify and hold TFAC and its affiliates harmless from and
against any and all liabilities, losses and damages incurred, expenses
reasonably incurred (including fees of attorneys and other professional advisors
and of expert witnesses) and judgments, settlements and court costs (all of the
foregoing being referred to collectively hereinafter as "TFAC Damages and
Claims") which arise out of or are attributable to Allmerica's gross negligence
or willful or criminal misconduct in performing its obligations under this
Agreement, including without any intended limitation, TFAC Damages or Claims
attributable to:
(a) Allmerica's breach of any representation or warranty under Article VI
or of any covenant under Article VIII, or XI; or
(b) TFAC's reliance on or implementation of any written instructions
provided by Allmerica.
9.02 BY TFAC. Except as otherwise expressly provided in this Agreement, TFAC
shall indemnify and hold Allmerica and its affiliates harmless from and against
any and all liabilities, losses and damages incurred, expenses reasonably
incurred (including fees of attorneys and other professional advisors and of
expert witnesses) and judgments, settlements and court costs (all of the
foregoing being referred to collectively hereinafter as "Allmerica Damages and
Claims") which arise out of or are attributable to TFAC's gross negligence or
willful or criminal misconduct in providing the Services and performing its
other obligations under this Agreement, including without any intended
limitation Allmerica Damages or Claims attributable to:
(a) TFAC's breach of any representation or warranty under Article V or of
any covenant under Article VII or XI; or
(b) TFAC's failure to properly implement any written instructions provided
by Allmerica, unless such instructions were inconsistent with the
terms of this Agreement, and such failure amounted to a unilateral
amendment of such terms of the Agreement, or were unreasonable.
Allmerica expressly acknowledges that the Administrative Services
provided under this Agreement are particularly limited and defers to
TFAC's judgement as to whether TFAC is capable of implementing any
written instructions provided by Allmerica relating to the
Administrative Services.
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9.03 PROCESSING LIABILITY. Subject to the provisions of 9.01 and 9.02, in the
event of any liability incurred by Allmerica or TFAC as a result of a Contract
processing error made by TFAC, TFAC shall be liable for 30% of such amount and
Allmerica shall be liable for 70% of such amount. For purposes of calculating
processing errors, both parties understand and agree that liabilities shall only
mean and include amounts legally required to be payable or creditable to
contractholders and their beneficiaries and shall not include internal costs
incurred by either party to correct such errors.
ARTICLE X: STANDARD OF CARE
10.01 GENERAL. TFAC shall comply in all material respects with all applicable
laws and regulations in providing the Services of which Allmerica provides
notice to TFAC.
ARTICLE XI: CONFIDENTIALITY & OWNERSHIP OF SERVICES AND CONTRACT INFORMATION
11.01 BY TFAC. TFAC acknowledges that all documents, reports, records, books,
files and other materials relative to Allmerica, its business and its
contractholders shall be the sole property of Allmerica and that such property
shall be held by TFAC as agent during the term of this Agreement and returned to
Allmerica upon request and/or termination of this Agreement at Allmerica's
expense, except that TFAC may retain copies of such materials. TFAC will not
destroy any documents or data that belong to Allmerica or are related to the
Services provided under this Agreement or the Contracts. Except as provided
below, all information furnished by Allmerica to TFAC relating to the Contracts
is confidential and neither TFAC nor any of its affiliates, agents or
representatives shall disclose any such information, directly or indirectly, to
any third party except to the extent required by law to make such disclosure.
11.02 BY ALLMERICA. Allmerica acknowledges that: (a) TFAC and certain other
persons may have proprietary rights in and to the TFAC System; and (b) that the
TFAC System may constitute and/or contains confidential material and trade
secrets of TFAC, its affiliates or unrelated persons, including any individual
or entity to which TFAC delegates duties. Accordingly, Allmerica agrees to
maintain the confidentiality of the TFAC System. Further, Allmerica acknowledges
that this Agreement in no way gives Allmerica any rights in or to the TFAC
System and that, except as provided below, all information furnished by TFAC to
Allmerica hereunder is confidential and neither Allmerica nor any of its
affiliates, agents or representatives shall disclose any such information,
directly or indirectly, to any third party except to the extent required by law
to make such disclosure.
11.03 BY BOTH PARTIES. Both parties acknowledge and agree that:
(a) the Service Fee structure under this Agreement, attached Exhibits and
Schedules are confidential and proprietary and such terms thereof
shall not be shared with any person other than those persons who have
a need to know in order to enable Allmerica or TFAC to perform their
obligations under this Agreement and which persons are employees,
advisors, representatives or agents of Allmerica, TFAC or the
affiliates of either;
(b) during the term of the Agreement and thereafter each party hereto
shall not, directly or indirectly, or through any third party utilize
confidential information obtained pursuant to this
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Agreement to recruit or attempt to recruit any Allmerica (in the case
of TFAC) or TFAC (in the case of Allmerica) insurance agents, brokers,
general agents or other producers; and
(c) all records, data, documents, reports, files and other material
generated in providing the Services shall be the sole property of
Allmerica. Upon termination of any part of this Agreement, TFAC agrees
to provide Allmerica, at Allmerica's expense, with a copy of all
records, data, documents, reports, files and other material maintained
or created to perform the Services and administer the Contracts.
11.04 Exceptions. Anything herein to the contrary notwithstanding, the following
information shall not be deemed confidential for purposes of this Article:
(a) information which is already public knowledge or becomes generally
available to the public other than as a result of a disclosure by the
party alleged to have violated this Article;
(b) information which becomes available to a party on a non-confidential
basis from a source (other than the party which is the subject of such
information) which is not bound by a confidentiality agreement with
the party to whom such information pertains or whom the party alleged
to have breached this Article has no reason to know is so bound; or
(c) information which, prior to disclosure thereof by the non-breaching
party, is in possession of the party alleged to have breached this
Article.
11.05 INJUNCTIVE RELIEF. Both parties acknowledge that the breach of this
Article XI by either of them could cause the non-breaching party irreparable
harm not compensable by monetary damages. Accordingly, the parties agree that
the breach or threatened breach of this Article by either of them shall entitle
the non-breaching party to injunctive relief, in addition to any other available
remedies.
ARTICLE XII: ACCESS TO RECORDS AND INFORMATION
12.01 BY ALLMERICA. Upon reasonable notice to TFAC, Allmerica shall have access,
during normal business hours, to all documents, records, books, files and other
materials relative to this Agreement and maintained by TFAC, subject to
Allmerica's adherence to TFAC's security practices and procedures.
12.02 AUDITORS AND REGULATORS. Allmerica and its duly authorized independent
auditors shall have the right upon reasonable notice to TFAC and at reasonable
frequencies during TFAC's normal business hours to perform on-site examinations,
inspections and audits of records and accounts directly pertaining to the
Contracts or Services provided hereunder. At the request of Allmerica, TFAC
shall make available to Allmerica, its auditors and representatives of
regulatory agencies, all business records, activities, procedures or operations
of TFAC that are reasonably related to the Services provided under this
Agreement, including the right to interview any TFAC personnel involved in
providing or supporting the Services.
If Allmerica determines, in consultation with TFAC, following an audit that
errors have been made in TFAC's records, procedures or operations, TFAC will
make prompt correction and forward evidence of such corrections to Allmerica.
TFAC will make all such corrections as soon as reasonably possible.
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ARTICLE XIII: TERMINATION
13.01 RIGHT TO TERMINATE. Subject to Sections 13.02 and 13.03, after the Initial
Term either party may terminate this Agreement at any time upon three (3) months
written notice to the other party. In addition, the Agreement may be terminated
by mutual consent of the parties in writing at any time.
13.02 DEFAULT. If either of the parties hereto materially breaches this
Agreement or is materially in default in the performance of any of its duties
and obligations hereunder (the "Defaulting Party"), the other party hereto may
give written notice thereof to the Defaulting Party and if such default or
breach shall not have been remedied to the non-defaulting party's reasonable
satisfaction within sixty (60) days after such written notice is given, then, at
the non-defaulting party's option, this Agreement shall terminate at the end of
such sixty (60) day period. At its option, either party hereto may also
terminate this Agreement without prior notice and be relieved of its obligations
under this Agreement in the event the other party experiences an Event of
Bankruptcy, as defined in Article III, that impairs the financially impaired
party from performing its duties under this Agreement.
13.03 NON-WAIVER. Termination of this Agreement due to default or breach by
Allmerica shall not constitute a waiver of any rights of TFAC in reference to
Services performed prior to such termination. Termination of this Agreement due
to default or breach by TFAC shall not constitute a waiver by Allmerica of any
rights it might have under this Agreement.
ARTICLE XIV: MISCELLANEOUS
14.01 ASSIGNMENT. Neither this Agreement nor any rights or obligations
hereunder, other than as specified in Sections 7.01 and 11.02, may be assigned
by either party hereto without the prior written consent of the other, which
consent shall not be unreasonably withheld.
14.02 DISPUTE RESOLUTION.
(a) The parties to this Agreement understand and agree that the
implementation of this Agreement will be enhanced by the timely and
open resolution of any disputes or disagreements between such parties.
Each party hereto agrees to use its best efforts to cause any disputes
or disagreements between such parties to be considered, negotiated in
good faith and resolved as soon as possible. In the event that any
dispute or agreement between the parties involving damages or claims of
less than or equal to TWENTY THOUSAND DOLLARS ($20,000.00) cannot be
resolved to the satisfaction of the parties within twenty (20) days
after either party has notified the other in writing of the need to
resolve such dispute or disagreement, then such dispute or disagreement
shall be immediately referred to a senior officer at Allmerica and TFAC
for consideration.
(b) All disputes and disagreements between the parties involving
damages and claims of more than TWENTY THOUSAND DOLLARS ($20,000.00) or
those disputes and disagreements that were not resolved in Section
14.02(a) will be decided by arbitration, regardless of the insolvency
of either party, unless the conservator, receiver, liquidator, or
statutory successor is specifically exempted from an arbitration
proceeding by applicable state law. Either party may initiate
arbitration by providing written notification to the other party, if
any dispute is not satisfactorily resolved within ninety (90) days
following written notice of the substance of the
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dispute to the other party. Such written notice shall set forth a brief
statement of the issue(s), the failure of the parties to reach
agreement, and the date of the demand for arbitration.
An arbitration panel shall be chosen consisting of three arbitrators. The
arbitrators must be impartial and must be or must have been officers of life
insurance or financial services companies other than the parties or their
affiliates. Each party shall select an arbitrator within thirty (30) days from
the date of the demand. If either party shall refuse or fail to appoint an
arbitrator within the time allowed, the party that has appointed an arbitrator
may notify the other party that, if it has not appointed its arbitrator within
the following ten (10) days, the arbitrator will appoint an arbitrator on its
behalf. The two arbitrators shall select a third arbitrator within thirty (30)
days of the appointment of the second arbitrator. If the two arbitrators fail to
agree on the selection of the third arbitrator within the time allowed, either
party may ask ARIAS oUS to appoint the third arbitrator. However, if ARIASoUS is
unable to appoint an arbitrator who is impartial and who is or was an officer of
a life insurance or financial services company other than the parties or their
affiliates, then either party may ask a court to appoint the third arbitrator
pursuant to the Uniform Arbitration Act or any similar statute empowering the
court to appoint an arbitrator.
The arbitration panel shall interpret this Agreement as an honorable engagement
rather than merely a legal obligation, and shall consider practical business and
equitable principles as well as industry custom and practice. The panel is
released from judicial formalities and shall not be bound by strict rules of
procedure and evidence.
The arbitration panel shall determine all arbitration schedules and procedural
rules. Organizational and other meetings shall be held in a location selected by
the party initiating the arbitration, unless the panel shall select another
location. The panel shall decide all matters by majority vote.
Decisions of the arbitration panel shall be final and binding on both parties.
The panel may, at its discretion, award costs and expenses it deems appropriate,
including but not limited to attorneys' fees and interest. Judgment may be
entered upon the final decision of the panel in any court of competent
jurisdiction. The panel may not award exemplary or punitive damages. Unless the
panel decides otherwise, each party will be separately responsible for paying
all fees and expenses charged by its respective counsel, accountants, actuaries,
and other representatives in connection with the arbitration, and the parties
shall bear equally the fees and expenses of the arbitrators and any ancillary
expenses associated with a hearing (e.g., any rental fee for use of the hearing
room, etc.).
14.03 REMEDIES. The remedies provided for in this Agreement are the sole and
exclusive remedies available to the parties hereto for: (a) any damages and
claims based upon, arising out of or otherwise relating to this Agreement and
the transactions contemplated hereunder; and (b) for any breach or threatened
breach of this Agreement.
14.04 INDEPENDENT CONTRACTOR. It is understood and agreed that the Services are
performed hereunder by TFAC as an independent contractor and not as an employee
or partner of Allmerica, and does not create any exclusive arrangement between
the parties.
14.05 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire
agreement between the parties hereto and supersedes all prior agreements with
respect to the subject matter hereof, whether oral or written. Except as
otherwise expressly provided in this Agreement, this Agreement, including the
Exhibits and Schedules hereto, may not be modified and no provision hereof may
be waived except in a written instrument executed by both of the parties hereto.
The waiver by either party hereto of any
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provisions of this Agreement on any one or more occasions shall not be
construed to constitute a waiver of that or any other provision on any other
occasion. This Agreement does not create and shall not be construed so as to
create any partnership or any type of joint venture by and between all or any
of the parties hereto.
14.06 SURVIVAL. The representations, warranties, covenants and obligations
contained herein shall survive the execution of the Agreement and the
performance of the Services hereunder.
14.07 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts and without regard
to the conflicts of laws principles thereof.
14.08 EXHIBITS & SCHEDULES. The Exhibits and Schedules hereto, including any
agreed upon amendments thereto, shall be deemed a part of this Agreement as
fully and effectively as set forth in full in the body of this Agreement. The
terms used in the Exhibits and Schedules shall have the same meaning as such
terms have in this Agreement, unless the contrary intention is clearly
manifested in such Exhibits and Schedules.
14.09 ANCILLARY AGREEMENT. The parties understand and agree that a minimum of
two Franklin Templeton Funds will be offered in each of Allmerica's new
multi-manager products, distributed through Allmerica's career agents and
Broker-Dealers. In addition, subject to system availability, two Franklin
Templeton Funds will be offered in each of Allmerica's existing multi-manager
products, distributed through Allmerica's career agents and Broker-Dealers. The
terms of the ancillary agreement will be set forth in a separate agreement to be
negotiated by the parties.
14.10 NEW PRODUCTS AND SERVICE AGREEMENTS. At any time and from time to time
while this Agreement remains in force, the parties may wish to enter into other
business arrangements with respect to new service agreements or variable life
and annuity products. The parties agree to negotiate in good faith the terms and
conditions of any future agreements.
14.11 SEVERABILITY. Any provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall be ineffective to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remaining provisions hereof, and any such invalidity or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
14.12 HIRING OF EMPLOYEES. During the term of this Agreement and for one (1)
year thereafter, Allmerica and TFAC and any of their affiliates shall not,
directly or indirectly, solicit for employment any person employed or working on
the Services provided under this Agreement within the preceding twelve (12)
months by the other party or any affiliate of the other party without the prior
written consent of the other party, which shall not be unreasonably withheld;
provided, however, that (i) in the event either party uses the services of a
professional recruiter and provides such recruiter solely with generic job
duties and job descriptions (without making any reference to the other party or
the other party's affiliates) and such recruiter contacts a qualified candidate
who happens to be an employee of the other party and that candidate initiates
contact through the recruiter with that party, then that party may employ that
employee, or (ii) in the event an employee of the other party responds to a
general advertisement placed by a party, then that party may employ that
employee.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers as of the Effective Date.
ALLMERICA FINANCIAL LIFE INSURANCE & ANNUITY COMPANY
Attest: ________________
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: ________________________________________
Its: _______________________________________
Date:________________________________________
TEMPLETON FUNDS ANNUITY COMPANY
Attest: ________________ By: ________________________________________
Its: _______________________________________
Date:________________________________________
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EXHIBIT A
SERVICES
I. ADMINISTRATIVE SERVICES
TFAC shall provide the Administrative Services described below, subject to such
alterations as the parties may from time to time mutually agree upon. In any
event, TFAC will be serving as the administrative services provider and in no
event will it perform services as a broker-dealer or insurance agency.
1. SET UP PHASE. TFAC will utilize the TFAC System for administering and issuing
Allmerica's Contracts. Allmerica will provide TFAC with the approved
applications and administrative forms necessary to administer and issue the
Contracts. TFAC will format and implement all forms and confirmation statements
necessary to administer and issue the Contracts and will adhere to the Service
Standards as outlined in Exhibit A-1.
2. RECEIPT OF APPLICATION OF PAYMENTS. Allmerica will receive all Contract
applications and the corresponding payment or "Single Purchase Payment" as
defined by the Contracts. On the day of receipt, Allmerica will fax all complete
applications and any accompanying paperwork to TFAC for immediate processing.
3. CONTRACT ISSUANCE. Unless directed otherwise, TFAC shall administer the
application in accordance with the information provided on the application. TFAC
will not process an application until Allmerica has reviewed and approved
suitability and licensure. Subject to the Service Standards outlined in Exhibit
A-1, TFAC shall be responsible for: processing all applications; and generating
applicable transaction and payment confirmation statements. The confirmation
statements shall be mailed to the Customer with a copy to the Allmerica agent.
TFAC shall process all transfer of assets documentation including, but not
limited to, mailing the letter of acceptance and transfer of assets form to the
issuing company. Upon receipt of the transferred check or funds, Allmerica shall
fax a copy to TFAC for application to the Contract. For 1035 Exchanges lacking
cost basis information, TFAC shall send a request to the original company and
one (1) follow up letter. For delivery receipts, TFAC shall send one (1) follow
up letter and then send to Allmerica for disposition if the receipt is not
obtained. All conservation of business efforts shall occur at Allmerica's
Principal Office.
4. ANNUITY PAYMENTS. Allmerica shall provide TFAC with daily annuity unit
values. TFAC shall calculate the annuity payments based on the annuity units
applicable to each Contract and email the value of each annuity payment to
Allmerica for review. Allmerica shall generate all annuity payment checks and
forward those payments to the Owner or designated payee. TFAC shall mail all
applicable transaction and payment confirmation statements to the Owner on
behalf of Allmerica's broker-dealer.
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5. TRANSACTIONS. Subject to the Service Standards set forth in Exhibit A-1, TFAC
shall be responsible for processing all transactions applicable under the
Contracts.
Requests for contract disbursements or transfers amongst the underlying funds
shall be administered by TFAC. The disbursements include partial withdrawals,
surrenders and exchanges. Allmerica shall provide TFAC with written disbursement
procedures and approved Allmerica forms and letters. TFAC shall verify the
owner's signature for every disbursement. TFAC will conduct all follow up work
necessary to implement the disbursement including but not limited to obtaining
any necessary information from the contractholder. TFAC shall mail all
transaction confirmation statements to the contractholders on behalf of
Allmerica's broker-dealer.
TFAC shall process all death benefit claims. Upon completion of its
calculations, TFAC shall fax the death benefit information to Allmerica.
Allmerica will issue and mail (1) death benefits checks to the
beneficiary/beneficiaries, or (2) any payment due upon the death of an
annuitant. TFAC shall prepare and transmit to Allmerica all information
necessary for Allmerica to file Form 1099 tax reports for the Contracts subject
to Administrative Services from the Effective Date through March 31, 2000.
Allmerica shall generate Form 1099s for disbursements from the Contracts.
6. PAYMENT OF COMMISSIONS. Allmerica is responsible for generating proper
commission payments and statements for all Purchase Payments received and
applied to the Contracts. TFAC will provide Allmerica with a report that will
contain any necessary Contract information so as to enable Allmerica to
calculate and pay any trail commissions to its agents/representatives.
7. WRITTEN COMMUNICATIONS. Any document delivered to TFAC for delivery to
Allmerica's contractholder shall be delivered by TFAC promptly and in accordance
with the Service Standards on Exhibit A-1.
8. RECORDKEEPING. TFAC shall maintain a complete file on record of the
Contracts. Upon request or termination of this Agreement, TFAC shall provide
Allmerica with either the original or a copy of each file.
All production cycles, which include accounting reports, quarterly/annual
statements, and confirmation statements shall be maintained chronologically at
TFAC.
9. COMPLAINTS & LITIGATION. Allmerica will respond to all customer complaints,
regulatory inquiries and lawsuits. Pursuant to the Service Standards set forth
on Exhibit A-1, TFAC agrees to provide Allmerica with information and data
necessary to respond to such complaints, inquiries or lawsuits as soon as
reasonably practicable so that Allmerica may respond in a timely fashion.
10. ILLUSTRATIONS. TFAC will immediately contact Allmerica with any request for
illustrations. Allmerica will prepare and forward the illustrations to the
appropriate agent/representative.
14
<PAGE>
11. REPORT PRODUCTION. TFAC shall provide daily, monthly or quarterly reports as
requested by Allmerica.
II. CONSULTING & CALL CENTER SERVICES
The Consulting & Call Center Service are as follows:
1. CALL CENTER. TFAC shall answer all Contract calls placed to two designated
toll free numbers. As part of its Call Center responsibilities, TFAC shall
forward to Allmerica on the day the request is received all transaction requests
or Contract questions not provided for under the Agreement. TFAC will confirm
that the caller or requesting party is entitled to the information or form
before providing any Contract information. TFAC will answer all customer and
agent inquiries, except for questions that need to be answered by a
broker-dealer. TFAC shall record all relevant information received from a
contractholder or agent in its database or computer system. In addition, TFAC
will maintain a log of all calls received from customers and agents and record
all telephone conversations.
As part of TFAC's Call Center responsibilities, TFAC shall answer routine
commission inquiries from commission payees (i.e., amount of commission, rate of
commission, status of commission). Allmerica will provide TFAC with commission
information and, if necessary, TFAC will consult a designated Allmerica employee
to obtain any additional commission information or data.
2. CONSULTATION AND TRAINING. TFAC shall train Allmerica's personnel and agents
on the Immediate Variable annuities and the Allmerica Contracts. As part of this
training, TFAC shall answer questions and make presentations with Allmerica
personnel, but not customers, at the Allmerica Principal Office, branch and/or
field offices.
3. MISCELLANEOUS TRANSACTIONS. After the Administrative Services have
terminated, TFAC will continue to process transfer requests, address changes and
comply with Section 9, "Complaints & Litigation", of Article I above until the
Agreement is terminated in its entirety.
15
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Exhibit A-1
SERVICE STANDARDS
1. CONTRACT ADMINISTRATION
SERVICE STANDARD
Application, in good order Same Day
Application without dollars 5 Days
1035/TOA (mail Letter of Acceptance) 3 Days
1035/TOA Follow-up calls 10 Days
Address Changes 5 Days
New Business Quality Check (no dollars) 3 Days
Issuance and mailing of Contracts 2 Days
Title (e.g., name and beneficiary changes) 5 Days
Claims 1 Day
Complaints/Regulatory Inquiries 2 Days
Withdrawals & Transfers 1 Day
2. CALL CENTER/CUSTOMER SERVICE/TRAINING
- - Agent Phone Lines
Abandonment Rate 2%
Average Speed of Answer 20 seconds
Average calls per day per rep 50
- - Customer Phone Lines
Abandonment Rate 3%
Average Speed of Answer 20 seconds
16
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Average calls per day per rep 70
Internal New Business efficiency 98%
17
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SCHEDULE 1
1. Allmerica Immediate Advantage Variable Annuity, Form A3029-99
18
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April 24, 2000
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester MA 01653
RE: SEPARATE ACCOUNT VA-K OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FILE NOS. 333-81859 AND 811-8114
Gentlemen:
In my capacity as Assistant Vice President and Counsel of First Allmerica
Financial Life Insurance Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
Separate Account VA-K on Form N-4 under the Securities Act of 1933 and amendment
under the Investment Company Act of 1940, with respect to the Company's
qualified and non-qualified variable annuity contracts.
I am of the following opinion:
1. 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 variable annuity contracts, when issued in accordance with the
Prospectuses contained in the Post-Effective Amendment to the Registration
Statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement for Separate Account VA-K
on Form N-4 filed under the Securities Act of 1933 and amendment under the
Investment Company Act of 1940.
Very truly yours,
/s/ John C. Donlon, Jr.
John C. Donlon, Jr.
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the Registration
Statement of Separate Account VA-K of First Allmerica Financial Life Insurance
Company on Form N-4 of our report dated February 1, 2000, relating to the
financial statements of First Allmerica Financial Life Insurance Company, and
our report dated April 3, 2000, relating to the financial statements of Separate
Account VA-K of First Allmerica Financial Life Insurance Company, both of which
appear in such Statement of Additional Information. We also consent to the
reference to us under the heading "Experts" in such Statement of Additional
Information.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
May 3, 2000
<PAGE>
FUND PARTICIPATION AGREEMENT
This Agreement is entered into as of the ____ day of ______, 1999, between
_______, a life insurance company organized under the laws of the State of
_______ ("Insurance Company"), and each of DREYFUS LIFE AND ANNUITY INDEX
FUND, INC. (d/b/a Dreyfus Stock Index Fund) and THE DREYFUS SOCIALLY
RESPONSIBLE GROWTH FUND, INC. (each, a "Fund").
ARTICLE I
DEFINITIONS
1.1 "Act" shall mean the Investment Company Act of 1940, as amended.
1.2 "Board" shall mean the Board of Directors of a Fund, which has the
responsibility for management and control of the Fund.
1.3 "Business Day" shall mean any day for which a Fund calculates net
asset value per share as described in the Fund's Prospectus.
1.4 "Commission" shall mean the Securities and Exchange Commission.
1.5 "Contract" shall mean a variable annuity or life insurance contract
that uses any Participating Fund (as defined below) as an underlying
investment medium. Individuals who participate under a group Contract
are "Participants."
1.6 "Contractholder" shall mean any entity that is a party to a Contract
with a Participating Company (as defined below).
1.7 "Disinterested Board Members" shall mean those members of the Board of
a Fund that are not deemed to be "interested persons" of the Fund, as
defined by the Act.
1.8 "Dreyfus" shall mean The Dreyfus Corporation and its affiliates,
including Dreyfus Service Corporation.
1.9 "Participating Companies" shall mean any insurance company (including
Insurance Company) that offers variable annuity and/or variable life
insurance contracts to the public and that has entered into an
agreement with one or more of the Funds.
1.10 "Participating Fund" shall mean each Fund and any other funds in the
Dreyfus Family of Funds, including, as applicable, any series thereof,
specified in Exhibit A, as such Exhibit may be amended from time to
time by agreement of the parties hereto, the shares of which are
available to serve as the underlying investment medium for the
aforesaid Contracts.
<PAGE>
1.11 "Prospectus" shall mean the current prospectus and statement of
additional information of a Fund, as most recently filed with the
Commission.
1.12 "Separate Account" shall mean _________, a separate account established
by Insurance Company in accordance with the laws of the State of
____________.
1.13 "Software Program" shall mean the software program used by a Fund for
providing Fund and account balance information including net asset
value per share. Such Program may include the Lion System. In
situations where the Lion System or any other Software Program used by
a Fund is not available, such information may be provided by telephone.
The Lion System shall be provided to Insurance Company at no charge.
1.14 "Insurance Company's General Account(s)" shall mean the general
account(s) of Insurance Company and its affiliates that invest in a
Fund.
ARTICLE II
REPRESENTATIONS
2.1 Insurance Company represents and warrants that (a) it is an insurance
company duly organized and in good standing under applicable law; (b)
it has legally and validly established the Separate Account pursuant to
the Illinois Insurance Code for the purpose of offering to the public
certain individual and group variable annuity and life insurance
contracts; (c) it has registered the Separate Account as a unit
investment trust under the Act to serve as the segregated investment
account for the Contracts; and (d) the Separate Account is eligible to
invest in shares of each Participating Fund without such investment
disqualifying any Participating Fund as an investment medium for
insurance company separate accounts supporting variable annuity
contracts or variable life insurance contracts.
2.2 Insurance Company represents and warrants that (a) the Contracts will
be described in a registration statement filed under the Securities Act
of 1933, as amended ("1933 Act"); (b) the Contracts will be issued and
sold in compliance in all material respects with all applicable federal
and state laws; and (c) the sale of the Contracts shall comply in all
material respects with state insurance law requirements. Insurance
Company agrees to notify each Participating Fund promptly of any
investment restrictions imposed by state insurance law and applicable
to the Participating Fund.
2.3 Insurance Company represents and warrants that the income, gains and
losses, whether or not realized, from assets allocated to the Separate
Account are, in accordance with the applicable Contracts, to be
credited to or charged against such Separate Account without regard to
other income, gains or losses from assets allocated to any other
accounts of Insurance Company. Insurance Company represents and
warrants that the assets of the Separate Account are and will be kept
separate from Insurance Company's General Account and any other
separate accounts Insurance Company may have, and will not be
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<PAGE>
charged with liabilities from any business that Insurance Company may
conduct or the liabilities of any companies affiliated with Insurance
Company.
2.4 Each Participating Fund represents that it is registered with the
Commission under the Act as an open-end, management investment company
and possesses, and shall maintain, all legal and regulatory licenses,
approvals, consents and/or exemptions required for the Participating
Fund to operate and offer its shares as an underlying investment medium
for Participating Companies.
2.5 Each Participating 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 Insurance
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.
2.6 Insurance Company represents and agrees that the Contracts are
currently, and at the time of issuance will be, treated as life
insurance policies or annuity contracts, whichever is appropriate,
under applicable provisions of the Code, and that it will make every
effort to maintain such treatment and that it will notify each
Participating Fund and Dreyfus 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. Insurance Company
agrees that any prospectus offering a Contract that is 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).
2.7 Each Participating Fund agrees that its assets shall be managed and
invested in a manner that complies with the requirements of Section
817(h) of the Code and the rules and regulations thereunder.
2.8 Insurance Company agrees that each Participating Fund shall be
permitted (subject to the other terms of this Agreement) to make its
shares available to other Participating Companies and Contractholders.
2.9 Each Participating Fund represents and warrants that any of its
directors, trustees, officers, employees, investment advisers, and
other individuals/entities who deal with the money and/or securities of
the Participating Fund are and shall continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit
of the Participating Fund in an amount not less than that required by
Rule 17g-1 under the Act. The aforesaid Bond shall include coverage for
larceny and embezzlement and shall be issued by a reputable bonding
company.
2.10 Insurance Company represents and warrants that all of its employees and
agents who deal with the money and/or securities of each Participating
Fund are and shall continue to be at all times covered by a blanket
fidelity bond or similar coverage in an amount not less
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<PAGE>
than the coverage required to be maintained by the Participating Fund.
The aforesaid Bond shall include coverage for larceny and embezzlement
and shall be issued by a reputable bonding company.
2.11 Insurance Company agrees that Dreyfus shall be deemed a third party
beneficiary under this Agreement and may enforce any and all rights
conferred by virtue of this Agreement.
ARTICLE III
FUND SHARES
3.1 The Contracts funded through the Separate Account will provide for the
investment of certain amounts in shares of each Participating Fund.
3.2 Each Participating Fund agrees to make its shares available for
purchase at the then applicable net asset value per share by Insurance
Company and the Separate Account on each Business Day pursuant to rules
of the Commission. Notwithstanding the foregoing, each Participating
Fund may refuse to sell its shares to any person, or suspend or
terminate the offering of its shares, if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole
discretion of its Board, acting in good faith and in light of its
fiduciary duties under federal and any applicable state laws, necessary
and in the best interests of the Participating Fund's shareholders.
3.3 Each Participating Fund agrees that shares of the Participating Fund
will be sold only to (a) Participating Companies and their separate
accounts or (b) "qualified pension or retirement plans" as determined
under Section 817(h)(4) of the Code. Except as otherwise set forth in
this Section 3.3, no shares of any Participating Fund will be sold to
the general public.
3.4 Each Participating Fund shall use its best efforts to provide closing
net asset value, dividend and capital gain information on a per-share
basis to Insurance Company by 6:00 p.m. Eastern time on each Business
Day. Any material errors in the calculation of net asset value,
dividend and capital gain information shall be reported immediately
upon discovery to Insurance Company. Non-material errors will be
corrected in the next Business Day's net asset value per share.
3.5 At the end of each Business Day, Insurance Company will use the
information described in Sections 3.2 and 3.4 to calculate the unit
values of the Separate Account for the day. Using this unit value,
Insurance Company will process the day's Separate Account transactions
received by it by the close of trading on the floor of the New York
Stock Exchange (currently 4:00 p.m. Eastern time) to determine the net
dollar amount of each Participating Fund's shares that will be
purchased or redeemed at that day's closing net asset value per share.
The net purchase or redemption orders will be transmitted to each
Participating Fund by Insurance Company by 11:00 a.m. Eastern time on
the Business Day next following Insurance Company's receipt of that
information. Subject to Sections
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<PAGE>
3.6 and 3.8, all purchase and redemption orders for Insurance
Company's General Accounts shall be effected at the net asset value
per share of each Participating Fund next calculated after receipt of
the order by the Participating Fund or its Transfer Agent.
3.6 Each Participating Fund appoints Insurance Company as its agent for the
limited purpose of accepting orders for the purchase and redemption of
Participating Fund shares for the Separate Account. Each Participating
Fund will execute orders at the applicable net asset value per share
determined as of the close of trading on the day of receipt of such
orders by Insurance Company acting as agent ("effective trade date"),
provided that the Participating Fund receives notice of such orders by
11:00 a.m. Eastern time on the next following Business Day and, if such
orders request the purchase of Participating Fund shares, the
conditions specified in Section 3.8, as applicable, are satisfied. A
redemption or purchase request that does not satisfy the conditions
specified above and in Section 3.8, as applicable, will be effected at
the net asset value per share computed on the Business Day immediately
preceding the next following Business Day upon which such conditions
have been satisfied in accordance with the requirements of this Section
and Section 3.8. Insurance Company represents and warrants that all
orders submitted by the Insurance Company for execution on the
effective trade date shall represent purchase or redemption orders
received from Contractholders prior to the close of trading on the New
York Stock Exchange on the effective trade date.
3.7 Insurance Company will make its best efforts to notify each applicable
Participating Fund in advance of any purchase or redemption orders
exceeding $1 million.
3.8 If Insurance Company's order requests the purchase of a Participating
Fund's shares, Insurance Company will pay for such purchases by wiring
Federal Funds to the Participating Fund or its designated custodial
account on the day the order is transmitted. Insurance Company shall
make all reasonable efforts to transmit to the applicable Participating
Fund payment in Federal Funds by 12:00 noon Eastern time on the
Business Day the Participating Fund receives the notice of the order
pursuant to Section 3.5. Each applicable Participating Fund will
execute such orders at the applicable net asset value per share
determined as of the close of trading on the effective trade date if
the Participating Fund receives payment in Federal Funds by 12:00
midnight Eastern time on the Business Day the Participating Fund
receives the notice of the order pursuant to Section 3.5. If payment in
Federal Funds for any purchase is not received or is received by a
Participating Fund after 12:00 noon Eastern time on such Business Day,
Insurance Company shall promptly, upon each applicable Participating
Fund's request, reimburse the respective Participating Fund for any
charges, costs, fees, interest or other expenses incurred by the
Participating Fund in connection with any advances to, or borrowings or
overdrafts by, the Participating Fund, or any similar expenses incurred
by the Participating Fund, as a result of portfolio transactions
effected by the Participating Fund based upon such purchase request. If
Insurance Company's order requests the redemption of any Participating
Fund's shares valued at or greater than $1 million, the Participating
Fund will wire such amount to Insurance Company within seven days of
the order.
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<PAGE>
3.9 Each Participating Fund has the obligation to ensure that its shares
are registered with applicable federal agencies at all times.
3.10 Each Participating Fund will confirm each purchase or redemption order
made by Insurance Company. Transfer of Participating Fund shares will
be by book entry only. No share certificates will be issued to
Insurance Company. Insurance Company will record shares ordered from a
Participating Fund in an appropriate title for the corresponding
account.
3.11 Each Participating Fund shall credit Insurance Company with the
appropriate number of shares.
3.12 On each ex-dividend date of a Participating Fund or, if not a Business
Day, on the first Business Day thereafter, each Participating Fund
shall communicate to Insurance Company the amount of dividend and
capital gain, if any, per share. All dividends and capital gains shall
be automatically reinvested in additional shares of the applicable
Participating Fund at the net asset value per share on the ex-dividend
date. Each Participating Fund shall, on the day after the ex-dividend
date or, if not a Business Day, on the first Business Day thereafter,
notify Insurance Company of the number of shares so issued.
ARTICLE IV
STATEMENTS AND REPORTS
4.1 Each Participating Fund shall provide monthly statements of account as
of the end of each month for all of Insurance Company's accounts by the
fifteenth (15th) Business Day of the following month.
4.2 Each Participating Fund shall distribute to Insurance Company copies of
the Participating Fund's Prospectuses, proxy materials, notices,
periodic reports and other printed materials (which the Participating
Fund customarily provides to its shareholders) in quantities as
Insurance Company may reasonably request for distribution to each
Contractholder and Participant.
4.3 Each Participating Fund will provide to Insurance Company at least one
complete copy of all registration statements, Prospectuses, 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 Participating Fund
or its shares, contemporaneously with the filing of such document with
the Commission or other regulatory authorities.
4.4 Insurance Company will provide to each Participating Fund at least one
copy of all registration statements, Prospectuses, reports, proxy
statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all
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<PAGE>
amendments to any of the above, that relate to the Contracts or the
Separate Account, contemporaneously with the filing of such document
with the Commission.
ARTICLE V
EXPENSES
5.1 The charge to each Participating Fund for all expenses and costs of the
Participating Fund, including but not limited to management fees,
administrative expenses and legal and regulatory costs, will be
included in the determination of the Participating Fund's daily net
asset value per share.
5.2 Except as provided in this Article V and, in particular in the next
sentence, Insurance Company shall not be required to pay directly any
expenses of any Participating Fund or expenses relating to the
distribution of its shares. Insurance Company shall pay the following
expenses or costs:
a. Such amount of the production expenses of any Participating Fund
materials, including the cost of printing a Participating Fund's
Prospectus, or marketing materials for prospective Insurance
Company Contractholders and Participants as Dreyfus and Insurance
Company shall agree from time to time.
b. Distribution expenses of any Participating Fund materials or
marketing materials for prospective Insurance Company
Contractholders and Participants.
c. Distribution expenses of any Participating Fund materials or
marketing materials for Insurance Company Contractholders and
Participants.
Except as provided herein, all other expenses of each Participating
Fund shall not be borne by Insurance Company.
ARTICLE VI
EXEMPTIVE RELIEF
6.1 Insurance Company has reviewed a copy of the order dated February 5,
1998 of the Securities and Exchange Commission under Section 6(c) of
the Act with respect to the Fund and, in particular, has reviewed the
conditions to the relief set forth in the related Notice. As set forth
therein, if the Fund is a Participating Fund, Insurance Company agrees,
as applicable, to report any potential or existing conflicts promptly
to the Fund's Board and, in particular, whenever contract voting
instructions are disregarded, and recognizes that it will be
responsible for assisting the Board in carrying out its
responsibilities under such application. Insurance Company agrees to
carry out such responsibilities with a view to the interests of
existing Contractholders.
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<PAGE>
6.2 If a majority of the Board, or a majority of Disinterested Board
Members, determines that a material irreconcilable conflict exists with
regard to Contractholder investments in a Participating Fund, the Board
shall give prompt notice to all Participating Companies and any other
Participating Fund. If the Board determines that Insurance Company is
responsible for causing or creating said conflict, Insurance Company
shall at its sole cost and expense, and to the extent reasonably
practicable (as determined by a majority of the Disinterested Board
Members), take such action as is necessary to remedy or eliminate the
irreconcilable material conflict. Such necessary action may include,
but shall not be limited to:
a. Withdrawing the assets allocable to the Separate Account from the
Participating Fund and reinvesting such assets in another
Participating Fund (if applicable) or a different investment
medium, or submitting the question of whether such segregation
should be implemented to a vote of all affected Contractholders;
and/or
b. Establishing a new registered management investment company.
6.3 If a material irreconcilable conflict arises as a result of a decision
by Insurance Company to disregard Contractholder voting instructions
and said decision represents a minority position or would preclude a
majority vote by all Contractholders having an interest in a
Participating Fund, Insurance Company may be required, at the Board's
election, to withdraw the investments of the Separate Account in that
Participating Fund.
6.4 For the purpose of this Article, a majority of the Disinterested Board
Members shall determine whether or not any proposed action adequately
remedies any irreconcilable material conflict, but in no event will any
Participating Fund be required to bear the expense of establishing a
new funding medium for any Contract. Insurance Company shall not be
required by this Article to establish a new funding medium for any
Contract if an offer to do so has been declined by vote of a majority
of the Contractholders materially adversely affected by the
irreconcilable material conflict.
6.5 No action by Insurance Company taken or omitted, and no action by the
Separate Account or any Participating Fund taken or omitted as a result
of any act or failure to act by Insurance Company pursuant to this
Article VI, shall relieve Insurance Company of its obligations under,
or otherwise affect the operation of, Article V.
ARTICLE VII
VOTING OF PARTICIPATING FUND SHARES
7.1 Each Participating Fund shall provide Insurance Company with copies, at
no cost to Insurance Company, of the Participating Fund's proxy
material, reports to shareholders and other communications to
shareholders in such quantity as Insurance Company shall reasonably
require for distributing to Contractholders or Participants.
-8-
<PAGE>
Insurance Company shall:
(a) solicit voting instructions from Contractholders or Participants
on a timely basis and in accordance with applicable law;
(b) vote the Participating Fund shares in accordance with
instructions received from Contractholders or Participants; and
(c) vote the Participating Fund shares for which no instructions have
been received in the same proportion as Participating Fund shares
for which instructions have been received.
Insurance Company agrees at all times to vote its General Account
shares in the same proportion as the Participating Fund shares for
which instructions have been received from Contractholders or
Participants. Insurance Company further agrees to be responsible for
assuring that voting the Participating Fund shares for the Separate
Account is conducted in a manner consistent with other Participating
Companies.
7.2 Insurance Company agrees that it shall not, without the prior written
consent of each applicable Participating Fund and Dreyfus, solicit,
induce or encourage Contractholders to (a) change or supplement the
Participating Fund's current investment adviser or (b) change, modify,
substitute, add to or delete from the current investment media for the
Contracts.
ARTICLE VIII
MARKETING AND REPRESENTATIONS
8.1 Each Participating Fund or its underwriter shall periodically furnish
Insurance Company with the following documents, in quantities as
Insurance Company may reasonably request:
a. Current Prospectus and any supplements thereto; and
b. Other marketing materials.
Expenses for the production of such documents shall be borne by
Insurance Company in accordance with Section 5.2 of this Agreement.
8.2 Insurance Company shall designate certain persons or entities that
shall have the requisite licenses to solicit applications for the sale
of Contracts. No representation is made as to the number or amount of
Contracts that are to be sold by Insurance Company. Insurance Company
shall make reasonable efforts to market the Contracts and shall comply
with all applicable federal and state laws in connection therewith.
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<PAGE>
8.3 Insurance Company shall furnish, or shall cause to be furnished, to
each applicable Participating Fund or its designee, each piece of sales
literature or other promotional material in which the Participating
Fund, its investment adviser or the administrator is named, at least
fifteen Business Days prior to its use. No such material shall be used
unless the Participating Fund or its designee approves such material.
Such approval (if given) must be in writing and shall be presumed not
given if not received within ten Business Days after receipt of such
material. Each applicable Participating Fund or its designee, as the
case may be, shall use all reasonable efforts to respond within ten
days of receipt.
8.4 Insurance Company shall not give any information or make any
representations or statements on behalf of a Participating Fund or
concerning a Participating Fund in connection with the sale of the
Contracts other than the information or representations contained in
the registration statement or Prospectus of, as may be amended or
supplemented from time to time, or in reports or proxy statements for,
the applicable Participating Fund, or in sales literature or other
promotional material approved by the applicable Participating Fund.
8.5 Each Participating Fund shall furnish, or shall cause to be furnished,
to Insurance Company, each piece of the Participating Fund's sales
literature or other promotional material in which Insurance Company or
the Separate Account is named, at least fifteen Business Days prior to
its use. No such material shall be used unless Insurance Company
approves such material. Such approval (if given) must be in writing and
shall be presumed not given if not received within ten Business Days
after receipt of such material. Insurance Company shall use all
reasonable efforts to respond within ten days of receipt.
8.6 Each Participating Fund shall not, in connection with the sale of
Participating Fund shares, give any information or make any
representations on behalf of Insurance Company or concerning Insurance
Company, the Separate Account, or the Contracts other than the
information or representations contained in a registration statement or
prospectus for the Contracts, as may be amended or supplemented from
time to time, or in published reports for the Separate Account that are
in the public domain or approved by Insurance Company for distribution
to Contractholders or Participants, or in sales literature or other
promotional material approved by Insurance Company.
8.7 For purposes of this Agreement, the phrase "sales literature or other
promotional material" or words of similar import include, without
limitation, 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 (such as 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),
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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 National
Association of Securities Dealers, Inc. rules, the Act or the 1933
Act.
ARTICLE IX
INDEMNIFICATION
9.1 Insurance Company agrees to indemnify and hold harmless each
Participating Fund, Dreyfus, each respective Participating Fund's
investment adviser and sub-investment adviser (if applicable), each
respective Participating Fund's distributor, and their respective
affiliates, and each of their directors, trustees, officers, employees,
agents and each person, if any, who controls or is associated with any
of the foregoing entities or persons within the meaning of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of Section 9.1),
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)
for which the Indemnified Parties may become subject, under the 1933
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect to thereof) (i) arise out of or are
based upon any untrue statement or alleged untrue statement of any
material fact contained in information furnished by Insurance Company
for use in the registration statement or Prospectus or sales literature
or advertisements of the respective Participating Fund or with respect
to the Separate Account or Contracts, 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; (ii) arise out of or as a result of conduct,
statements or representations (other than statements or representations
contained in the Prospectus and sales literature or advertisements of
the respective Participating Fund) of Insurance Company or its agents,
with respect to the sale and distribution of Contracts for which the
respective Participating Fund's shares are an underlying investment;
(iii) arise out of the wrongful conduct of Insurance Company or persons
under its control with respect to the sale or distribution of the
Contracts or the respective Participating Fund's shares; (iv) arise out
of Insurance Company's incorrect calculation and/or untimely reporting
of net purchase or redemption orders; or (v) arise out of any breach by
Insurance Company of a material term of this Agreement or as a result
of any failure by Insurance Company to provide the services and furnish
the materials or to make any payments provided for in this Agreement.
Insurance Company will reimburse any Indemnified Party in connection
with investigating or defending any such loss, claim, damage, liability
or action; provided, however, that with respect to clauses (i) and (ii)
above Insurance Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon any untrue statement or omission or alleged omission made
in such registration statement, prospectus, sales literature, or
advertisement in conformity with written information furnished to
Insurance Company by the respective Participating
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Fund specifically for use therein. This indemnity agreement will be in
addition to any liability which Insurance Company may otherwise have.
9.2 Each Participating Fund severally agrees to indemnify and hold harmless
Insurance Company and each of its directors, officers, employees,
agents and each person, if any, who controls Insurance Company within
the meaning of the 1933 Act against any losses, claims, damages or
liabilities to which Insurance Company or any such director, officer,
employee, agent or controlling person may become subject, under the
1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) (1) 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 or advertisements of the respective Participating
Fund; (2) arise out of or are based upon the omission to state in the
registration statement or Prospectus or sales literature or
advertisements of the respective Participating Fund any material fact
required to be stated therein or necessary to make the statements
therein not misleading; or (3) 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 or advertisements with respect to the Separate Account or
the Contracts and such statements were based on information provided to
Insurance Company by the respective Participating Fund; and the
respective Participating Fund will reimburse any legal or other
expenses reasonably incurred by Insurance Company or any such director,
officer, employee, agent or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the respective Participating Fund will
not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement
or omission or alleged omission made in such registration statement,
Prospectus, sales literature or advertisements in conformity with
written information furnished to the respective Participating Fund by
Insurance Company specifically for use therein. This indemnity
agreement will be in addition to any liability which the respective
Participating Fund may otherwise have.
9.3 Each Participating Fund severally shall indemnify and hold Insurance
Company harmless against any and all liability, loss, damages, costs or
expenses which Insurance Company may incur, suffer or be required to
pay due to the respective Participating Fund's (1) incorrect
calculation of the daily net asset value, dividend rate or capital gain
distribution rate; (2) incorrect reporting of the daily net asset
value, dividend rate or capital gain distribution rate; and (3)
untimely reporting of the net asset value, dividend rate or capital
gain distribution rate; provided that the respective Participating Fund
shall have no obligation to indemnify and hold harmless Insurance
Company if the incorrect calculation or incorrect or untimely reporting
was the result of incorrect information furnished by Insurance Company
or information furnished untimely by Insurance Company or otherwise as
a result of or relating to a breach of this Agreement by Insurance
Company.
9.4 Promptly after receipt by an indemnified party under this Article of
notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is
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to be made against the indemnifying party under this Article, notify
the indemnifying party of the commencement thereof. The omission to so
notify the indemnifying party will not relieve the indemnifying party
from any liability under this Article IX, 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. In case any such action is brought
against any indemnified party, and it notified the indemnifying party
of the commencement thereof, the indemnifying party will be entitled
to participate therein and, to the extent that it may wish, assume the
defense thereof, with counsel satisfactory to such indemnified party,
and to the extent that the indemnifying party has given notice to such
effect to the indemnified party and is performing its obligations
under this Article, the indemnifying party shall not be liable for any
legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof, other than reasonable
costs of investigation. Notwithstanding the foregoing, 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.
A successor by law of the parties to this Agreement shall be entitled
to the benefits of the indemnification contained in this Article IX.
The provisions of this Article IX shall survive termination of this
Agreement.
9.5 Insurance Company shall indemnify and hold each respective
Participating Fund, Dreyfus and sub-investment adviser of the
Participating Fund harmless against any tax liability incurred by the
Participating Fund under Section 851 of the Code arising from purchases
or redemptions by Insurance Company's General Accounts or the account
of its affiliates.
ARTICLE X
COMMENCEMENT AND TERMINATION
10.1 This Agreement shall be effective as of the date hereof and shall
continue in force until terminated in accordance with the provisions
herein.
10.2 This Agreement shall terminate without penalty:
a. As to any Participating Fund, at the option of Insurance Company
or the Participating Fund at any time from the date hereof upon
180 days' notice, unless a shorter time is agreed to by the
respective Participating Fund and Insurance Company;
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b. As to any Participating Fund, at the option of Insurance Company,
if shares of that Participating Fund are not reasonably available
to meet the requirements of the Contracts as determined by
Insurance Company. Prompt notice of election to terminate shall
be furnished by Insurance Company, said termination to be
effective ten days after receipt of notice unless the
Participating Fund makes available a sufficient number of shares
to meet the requirements of the Contracts within said ten-day
period;
c. As to a Participating Fund, at the option of Insurance Company,
upon the institution of formal proceedings against that
Participating Fund by the Commission, National Association of
Securities Dealers or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in
Insurance Company's reasonable judgment, materially impair that
Participating Fund's ability to meet and perform the
Participating Fund's obligations and duties hereunder. Prompt
notice of election to terminate shall be furnished by Insurance
Company with said termination to be effective upon receipt of
notice;
d. As to a Participating Fund, at the option of each Participating
Fund, upon the institution of formal proceedings against
Insurance Company by the Commission, National Association of
Securities Dealers or any other regulatory body, the expected or
anticipated ruling, judgment or outcome of which would, in the
Participating Fund's reasonable judgment, materially impair
Insurance Company's ability to meet and perform Insurance
Company's obligations and duties hereunder. Prompt notice of
election to terminate shall be furnished by such Participating
Fund with said termination to be effective upon receipt of
notice;
e. As to a Participating Fund, at the option of that Participating
Fund, if the Participating Fund shall determine, in its sole
judgment reasonably exercised in good faith, that Insurance
Company has suffered a material adverse change in its business or
financial condition or is the subject of material adverse
publicity and such material adverse change or material adverse
publicity is likely to have a material adverse impact upon the
business and operation of that Participating Fund or Dreyfus,
such Participating Fund shall notify Insurance Company in writing
of such determination and its intent to terminate this Agreement,
and after considering the actions taken by Insurance Company and
any other changes in circumstances since the giving of such
notice, such determination of the Participating Fund shall
continue to apply on the sixtieth (60th) day following the giving
of such notice, which sixtieth day shall be the effective date of
termination;
f. As to a Participating Fund, upon termination of the Investment
Advisory Agreement between that Participating Fund and Dreyfus or
its successors unless Insurance Company specifically approves the
selection of a new Participating Fund investment adviser. Such
Participating Fund shall promptly furnish notice of such
termination to Insurance Company;
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<PAGE>
g. As to a Participating Fund, in the event that Participating
Fund's shares are not registered, issued or sold in accordance
with applicable federal law, or such law precludes the use of
such shares as the underlying investment medium of Contracts
issued or to be issued by Insurance Company. Termination shall be
effective immediately as to that Participating Fund only upon
such occurrence without notice;
h. At the option of a Participating Fund upon a determination by its
Board in good faith that it is no longer advisable and in the
best interests of shareholders of that Participating Fund to
continue to operate pursuant to this Agreement. Termination
pursuant to this Subsection (h) shall be effective upon notice by
such Participating Fund to Insurance Company of such termination;
i. At the option of a Participating Fund if the Contracts cease to
qualify as annuity contracts or life insurance policies, as
applicable, under the Code, or if such Participating Fund
reasonably believes that the Contracts may fail to so qualify;
j. At the option of any party to this Agreement, upon another
party's breach of any material provision of this Agreement;
k. At the option of a Participating Fund, if the Contracts are not
registered, issued or sold in accordance with applicable federal
and/or state law; or
l. Upon assignment of this Agreement, unless made with the written
consent of every other non-assigning party.
Any such termination pursuant to Section 10.2a, 10.2d, 10.2e,
10.2f or 10.2k herein shall not affect the operation of Article V
of this Agreement. Any termination of this Agreement shall not
affect the operation of Article IX of this Agreement.
10.3 Notwithstanding any termination of this Agreement pursuant to Section
10.2 hereof, each Participating Fund and Dreyfus may, at the option of
the Participating Fund, continue to make available additional shares of
that Participating Fund for as long as the Participating Fund desires
pursuant to the terms and conditions of this Agreement as provided
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 that Participating Fund and
Dreyfus so elect to make additional Participating Fund shares
available, the owners of the Existing Contracts or Insurance Company,
whichever shall have legal authority to do so, shall be permitted to
reallocate investments in that Participating Fund, redeem investments
in that Participating Fund and/or invest in that Participating Fund
upon the making of additional purchase payments under the Existing
Contracts. In the event of a termination of this Agreement pursuant to
Section 10.2 hereof, such Participating Fund and Dreyfus, as promptly
as is practicable under the circumstances, shall notify Insurance
Company whether Dreyfus and that Participating Fund will continue to
make that Participating Fund's shares available after such
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<PAGE>
termination. If such Participating Fund shares continue to be made
available after such termination, the provisions of this Agreement
shall remain in effect and thereafter either of that Participating
Fund or Insurance Company may terminate the Agreement as to that
Participating Fund, as so continued pursuant to this Section 10.3,
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
Participating Fund, need not be for more than six months.
10.4 Termination of this Agreement as to any one Participating Fund shall
not be deemed a termination as to any other Participating Fund unless
Insurance Company or such other Participating Fund, as the case may be,
terminates this Agreement as to such other Participating Fund in
accordance with this Article X.
ARTICLE XI
AMENDMENTS
11.1 Any other changes in the terms of this Agreement, except for the
addition or deletion of any Participating Fund as specified in Exhibit
A, shall be made by agreement in writing between Insurance Company and
each respective Participating Fund.
ARTICLE XII
NOTICE
12.1 Each notice required by this Agreement shall be given by certified
mail, return receipt requested, to the appropriate parties at the
following addresses:
Insurance Company:
-----------------------------------
---------------------
- -
---------------------
Attn:
----------------
Participating Funds: [Name of Fund]
c/o Premier Mutual Fund Services, Inc.
200 Park Avenue
New York, New York 10166
Attn: Vice President and Assistant
Secretary
with copies to: [Name of Fund]
c/o The Dreyfus Corporation
200 Park Avenue
New York, New York 10166
Attn: Mark N. Jacobs, Esq.
Steven F. Newman, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
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New York, New York 10038-4982
Attn: Lewis G. Cole, Esq.
Stuart H. Coleman, Esq.
Notice shall be deemed to be given on the date of receipt by the
addresses as evidenced by the return receipt.
MISCELLANEOUS XIII
13.1 This Agreement has been executed on behalf of each Fund by the
undersigned officer of the Fund in his capacity as an officer of the
Fund. The obligations of this Agreement shall only be binding upon the
assets and property of the Fund and shall not be binding upon any
director, trustee, officer or shareholder of the Fund individually. It
is agreed that the obligations of the Funds are several and not joint,
that no Fund shall be liable for any amount owing by another Fund and
that the Funds have executed one instrument for convenience only.
LAW XIV
14.1 This Agreement shall be construed in accordance with the internal laws
of the State of New York, without giving effect to principles of
conflict of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be duly executed and attested as of the date first above written.
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By:
---------------------------------
Its:
---------------------------------
Attest:
-----------------------------
DREYFUS LIFE AND ANNUITY INDEX
FUND, INC.
By:
---------------------------------
Its:
---------------------------------
Attest:
-----------------------------
THE DREYFUS SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
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By:
---------------------------------
Its:
---------------------------------
Attest:
-----------------------------
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EXHIBIT A
LIST OF PARTICIPATING FUNDS
Dreyfus Life and Annuity Index Fund, Inc. (d/b/a Dreyfus Stock Index Fund)
The Dreyfus Socially Responsible Growth Fund, Inc.
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FORM
EVERGREEN VARIABLE ANNUITY TRUST
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this ____ day of __________, 1999 between
EVERGREEN VARIABLE ANNUITY TRUST, an open-end management investment company
organized as a Delaware business trust (the "Trust"),
and________________________, a life insurance company organized under the laws
of the State of __________ (the "Company"), on its own behalf and on behalf of
each segregated asset account of the Company set forth on Schedule A, as may be
amended from time to time (the "Accounts").
W I T N E S S E T H:
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and the offer and sale of its shares are registered under the Securities Act of
1933, as amended (the "1933 Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has obtained an order from the Securities and
Exchange Commission ("Commission") granting Participating Insurance Companies
and their separate account(s) exemptions from the provisions of Section(s) 9(a),
13(a), 15(a) and 15(b) of 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 Trust to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and nonaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Shared Trust Exemptive Order"); and
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and/or variable annuity contracts
identified by the form number(s) listed on Schedule A, as may be amended from
time to time (the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
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<PAGE>
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 that Account on Schedule A, to set aside and
invest assets attributable to the Contracts; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Portfolios at net
asset value on behalf of each Account to fund the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
Sale of Trust Shares
1.1. The Trust shall make shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The trustees of the Trust (the "Trustees") 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 Trustees acting in good
faith and in light of their fiduciary duties under federal and any applicable
state laws, necessary and in the best interest of the shareholders of such
Portfolio.
1.2. The Trust will redeem any full or fractional shares of any
Portfolio when requested by the Company on behalf of an Account at the net asset
value next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then current
prospectus of the Trust. The Trust shall make payment for such shares in the
manner established from time to time by the Trust, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act.
1.3. For the purposes of Sections 1.1. and 1.2., the Trust hereby
appoints the Company as its agent for the limited purpose of receiving and
accepting purchase and redemption orders resulting from investment in and
payments under the Contracts. Receipt by the Company shall constitute receipt by
the Trust provided that: (a) such orders are received by the Company in good
order prior to the close of the regular trading session of the New York Stock
Exchange, and (b) the Trust receives notice of such orders by 9:30 a.m., New
York 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 Trust
calculates its net asset value.
1.4. Purchase orders that are transmitted to the Trust in accordance
with Section 1.3. shall be paid for on the same Business Day that the Trust
receives notice of the order. Payments shall be made in federal funds
transmitted by wire.
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1.5. The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on shares of any Portfolio. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's shares in additional shares of
that Portfolio. The Trust shall notify the Company of the number of shares so
issued as payment of such dividends and distributions.
1.6. The Trust 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 7:00 p.m., New
York time.
1.7. The Trust agrees that its shares will be sold only to
Participating Insurance Companies and their separate accounts and to certain
qualified pension and retirement plans to the extent permitted by the Shared
Trust Exemptive Order. No shares of any Portfolio will be sold directly to the
general public. The Company agrees that the Trust shares will be used only for
the purposes of funding the Contracts and Accounts listed in Schedule A, as
amended from time to time.
1.8. The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.12. and
Article IV of this Agreement.
ARTICLE II
Obligations of the Parties
2.1. The Trust shall bear the costs of registering and qualifying the
Trust's shares, and of preparing and filing the Trust's prospectus, registration
statement, Trust sponsored proxy materials (or similar materials such as voting
instruction solicitation materials), reports to shareholders, and all statements
and notices required by federal or state law. The Trust shall pay all taxes on
the issuance and/or transfer of the Trust's shares.
2.2. The Trust shall bear the printing costs (or duplicating costs with
respect to the statement of additional information) associated with distributing
the Trust's current prospectus, statement of additional information, annual
report, semi-annual report, Trust sponsored proxy material or other shareholder
communications, including any amendments or supplements to any of the foregoing,
to the extent required to be provided by the Trust to its then-current
shareholders. The Trust shall also bear the mailing costs associated with
distributing Trust sponsored proxy material. The Trust shall not bear any costs
of preparing, printing, recording, taping or disseminating sales literature or
other promotional materials or the costs of printing and mailing prospective
Contract owners copies of the Trust's prospectus, statement of additional
information, periodic reports or other printed materials.
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<PAGE>
2.3. The Trust shall provide the Company (at the Company's expense)
with as many copies of the Trust's current prospectus as the Company may
reasonably request for distribution to prospective purchasers of Contracts. If
requested by the Company in lieu thereof, the Trust shall provide such
documentation (including a final copy of the current prospectus as set in type
at the Trust'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
Trust is amended) to have the prospectus for the Contracts and the Trust's
prospectus printed together in one document (at the Company's expense).
2.4. The Company will bear the costs of registering and qualifying the
Accounts for sale, printing (or duplicating costs with respect to the statement
of additional information) and mailing costs associated with the delivery of the
Accounts' current prospectuses and statements of additional information, private
placement memoranda, annual and semi-annual reports, Contracts, Contract
applications, sales literature or other promotional material, Account sponsored
proxy materials and voting solicitation instructions.
2.5. The Company will bear the responsibility and correlative expense
for administrative and support services for Contract owners. The Trust
recognizes the Company as the sole shareholder of shares of the Trust issued
under this Agreement.
2.6. The Company agrees and acknowledges that one of the Trust's
advisers, Evergreen Asset Management Corp. ("Evergreen Asset"), is the sole
owner of the name and mark "Evergreen" and that all use of any designation
comprised in whole or in part of Evergreen (an "Evergreen Mark") under this
Agreement shall inure to the benefit of Evergreen Asset. Except as provided in
Section 2.6., the Company shall not use any Evergreen Mark on its own behalf or
on behalf of the Accounts or Contracts in any registration statement,
advertisement, sales literature or other materials relating to the Accounts or
Contracts without the prior written consent of Evergreen Asset. Upon termination
of this Agreement for any reason, the Company shall cease all use of any
Evergreen Mark(s) as soon as reasonably practicable.
2.7. The Company shall furnish, or cause to be furnished, to the Trust
or its designee, a copy of each Contract prospectus or statement of additional
information in which the Trust or its investment advisers are named prior to the
filing of such document with the Commission. The Company shall also furnish, or
shall cause to be furnished, to the Trust or its designee, each piece of sales
literature or other promotional material including private placement memoranda,
in which the Trust or its investment advisers are named, at least fifteen
Business Days prior to its use. No such material shall be used if the Trust or
its designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
2.8. The Company will provide to the Trust at least one complete copy
of each report, solicitation for voting instructions, application for exemption,
request for no-action relief, and any amendment to any of the above (or any
amendment to the registration statement, prospectus, statement of additional
information, piece of sales literature or other promotional material) that
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<PAGE>
relates to the Contracts or the Account, contemporaneously with the filing of
the document with the Commission, the NASD, or other regulatory authorities.
2.9. For purposes of this Article II, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements,
newspapers, magazines, or other periodicals, 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,
shareholder newsletters, 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.
2.10. The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust or
its investment advisers in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Trust shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
annual and semi-annual reports of the Trust, Trust-sponsored proxy statements,
or in sales literature or other promotional material approved by the Trust or
its designee, except as required by legal process or regulatory authorities or
with the written permission of the Trust or its designee.
2.11. The Trust shall furnish or cause to be furnished, to the Company
or its designee, a copy of each Trust prospectus or statement of additional
information in which the Company or the Accounts are named prior to the filing
of such document with the Commission. The Trust 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 or the Accounts are 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.
2.12. The Trust shall not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, the Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement, prospectus
or private placement memorandum for the Contracts (as such registration
statement, prospectus or private placement memorandum may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
2.13. At the request of either party to this Agreement, the other party
will make available to the requesting party's independent auditors and/or
representatives of the appropriate
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regulatory agencies, all records, data and access to operating procedures that
may be reasonably requested.
2.14. So long as, and to the extent that the Commission interprets the
1940 Act to require pass-through voting privileges for variable contract owners,
the Company will provide pass-through voting privileges to owners of policies
whose cash values are invested, through the Accounts, in shares of the Trust and
shall distribute all proxy material furnished by the Trust. The Trust shall
require all Participating Insurance Companies to calculate voting privileges in
the same manner and the Company shall be responsible for assuring that the
Accounts calculated voting privileges in the manner established by the Trust.
With respect to each Account, the Company will vote shares of the Trust held by
the Account and for which no timely voting instructions from policy owners are
received as well as shares it owns that are held by that Account, in the same
proportion as those shares for which voting instructions are received. The
Company and its agents will in no way recommend or oppose or interfere with the
solicitation of proxies for Trust shares held by Contract owners without the
prior written consent of the Trust, which consent may be withheld in the Trust's
sole discretion.
ARTICLE III
Representations and Warranties
3.1. The Company represents and warrants that it is an insurance
company duly organized and in good standing under the laws of the State of
____________ and that it has legally and validly established each Account as a
segregated asset account under such law on the dates set forth in Schedule A.
3.2. The Company represents and warrants that it 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.
3.3. The Company represents and warrants that the Contracts are, or
will be, registered under the 1933 Act to the extent required by the 1933 Act
prior to any issuance or sale of the Contracts, the Contracts will be issued and
sold in compliance in all material respects with all applicable federal and
state law, and the sale of the Contracts will comply in all material respects
with state insurance suitability requirements.
3.4. The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Delaware.
3.5. The Trust represents and warrants that the Trust shares offered
and sold pursuant to this Agreement will be registered under the 1933 Act and
that the Trust is registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement 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 Trust shall register and qualify its shares for sale
in
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accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6. The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in Section
817(h) of the Internal Revenue Code of 1986, as amended (the "Code"), and the
rules and regulations thereunder. In the event of a breach of this Section 3.6
by the Trust, it will take all reasonable steps to: (1) immediately notify the
Company of such breach, and (2) adequately diversify the Trust so as to achieve
compliance within the grace period afforded by Section 1.817-5(b) of the rules
and regulations under the Code.
3.7. The Company represents that the Contracts are currently treated as
annuity or life insurance contracts under applicable provisions of the Code and
warrants and agrees that it will make every effort to maintain such treatment
and that it will notify the Trust 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.
ARTICLE IV
Potential Conflicts
4.1. The parties acknowledge that the Trust's shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. A material irreconcilable conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory or other 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 Trustees shall promptly inform the Company
if they determine that a material irreconcilable conflict exists and the
implications thereof. The Trustees shall have sole authority to determine
whether a material irreconcilable conflict exists and their determination shall
be binding upon the Company.
4.2. The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Trust Exemptive
Order and this Article IV by providing the Trustees with all information
reasonably necessary for them to consider any issues raised including, but not
limited to, information as to a decision by the Company to disregard Contract
owner voting instructions.
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4.3. If it is determined by a majority of the Trustees, or a majority
of the disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of Contract owners, the Company shall, in cooperation
with other Participating Insurance Companies whose contract owners are also
affected, at its expense and to the extent reasonably practicable (as determined
by the Trustees) take whatever steps are necessary to remedy or eliminate the
material irreconcilable conflict, which steps could include: (a) withdrawing the
assets allocable to some or all of the Accounts from the Trust or any Portfolio
and reinvesting such assets in a different investment medium, including (but not
limited to) another Portfolio of the Trust, or submitting the question of
whether or not 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 (b) establishing a new registered
management investment company or managed separate account and obtaining any
necessary approvals or orders of the Commission in connection therewith.
4.4. 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 Trust's election, to withdraw the affected Account's
investment in the Trust 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 Trustees. Any such withdrawal
and termination must take place within six (6) months after the Trust gives
written notice that this provision is being implemented. Until the end of such
six (6) month period, the Trust shall continue to accept and implement orders by
the Company for the purchase and redemption of shares of the Trust.
4.5. If any 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 Trust and terminate this
Agreement with respect to such Account within six (6) months after the Trust
gives written notice that it has determined that such decision has created a
material irreconcilable 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
Trustees. Until the end of such six (6) month period, the Trust shall continue
to accept and implement orders by the Company for the purchase and redemption of
shares of the Trust.
4.6. For purposes of Sections 4.3. through 4.5. of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict. The Company
shall not be required by Section 4.3 to establish a new funding medium for the
Contracts if any offer to do so has been declined by vote of a majority of
Contract owners materially adversely affected by the material irreconcilable
conflict. In the event that the Trustees determine that any proposed action does
not adequately remedy any material irreconcilable conflict, then the Company
will withdraw the Account's investment
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<PAGE>
in the Trust and terminate this Agreement within six (6) months after the Trust
gives written notice 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 Trustees.
4.7. The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared Trust
Exemptive Order and this Article IV. Said reports, materials and data shall be
submitted more frequently if deemed appropriate by the Trustees.
4.8. 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 and/or shared
funding (as defined in the Shared Trust Exemptive Order) on terms and conditions
materially different from those contained in the Shared Trust Exemptive Order,
then the Trust 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.
ARTICLE V
Indemnification
5.1. The Company agrees to indemnify and hold harmless the Trust and
each of its Trustees, officers, employees and agents, and each person, if any,
who controls the Trust within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 5.1.)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Company) or expenses (including
the reasonable costs of investigating or defending any alleged loss, claim,
damage, liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which the Indemnified Parties
may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses are related to the sale, acquisition, or
redemption of the Trust's shares or the Contracts and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in a registration
statement, prospectus or private placement memorandum for the Contracts or in
the Contracts themselves or in sales literature generated or approved by the
Company relating to the Contracts or Accounts (or any amendment or supplement to
any of the foregoing) (collectively, "Company Documents"), 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 indemnity 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 was accurately derived from written
information furnished to the Company by or on behalf of the Trust for use in
Company Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
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(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately derived
from Trust Documents as defined in Section 5.2.(a)) or wrongful conduct of the
Company or persons under its control, with respect to the sale, distribution or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Trust Documents as
defined in Section 5.2.(a) or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished to the
Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to
provide the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation, warranty or agreement made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by the
Company; or
(f) arise out of or result from negligence or wrongful conduct
in the Company's administration of the Accounts or the Contracts.
5.2. The Trust agrees to indemnify and hold harmless the Company and
each of its directors, officers, employees and agents 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 5.2.)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Trust) or expenses (including the
reasonable costs of investigating or defending any alleged loss, claim, damage,
liability or expense and reasonable legal counsel fees incurred in connection
therewith) (collectively, "Losses"), to which the Indemnified Parties may become
subject under any statute or regulation, or at common law or otherwise, insofar
as such Losses are related to the sale, acquisition, or redemption of the
Trust's shares or the Contracts and:
(a) 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 for the Trust (or any amendment or supplement thereto),
(collectively, "Trust Documents"), 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 indemnity 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 was accurately derived from written information furnished to
the Trust by or on behalf of the Company for use in Trust Documents or otherwise
for use in connection with the sale of the Contracts or Trust shares; or
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(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately derived
from Company Documents) or wrongful conduct of the Trust or persons under its
control, with respect to the sale, distribution or acquisition of the Contracts
or Trust shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Company Documents or
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading if
such statement or omission was made in reliance upon and accurately derived form
written information furnished to the Company by or on behalf of the Trust; or
(d) arise out of or result from any failure by the Trust to
provide the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation, warranty or agreement made by the Trust in this Agreement or
arise out of or result from any other material breach of this Agreement by the
Trust.
5.3. Neither the Company nor the Trust shall be liable under the
indemnification provisions of Section 5.1. or 5.2., as applicable, with respect
to any Losses incurred or assessed against an indemnified party that 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.
5.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions of Section 5.1. or 5.2., as applicable, with respect
to any claim made against an indemnified party unless such indemnified party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim which shall have been served upon or otherwise received by
such indemnified party (or after such indemnified party shall have received
notice of service upon or other notification to any designated agent), but
failure to notify the party against whom indemnification is sought of any such
claim shall not relieve that party from any liability which it may have to the
indemnified party in the absence of Sections 5.1. and 5.2. except to the extent
that the indemnifying party has been prejudiced by such failure to give notice.
5.5. In case any such action is brought against the indemnified
parties, the indemnifying party shall be entitled to participate, at its own
expense, in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably satisfactory to
the party named in the action. After notice from the indemnifying party to the
indemnified party of an election to assume such defense, the indemnified party
shall bear the fees and expenses of any additional counsel retained by it, and
the indemnifying party will not be liable to the indemnified party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
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ARTICLE VI
Termination
6.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by six (6) months advance
written notice delivered to the other party; or
(b) termination by the Company by written notice to the Trust 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 not consistent with the Company's obligations to Contract owners;
provided, however, that such a termination shall apply only to the Portfolio not
reasonably available and the Trust shall have ninety (90) days from the initial
notification by the Company of the deficiency to correct such deficiency. If not
cured within ninety (90) days, prompt written notice of the election to
terminate for such cause shall again be furnished by the Company to the Trust;
or
(c) termination by the Company by written notice to the Trust with
respect to any Portfolio in the event such 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
(d) termination by the Company by written notice to the Trust with
respect to any Portfolio in the event that the Trust ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or any independent
or resulting failure under Section 817 of the Code, or under any successor or
similar provision of either, or if the Company reasonably believes that the
Trust may fail to so qualify; or
(e) termination by the Trust by written notice to the Company if the
Trust 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 and that material
adverse change or material adverse publicity will have a material adverse impact
upon the business and operations of the Company or the Trust; but no such
termination shall be effective under this subsection (e) until the Company has
been afforded a reasonable opportunity to respond to a statement by the Trust
concerning the reason for notice of termination hereunder; or
(f) termination by the Company by written notice to the Trust if the
Company shall determine, in its sole judgment exercised in good faith, that
either the Trust or an investment adviser to the Trust 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
and that material adverse change or material adverse publicity will have a
material
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adverse impact upon the business and operations of the Trust; but no such
termination shall be effective under this subsection (f) until the Trust has
been afforded a reasonable opportunity to respond to a statement by the Company
concerning the reason for notice of termination hereunder; or
(g) termination by the Trust in the event that formal administrative
proceedings are instituted against the Company by the NASD, the Commission, an
insurance commissioner 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 Trust's shares; provided,
however, that the Trust determines in its sole judgement 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
(h) termination by the Company in the event that formal administrative
proceedings are instituted against the Trust by the NASD, the Commission, any
state securities or insurance department or any other regulatory body regarding
the Trust's duties under this Agreement, provided, however, that the Company
determines in its sole judgement exercised in good faith, that any such
administrative proceedings will have a material adverse effect upon the ability
of the Trust to perform its obligations under this Agreement.
6.2. Notwithstanding any termination of this Agreement, the Trust
shall, at the option of the Company, continue to make available additional
shares of the Trust (or any Portfolio) pursuant to the terms and conditions of
this Agreement for all Contracts in effect on the effective date of termination
of this Agreement, provided that the Company continues to pay the costs set
forth in Article II.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.12. shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
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 TRUST:
Evergreen Funds
200 Berkeley Street
Boston, Massachusetts 02116-9000
Attention: Legal Department
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IF TO THE COMPANY:
ARTICLE VIII
Miscellaneous
8.1. 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.
8.2. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3. 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.
8.4. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
8.5. The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising directly or indirectly under this Agreement, of
any and every nature whatsoever, shall be satisfied solely out of the assets of
the Trust and that no Trustee, officer, agent or holder of shares of beneficial
interest of the Trust shall be personally liable for any such liabilities.
8.6. Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Commission, 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.
8.7. 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.
8.8. The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
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8.9. This Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns, provided that no party
may assign this Agreement without the prior written consent of the other party.
8.10. No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative as
of the date and year first above written.
_______________ INSURANCE COMPANY EVERGREEN VARIABLE ANNUITY TRUST
By: __________________________ By:___________________________
Name: Name:
Title: Title:
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SCHEDULE A
Separate Accounts, Contracts and Associated Portfolios
------------------------------------------------------
Name of Separate Accounts and Date
Established by Board of Directors
- ---------------------------------
Contracts Funded by Separate Account and Form Number
- ----------------------------------------------------
Designated Portfolios
- ---------------------
<PAGE>
FUND PARTICIPATION AGREEMENT
This AGREEMENT is made this ____day of __________________, 2000, by and
between FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY ("FAFLIC") (the
"Insurer"), a life insurance company domiciled in MASSACHUSETTS, on its behalf
and on behalf of the segregated asset accounts of the Insurer listed on Exhibit
A to this Agreement (the "Separate Accounts"); Insurance Series (the "Fund"), a
Massachusetts business trust; and Federated Securities Corp. (the
"Distributor"), a Pennsylvania corporation.
W I T N E S S E T H
WHEREAS, the Fund is registered with the Securities and Exchange Commission
("SEC") as an open-end management investment company under the Investment
Company Act of 1940, as amended ("1940 Act") and the Fund is authorized to issue
separate classes of shares of beneficial interest ("shares"), each representing
an interest in a separate portfolio of assets known as a "portfolio" and each
portfolio has its own investment objective, policies, and limitations; and
WHEREAS, the Fund is available to offer shares of one or more of its
portfolios to separate accounts of insurance companies that fund variable
annuity and variable life insurance contracts ("Variable Contracts") and to
serve as an investment medium for Variable Contracts offered by insurance
companies that have entered into participation agreements substantially similar
to this agreement ("Participating Insurance Companies"), and
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WHEREAS, the Fund is currently comprised of eleven separate portfolios, and
other portfolios may be established in the future; and
WHEREAS, the Fund has obtained an order from the SEC dated December 29,
1993 (File No. 812-8620), 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 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 life insurance companies that may
or may not be affiliated with one another (hereinafter the "Mixed and Shared
Funding Exemptive Order"); and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended ("1934 Act"), and is a
member in good standing of the National Association of Securities Dealers, Inc.
("NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Insurer wishes to purchase shares of one or more of the Fund's
portfolios on behalf of its Separate Accounts to serve as an investment medium
for Variable Contracts funded by the Separate Accounts, and the Distributor is
authorized to sell shares of the Fund's portfolios;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
and covenants hereinafter set forth, the parties hereby agree as follows:
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ARTICLE I. SALE OF FUND SHARES
1.1 The Distributor agrees to sell to the Insurer those shares of the
portfolios offered and made available by the Fund and identified on Exhibit B
("Portfolios") that the Insurer orders on behalf of its Separate Accounts, and
agrees to execute such orders on each day on which the Fund calculates its net
asset value pursuant to rules of the SEC ("business day") at the net asset value
next computed after receipt and acceptance by the Fund or its agent of the order
for the shares of the Fund.
1.2 The Fund agrees to make available on each business day shares of
the Portfolios for purchase at the applicable net asset value per share by the
Insurer on behalf of its Separate Accounts; provided, however, that the Board of
Trustees of the Fund 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 Trustees, acting in good faith and in light of the
Trustees' fiduciary duties under applicable law, necessary in the best interests
of the shareholders of any Portfolio.
1.3 The Fund and the Distributor agree that shares of the Portfolios
of the Fund will be sold only to Participating Insurance Companies, their
separate accounts, and other persons consistent with each Portfolio being
adequately diversified pursuant to Section 817(h) of the Internal Revenue Code
of 1986, as amended ("Code"), and the regulations thereunder. No shares of any
Portfolio will be sold directly to the general public to the extent not
permitted by applicable tax law.
1.4 The Fund and the Distributor will not sell shares of the
Portfolios to any insurance company or separate account unless an agreement
containing provisions substantially the same as the provisions in Article IV of
this Agreement is in effect to govern such sales.
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1.5 Upon receipt of a request for redemption in proper form from the
Insurer, the Fund agrees to redeem any full or fractional shares of the
Portfolios held by the Insurer, ordinarily executing such requests on each
business day at the net asset value next computed after receipt and acceptance
by the Fund or its agent of the request for redemption, except that the Fund
reserves the right to suspend the right of redemption, consistent with Section
22(e) of the 1940 Act and any rules thereunder. Such redemption shall be paid
consistent with applicable rules of the SEC and procedures and policies of the
Fund as described in the current prospectus.
1.6 For purposes of Sections 1.2 and 1.5, the Insurer shall be the
agent of the Fund for the limited purpose of receiving and accepting purchase
and redemption orders from each Separate Account and receipt of such orders by
4:00 p.m. Eastern time by the Insurer shall be deemed to be receipt by the Fund
for purposes of Rule 22c-1 of the 1940 Act; provided that the Fund receives
notice of such orders on the next following business day prior to 4:00 p.m.
Eastern time on such day, although the Insurer will use its best efforts to
provide such notice by 9:00 a.m. Eastern time.
1.7 The Insurer agrees to purchase and redeem the shares of each
Portfolio in accordance with the provisions of the current prospectus for the
Fund.
1.8 The Insurer shall pay for shares of the Portfolio on the next
business day after it places an order to purchase shares of the Portfolio.
Payment shall be in federal funds transmitted by wire.
1.9 Issuance and transfer of shares of the Portfolios will be by book
entry only unless otherwise agreed by the Fund. Stock certificates will not be
issued to the
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Insurer or the Separate Accounts unless otherwise agreed by the Fund. Shares
ordered from the Fund will be recorded in an appropriate title for the Separate
Accounts or the appropriate subaccounts of the Separate Accounts.
1.10 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Insurer of any income dividends or
capital gain distributions payable on the shares of the Portfolios. The Insurer
hereby elects to reinvest in the Portfolio all such dividends and distributions
as are payable on a Portfolio's shares and to receive such dividends and
distributions in additional shares of that Portfolio. The Insurer reserves the
right to revoke this election in writing and to receive all such dividends and
distributions in cash. The Fund shall notify the Insurer of the number of shares
so issued as payment of such dividends and distributions.
1.11 The Fund shall instruct its recordkeeping agent to advise the
Insurer on each business day of the net asset value per share for each Portfolio
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 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1 The Insurer represents and warrants that it is an insurance
company duly organized and in good standing under applicable law and that it is
taxed as an insurance company under Subchapter L of the Code.
2.2 The Insurer represents and warrants that it has legally and
validly established each of the Separate Accounts as a segregated asset account
under the
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Massachusetts Insurance Code, and that each of the Separate Accounts is a
validly existing segregated asset account under applicable federal and state
law.
2.3 The Insurer represents and warrants that the Variable Contracts
issued by the Insurer or interests in the Separate Accounts under such Variable
Contracts (1) are or, prior to issuance, will be registered as securities under
the Securities Act of 1933 ("1933 Act") or, alternatively, (2) are not
registered because they are properly exempt from registration under the 1933 Act
or will be offered exclusively in transactions that are properly exempt from
registration under the 1933 Act.
2.4 The Insurer represents and warrants that each of the Separate
Accounts (1) has been registered as a unit investment trust in accordance with
the provisions of the 1940 Act or, alternatively, (2) has not been registered in
proper reliance upon an exclusion from registration under the 1940 Act.
2.5 The Insurer represents that it believes, in good faith, that the
Variable Contracts issued by the Insurer are currently treated as annuity
contracts or life insurance policies (which may include modified endowment
contracts), whichever is appropriate, under applicable provisions of the Code.
2.6 The Fund represents and warrants that it is duly organized as a
business trust under the laws of the Commonwealth of Massachusetts, and is in
good standing under applicable law.
2.7 The Fund represents and warrants that the shares of the Portfolios
are duly authorized for issuance in accordance with applicable law and that the
Fund is registered as an open-end management investment company under the 1940
Act.
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2.8 The Fund represents that it believes, in good faith, that the
Portfolios currently comply with the diversification provisions of Section
817(h) of the Code and the regulations issued thereunder relating to the
diversification requirements for variable life insurance policies and variable
annuity contracts.
2.9 The Distributor represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
ARTICLE III. GENERAL DUTIES
3.1 The Fund shall take all such actions as are necessary to permit
the sale of the shares of each Portfolio to the Separate Accounts, including
maintaining its registration as an investment company under the 1940 Act, and
registering the shares of the Portfolios sold to the Separate Accounts under the
1933 Act for so long as required by applicable law. The Fund shall amend its
Registration Statement filed with the SEC under the 1933 Act and the 1940 Act
from time to time as required in order to effect the continuous offering of the
shares of the Portfolios. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states to the extent deemed
necessary by the Fund or the Distributor.
3.2 The Fund shall make every effort to maintain qualification of each
Portfolio as a Regulated Investment Company under Subchapter M of the Code (or
any successor or similar provision) and shall notify the Insurer immediately
upon having a reasonable basis for believing that a Portfolio has ceased to so
qualify or that it might not so qualify in the future.
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3.3 The Fund shall make every effort to enable each Portfolio to
comply with the diversification provisions of Section 817(h) of the Code and the
regulations issued thereunder relating to the diversification requirements for
variable life insurance policies and variable annuity contracts and any
prospective amendments or other modifications to Section 817 or regulations
thereunder, and shall notify the Insurer immediately upon having a reasonable
basis for believing that any Portfolio has ceased to comply.
3.4 The Insurer shall take all such actions as are necessary under
applicable federal and state law to permit the sale of the Variable Contracts
issued by the Insurer, including registering each Separate Account as an
investment company to the extent required under the 1940 Act, and registering
the Variable Contracts or interests in the Separate Accounts under the Variable
Contracts to the extent required under the 1933 Act, and obtaining all necessary
approvals to offer the Variable Contracts from state insurance commissioners.
3.5 The Insurer shall make every effort to maintain the treatment of
the Variable Contracts issued by the Insurer as annuity contracts or life
insurance policies, whichever is appropriate, under applicable provisions of the
Code, and shall notify the Fund and the Distributor immediately upon having a
reasonable basis for believing that such Variable Contracts have ceased to be so
treated or that they might not be so treated in the future.
3.6 The Insurer shall offer and sell the Variable Contracts issued by
the Insurer in accordance with applicable provisions of the 1933 Act, the 1934
Act, the 1940 Act, the NASD Rules of Fair Practice, and state law respecting the
offering of variable life insurance policies and variable annuity contracts.
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<PAGE>
3.7 The Distributor shall sell and distribute the shares of the
Portfolios of the Fund in accordance with the applicable provisions of the 1933
Act, the 1934 Act, the 1940 Act, the NASD Rules of Fair Practice, and state law.
3.8 During such time as the Fund engages in Mixed Funding or Shared
Funding, a majority of the Board of Trustees of the Fund shall consist of
persons who are not "interested persons" of the Fund ("disinterested Trustees"),
as defined by Section 2(a)(19) of the 1940 Act and the rules thereunder, and as
modified by any applicable orders of the SEC, except that if this provision of
this Section 3.8 is not met by reason of the death, disqualification, or bona
fide resignation of any Trustee or Trustees, then the operation of this
provision shall be suspended (a) for a period of 45 days if the vacancy or
vacancies may be filled by the Fund's Board; (b) for a period of 60 days if a
vote of shareholders is required to fill the vacancy or vacancies; or (c) for
such longer period as the SEC may prescribe by order upon application.
3.9 The Insurer and its agents will not in any way recommend any
proposal or oppose or interfere with any reasonable proposal submitted by the
Fund at a meeting of owners of Variable Contracts or shareholders of the Fund,
and will in no way recommend, oppose, or interfere with the solicitation of
proxies for Fund shares held by Contract Owners, without the prior written
consent of the Fund, which consent may be withheld in the Fund's sole
discretion.
3.10 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities having jurisdiction (including, without
limitation, the SEC, the NASD, and state insurance regulators) and shall permit
such authorities
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reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
ARTICLE IV. POTENTIAL CONFLICTS
4.1 During such time as the Fund engages in Mixed Funding or Shared
Funding, the parties hereto shall comply with the conditions in this Article IV.
4.2 The Fund's Board of Trustees shall monitor the Fund for the
existence of any material irreconcilable conflict (1) between the interests of
owners of variable annuity contracts and variable life insurance policies, and
(2) between the interests of owners of Variable Contracts ("Variable Contract
Owners") issued by different Participating Life Insurance Companies that invest
in the Fund. A material irreconcilable 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
interpretive 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 of
the Fund are being managed; (e) a difference in voting instructions given by
variable annuity and variable life insurance contract owners; or (f) a decision
by a Participating Insurance Company to disregard the voting instructions of
Variable Contract Owners.
4.3 The Insurer agrees that it shall report any potential or existing
conflicts of which it is aware to the Fund's Board of Trustees. The Insurer will
be responsible for assisting the Board of Trustees of the Fund in carrying out
its responsibilities under the Mixed and Shared Funding Exemptive Order, or, if
the Fund is engaged in Mixed
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Funding or Shared Funding in reliance on Rule 6e-2, 6e-3(T), or any other
regulation under the 1940 Act, the Insurer will be responsible for assisting the
Board of Trustees of the Fund in carrying out its responsibilities under such
regulation, 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 Insurer to inform the Board whenever Variable Contract
Owner voting instructions are disregarded. The Insurer shall carry out its
responsibility under this Section 4.3 with a view only to the interests of the
Variable Contract Owners.
4.4 The Insurer agrees that in the event that it is determined by a
majority of the Board of Trustees of the Fund or a majority of the Fund's
disinterested Trustees that a material irreconcilable conflict exists, the
Insurer shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested Trustees of the Board of the
Fund), 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 another portfolio of the Fund, or submitting the question as to
whether such segregation should be implemented to a vote of all affected
Variable Contract Owners and, as appropriate, segregating the assets of any
appropriate group (I.E., annuity contract owners or life insurance contract
owners of contracts issued by one or more Participating Insurance Companies),
that votes in favor of such segregation, or offering to the affected Variable
Contract Owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account. If a
material irreconcilable conflict arises because of the Insurer's decision to
disregard Variable Contract Owners' voting instructions and that decision
represents a minority position or would preclude a majority vote, the Insurer
shall be required, at the Fund's
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election, to withdraw the Separate Accounts' investment in the Fund, 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 Trustees, and no charge or penalty will be imposed
as a result of such withdrawal. These responsibilities shall be carried out with
a view only to the interests of the Variable Contract Owners. A majority of the
disinterested Trustees of the Fund shall determine whether or not any proposed
action adequately remedies any material irreconcilable conflict, but in no event
will the Fund or its investment adviser or the Distributor be required to
establish a new funding medium for any Variable Contract. The Insurer shall not
be required by this Section 4.4 to establish a new funding medium for any
Variable Contract if any offer to do so has been declined by vote of a majority
of Variable Contract Owners materially adversely affected by the material
irreconcilable conflict.
4.5 The Insurer, at least annually, shall submit to the Fund's Board
of Trustees such reports, materials, or data as the Board reasonably may request
so that the Trustees of the Fund may fully carry out the obligations imposed
upon the Board by the conditions contained in the application for the Mixed and
Shared Funding Exemptive Order and said reports, materials, and data shall be
submitted more frequently if deemed appropriate by the Board.
4.6 All reports of potential or existing conflicts received by the
Fund's Board of Trustees, and all Board action with regard to determining the
existence of a conflict, notifying Participating Insurance Companies of a
conflict, and determining whether any proposed action adequately remedies a
conflict, shall be properly recorded in the minutes of the Board of Trustees of
the Fund or other appropriate records, and such minutes or other records shall
be made available to the SEC upon request.
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4.7 The Board of Trustees of the Fund shall promptly notify the
Insurer in writing of its determination of the existence of an irreconcilable
material conflict and its implications.
ARTICLE V. PROSPECTUSES AND PROXY STATEMENTS; VOTING
5.1 The Insurer shall distribute such prospectuses, proxy statements
and periodic reports of the Fund to the owners of Variable Contracts issued by
the Insurer as required to be distributed to such Variable Contract Owners under
applicable federal or state law.
5.2 The Distributor shall provide the Insurer with as many copies of
the current prospectus of the Fund as the Insurer may reasonably request. If
requested by the Insurer in lieu thereof, the Fund shall provide such
documentation (including a final copy of the Fund's prospectus as set in type or
in camera-ready copy or electronically) and other assistance as is reasonably
necessary in order for the Insurer to either print a stand-alone document or
print together in one document the current prospectus for the Variable Contracts
issued by the Insurer and the current prospectus for the Fund, or a document
combining the Fund prospectus with prospectuses of other funds in which the
Variable Contracts may be invested. The Fund shall bear the expense of printing
copies of its current prospectus that will be distributed to existing Variable
Contract Owners, and the Insurer shall bear the expense of printing copies of
the Fund's prospectus that are used in connection with offering the Variable
Contracts issued by the Insurer.
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5.3 The Fund and the Distributor shall provide, at the Fund's expense,
such copies of the Fund's current Statement of Additional Information ("SAI") as
may reasonably be requested, to the Insurer and to any owner of a Variable
Contract issued by the Insurer who requests such SAI.
5.4 The Fund, at its expense, shall provide the Insurer with copies of
its proxy statements, periodic reports to shareholders, and other communications
to shareholders in such quantity as the Insurer shall reasonably require for
purposes of distributing to owners of Variable Contracts issued by the Insurer.
The Fund, at the Insurer's expense, shall provide the Insurer with copies of its
periodic reports to shareholders and other communications to shareholders in
such quantity as the Insurer shall reasonably request for use in connection with
offering the Variable Contracts issued by the Insurer. If requested by the
Insurer in lieu thereof, the Fund shall provide such documentation (including a
final copy of the Fund's proxy statements, periodic reports to shareholders, and
other communications to shareholders, as set in type or in camera-ready copy or
electronically) and other assistance as reasonably necessary in order for the
Insurer to print such shareholder communications for distribution to owners of
Variable Contracts issued by the Insurer.
5.5 For so long as the SEC interprets the 1940 Act to require
pass-through voting by Participating Insurance Companies whose Separate Accounts
are registered as investment companies under the 1940 Act, the Insurer shall
vote shares of each Portfolio of the Fund held in a Separate Account or a
subaccount thereof, whether or not registered under the 1940 Act, at regular and
special meetings of the Fund in accordance with instructions timely received by
the Insurer (or its designated agent) from owners of Variable Contracts funded
by such Separate Account or subaccount thereof having a voting interest in the
Portfolio. The Insurer shall vote shares of a
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Portfolio of the Fund held in a Separate Account or a subaccount thereof that
are attributable to the Variable Contracts as to which no timely instructions
are received, as well as shares held in such Separate Account or subaccount
thereof that are not attributable to the Variable Contracts and owned
beneficially by the Insurer (resulting from charges against the Variable
Contracts or otherwise), in the same proportion as the votes cast by owners of
the Variable Contracts funded by that Separate Account or subaccount thereof
having a voting interest in the Portfolio from whom instructions have been
timely received. The Insurer shall vote shares of each Portfolio of the Fund
held in its general account, if any, in the same proportion as the votes cast
with respect to shares of the Portfolio held in all Separate Accounts of the
Insurer or subaccounts thereof, in the aggregate.
5.6 During such time as the Fund engages in Mixed Funding or Shared
Funding, the Fund shall disclose in its prospectus that (1) the Fund is intended
to be a funding vehicle for variable annuity and variable life insurance
contracts offered by various insurance companies, (2) material irreconcilable
conflicts possibly may arise, and (3) the Board of Trustees of the Fund will
monitor events in order to identify the existence of any material irreconcilable
conflicts and to determine what action, if any, should be taken in response to
any such conflict. The Fund hereby notifies the Insurer that prospectus
disclosure may be appropriate regarding potential risks of offering shares of
the Fund to separate accounts funding both variable annuity contracts and
variable life insurance policies and to separate accounts funding Variable
Contracts of unaffiliated life insurance companies.
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<PAGE>
ARTICLE VI. SALES MATERIAL AND INFORMATION
6.1 The Insurer 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 any Portfolio thereof) or its investment adviser
or the Distributor is named at least 15 days prior to the anticipated use of
such material, and no such sales literature or other promotional material shall
be used unless the Fund and the Distributor or the designee of either approve
the material or do not respond with comments on the material within 15 days from
receipt of the material.
6.2 The Insurer agrees that neither it nor any of its affiliates or
agents shall 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 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 and by the Distributor or its designee, except with the permission of
the Fund or its designee and the Distributor or its designee.
6.3 The Fund or the Distributor or the designee of either shall
furnish to the Insurer or its designee, each piece of sales literature or other
promotional material in which the Insurer or its Separate Accounts are named at
least 15 days prior to the anticipated use of such material, and no such
material shall be used unless the Insurer or its designee approves the material
or does not respond with comments on the material within 15 days from receipt of
the material.
6.4 The Fund and the Distributor agree that each and the affiliates
and agents of each shall not give any information or make any representations on
behalf of the Insurer or concerning the Insurer, the Separate Accounts, or the
Variable Contracts
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<PAGE>
issued by the Insurer, other than the information or representations contained
in a registration statement or prospectus for such Variable Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in reports for the Separate Accounts or prepared for distribution to
owners of such Variable Contracts, or in sales literature or other promotional
material approved by the Insurer or its designee, except with the permission of
the Insurer.
6.5 The Fund will provide to the Insurer at least one complete copy of
the Mixed and Shared Funding Exemptive Application and any amendments thereto,
all prospectuses, Statements of Additional Information, reports, proxy
statements and other voting solicitation materials, and all amendments and
supplements to any of the above, that relate to the Fund or its shares, promptly
after the filing of such document with the SEC or other regulatory authorities.
6.6 The Insurer will provide to the Fund all prospectuses (which shall
include an offering memorandum if the Variable Contracts issued by the Insurer
or interests therein are not registered under the 1933 Act), Statements of
Additional Information, reports, solicitations for voting instructions relating
to the Fund, and all amendments or supplements to any of the above that relate
to the Variable Contracts issued by the Insurer or the Separate Accounts which
utilize the Fund as an underlying investment medium, promptly after the filing
of such document with the SEC or other regulatory authority.
6.7 For purposes of this Article VI, 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
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pictures, computerized media, 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.
ARTICLE VII. INDEMNIFICATION
7.1 INDEMNIFICATION BY THE INSURER
7.1(a) The Insurer agrees to indemnify and hold harmless the
Fund, each of its Trustees and officers, any affiliated person of the Fund
within the meaning of Section 2(a)(3) of the 1940 Act, and the Distributor
(collectively, the "Indemnified Parties" for purposes of this Section 7.1)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Insurer) or litigation expenses
(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 litigation expenses are
related to the sale or acquisition of the Fund's shares or the Variable
Contracts issued by the Insurer 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 (which shall
include an offering memorandum) for the Variable Contracts issued
by the Insurer or sales literature for such Variable 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
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the Insurer by or on behalf of the Fund for use in the
registration statement or prospectus for the Variable Contracts
issued by the Insurer or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of
such Variable Contracts or Fund shares; or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations contained
in the registration statement, prospectus or sales literature of
the Fund not supplied by the Insurer or persons under its control)
or wrongful conduct of the Insurer or any of its affiliates,
employees or agents with respect to the sale or distribution of
the Variable Contracts issued by the Insurer or the 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 Insurer;
or
(iv) arise out of or result from any material breach
of any representation and/or warranty made by the Insurer in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Insurer;
except to the extent provided in Sections 7.1(b) and 7.1(c) hereof.
7.1(b) The Insurer shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
expenses to which an Indemnified Party would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of the
Indemnified Party's duties or by reason of the Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the Fund.
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7.1(c) The Insurer shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Party shall have notified the Insurer 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 Party shall have received notice
of such service on any designated agent), but failure to notify the Insurer
of any such claim shall not relieve the Insurer 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 Insurer shall be
entitled to participate, at its own expense, in the defense of such action.
The Insurer also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Insurer to such party of the Insurer'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 Insurer 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.
7.1(d) The Indemnified Parties shall promptly notify the
Insurer of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund shares or the Variable
Contracts issued by the Insurer or the operation of the Fund.
7.2 INDEMNIFICATION BY THE DISTRIBUTOR
7.2(a) The Distributor agrees to indemnify and hold harmless
the Insurer, its affiliated principal underwriter of the Variable Contracts, and
each of their directors and officers and any affiliated person of the Insurer
within the meaning
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of Section 2(a)(3) of the 1940 Act (collectively, the "Indemnified Parties" for
purposes of this Section 7.2) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Distributor) or litigation expenses (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 litigation expenses are related to the sale or acquisition of the
Fund's shares or the Variable Contracts issued by the Insurer 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 Distributor
or the Fund or the designee of either by or on behalf of the
Insurer 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 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 Contracts issued by the Insurer or Fund shares; or
(ii) arise out of or as a result of any statement or
representations (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Variable Contracts not supplied by the
Distributor or any employees or agents thereof) or wrongful
conduct of the Fund or Distributor, or the affiliates, employees,
or agents of the Fund or the Distributor with respect to the sale
or distribution of the Variable Contracts issued by the Insurer
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 Variable
Contracts issued by the Insurer, or any amendment thereof or
supplement thereto, or the omission or alleged
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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 Insurer by or on behalf of the
Fund; or
(iv) arise out of or result from any material breach
of any representation and/or warranty made by the Distributor in
this Agreement or arise out of or result from any other material
breach of this Agreement by the Distributor;
except to the extent provided in Sections 7.2(b) and 7.2(c) hereof.
7.2(b) The Distributor shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation expenses to which an Indemnified Party would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence in
the performance of the Indemnified Party's duties or by reason of the
Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Insurer or the Separate Accounts.
7.2(c) The Distributor shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Party shall have notified the Distributor 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 Party shall have received notice of such
service on any designated agent), but failure to notify the Distributor of any
such claim shall not relieve the Distributor 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 Distributor will be entitled to
participate, at is own expense, in the defense thereof. The Distributor also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from
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the Distributor to such party of the Distributor'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 Distributor will not be liable to
such party under this Agreement for any legal or other expense subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
7.2(d) The Insurer shall promptly notify the Distributor 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
Contracts issued by the Insurer or the operation of the Separate Accounts.
7.3 INDEMNIFICATION BY THE FUND
7.3(a) The Fund agrees to indemnify and hold harmless the
Insurer, its affiliated principal underwriter of the Variable Contracts, and
each of their directors and officers and any affiliated person of the Insurer
within the meaning of Section 2(a)(3) of the 1940 Act (collectively, the
"Indemnified Parties" for purposes of this Section 7.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation expenses (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 litigation expenses are related to the sale or
acquisition of the Fund's shares or the Variable Contracts issued by the Insurer
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
23
<PAGE>
or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to the
Distributor or the Fund or the designee of either by or on behalf
of the Insurer 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 Contracts issued by the Insurer or Fund shares;
or
(ii) arise out of or as a result of any statement or
representation (other than statements or representations
contained in the registration statement, prospectus or sales
literature for the Variable Contracts not supplied by the
Distributor or any employees or agents thereof) or wrongful
conduct of the Fund, or the affiliates, employees, or agents of
the Fund, with respect to the sale or distribution of the
Variable Contracts issued by the Insurer 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 Variable
Contracts issued by the Insurer, 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 Insurer by or on behalf of the
Fund; or
(iv) 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;
except to the extent provided in Sections 7.3(b) and 7.3(c) hereof.
7.3(b) The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
expenses to which an Indemnified Party would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of the
Indemnified Party's duties or by reason of the Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the Insurer or the
Separate Accounts.
24
<PAGE>
7.3(c) The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such 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
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.
7.3(d) The Insurer shall promptly notify the Fund 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 Contracts
issued by the Insurer or the sale of the Fund's shares.
ARTICLE VIII. APPLICABLE LAW
8.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Pennsylvania.
25
<PAGE>
8.2 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, the Mixed and Shared Funding Exemptive
Order), and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE IX. TERMINATION
9.1 This Agreement shall terminate:
(a) at the option of any party upon 180 days advance written
notice to the other ; or
(b) at the option of the Insurer if shares of the Portfolios
are not reasonably available to meet the requirements of the Variable Contracts
issued by the Insurer, as determined by the Insurer, and upon prompt notice by
the Insurer to the other parties; or
(c) at the option of the Fund or the Distributor upon
institution of formal proceedings against the Insurer or its agent by the NASD,
the SEC, or any state securities or insurance department or any other regulatory
body regarding the Insurer's duties under this Agreement or related to the sale
of the Variable Contracts issued by the Insurer, the operation of the Separate
Accounts, or the purchase of the Fund shares; or
26
<PAGE>
(d) at the option of the Insurer upon institution of formal
proceedings against the Fund or the Distributor by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body; or
(e) upon requisite vote of the Variable Contract Owners having
an interest in the Separate Accounts (or any subaccounts thereof) to substitute
the shares of another investment company for the corresponding shares of the
Fund or a Portfolio in accordance with the terms of the Variable Contracts for
which those shares had been selected or serve as the underlying investment
media; or
(f) in the event any of the shares of a Portfolio 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 Contracts issued or to be issued by the Insurer; or
(g) by any party to the Agreement upon a determination by a
majority of the Trustees of the Fund, or a majority of its disinterested
Trustees, that an irreconcilable conflict, as described in Article IV hereof,
exists; or
(h) at the option of the Insurer if the Fund or a Portfolio
fails to meet the requirements under Subchapter M of the Code for qualification
as a Regulated Investment Company specified in Section 3.2 hereof or the
diversification requirements specified in Section 3.3 hereof.
9.2 Each party to this Agreement shall promptly notify the other
parties to the Agreement of the institution against such party of any such
formal proceedings as described in Sections 9.1(c) and (d) hereof. The Insurer
shall give 60 days prior
27
<PAGE>
written notice to the Fund of the date of any proposed vote of Variable Contract
Owners to replace the Fund's shares as described in Section 9.1(e) hereof.
9.3 Except as necessary to implement Variable Contract Owner initiated
transactions, or as required by state insurance laws or regulations, the Insurer
shall not redeem Fund shares attributable to the Variable Contracts issued by
the Insurer (as opposed to Fund shares attributable to the Insurer's assets held
in the Separate Accounts), and the Insurer shall not prevent Variable Contract
Owners from allocating payments to a Portfolio, until 60 days after the Insurer
shall have notified the Fund or Distributor of its intention to do so.
9.4 Notwithstanding any termination of this Agreement, the Fund and
the Distributor shall at the option of the Insurer continue to make available
additional shares of the Fund pursuant to the terms and conditions of this
Agreement, for all Variable Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, based upon instructions from the owners of the
Existing Contracts, the Separate Accounts shall be permitted to reallocate
investments in the Portfolios of the Fund and redeem investments in the
Portfolios, and shall be permitted to invest in the Portfolios in the event that
owners of the Existing Contracts make additional purchase payments under the
Existing Contracts. If this Agreement terminates, the parties agree that
Sections 3.10, 7.1, 7.2, 7.3, 8.1, and 8.2, and, to the extent that all or a
portion of the assets of the Separate Accounts continue to be invested in the
Fund or any Portfolio of the Fund, Articles I, II, and IV and Sections 5.5 and
5.6 will remain in effect after termination.
28
<PAGE>
ARTICLE X. 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:
Insurance Series
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Distributor:
Federated Securities Corp.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Attn.: John W. McGonigle
If to the Insurer:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
Attention: Richard M. Reilly, Vice President
ARTICLE XI: MISCELLANEOUS
11.1 The Fund and the Insurer agree that if and to the extent Rule 6e-2
or Rule 6e-3(T) under the 1940 Act is amended or if Rule 6e-3 is adopted in
final form, to the extent applicable, the Fund and the Insurer shall each take
such steps as may be necessary to comply with the Rule as amended or adopted in
final form.
29
<PAGE>
11.2 A copy of the Fund's Agreement and Declaration of Trust is on file
with the Secretary of the Commonwealth of Massachusetts and notice is hereby
given that any agreements that are executed on behalf of the Fund by any Trustee
or officer of the Fund are executed in his or her capacity as Trustee or officer
and not individually. The obligations of this Agreement shall only be binding
upon the assets and property of the Fund and shall not be binding upon any
Trustee, officer or shareholder of the Fund individually.
11.3 Nothing in this Agreement shall impede the Fund's Trustees or
shareholders of the shares of the Fund's Portfolios from exercising any of the
rights provided to such Trustees or shareholders in the Fund's Agreement and
Declaration of Trust, as amended, a copy of which will be provided to the
Insurer upon request.
11.4 Administrative services to Variable Contract Owners shall be the
responsibility of Insurer. Insurer, on behalf of its separate accounts will be
the sole shareholder of record of Fund shares. Fund and Distributor recognize
that they will derive a substantial savings in administrative expense by virtue
of having a sole shareholder rather than multiple shareholders. In consideration
of the administrative savings resulting from having a sole shareholder rather
than multiple shareholders, Distributor agrees to pay to Insurer an amount
computed at an annual rate of .25 of 1% of the average daily net asset value of
shares held in subaccounts for which Insurer provides administrative services.
Distributor's payments to Insurer are for administrative services only and do
not constitute payment in any manner for investment advisory services.
11.5 It is understood that the name "Federated" or any derivative
thereof or logo associated with that name is the valuable property of the
Distributor and its
30
<PAGE>
affiliates, and that the Insurer has the right to use such name (or derivative
or logo) only so long as this Agreement is in effect. Upon termination of this
Agreement the Insurer shall forthwith cease to use such name (or derivative or
logo).
11.6 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.
11.7 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
11.8 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.
11.9 This Agreement may not be assigned by any party to the Agreement
except with the written consent of the other parties to the Agreement.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
INSURANCE SERIES
ATTEST: BY:
------------------------- --------------------------------
Name: Name:
--------------------------- ------------------------------
Title: Title:
-------------------------- -----------------------------
FEDERATED SECURITIES CORP.
ATTEST: BY:
------------------------- --------------------------------
Name: Name:
--------------------------- ------------------------------
Title: Title:
-------------------------- -----------------------------
FIRST ALLMERICA
FINANCIAL LIFE INSURANCE
COMPANY
ATTEST: BY:
------------------------- --------------------------------
Name: Name:
--------------------------- ------------------------------
Title: Title:
-------------------------- -----------------------------
32
<PAGE>
EXHIBIT A
FUVUL Separate Account
33
<PAGE>
EXHIBIT B
American Leaders Fund II
High Income Bond Fund II
Prime Money Fund II
34
<PAGE>
PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this 1st day of August 1998, by
and among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY, a Delaware
corporation (the "Company") on its own behalf and on behalf of each of the
segregated asset accounts of the Company set forth in Schedule A hereto, as may
be amended from time to time (the "Accounts"), and MASSACHUSETTS FINANCIAL
SERVICES COMPANY, a Delaware corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, the series of shares of the Trust offered by the Trust to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and, collectively, the "Portfolios");
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or
variable life insurance contracts (individually, the "Policy" or, collectively,
the "Policies") which, if required by applicable law, will be registered under
the 1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated
asset accounts, established by resolution of the Board of Directors of the
Company, to set aside and invest assets attributable to the aforesaid variable
annuity and/or variable life insurance contracts that are allocated to the
Accounts (the Policies and the Accounts covered by this Agreement, and each
corresponding Portfolio covered by this Agreement in which the Accounts invest,
is specified in Schedule A attached hereto as may be modified from time to
time);
WHEREAS, the Company has registered or will register the Accounts as
unit investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered
as a broker-dealer with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act of 1934, as
<PAGE>
amended (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD");
WHEREAS, Allmerica Investments, Inc., the underwriter for the
individual variable annuity and the variable life policies, is registered as a
broker-dealer with the SEC under the 1934 Act and is a member in good standing
of the NASD; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Accounts to fund the Policies, and the Trust intends to sell such Shares to
the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust,
MFS, and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that
Business Day, as defined below) and which are available for purchase by
such Accounts, executing such orders on a daily basis at the net asset
value next computed after receipt by the Trust or its designee of the
order for the Shares. For purposes of this Section 1.1, the Company
shall be the designee of the Trust for receipt of such orders from
Policy owners and receipt by such designee shall constitute receipt by
the Trust; PROVIDED that the Trust receives notice of such orders by
9:30 a.m. New York time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange, Inc. (the
"NYSE") is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and
the Accounts on those days on which the Trust calculates its net asset
value pursuant to rules of the SEC and the Trust shall calculate such
net asset value on each day which the NYSE is open for trading.
Notwithstanding the foregoing, the Board of Trustees of the Trust (the
"Board") may refuse to sell any Shares to the Company and the Accounts,
or suspend or terminate the offering of the Shares 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 its fiduciary duties under federal and any applicable state laws,
necessary in the best interest of the Shareholders of such Portfolio.
1.3. The Trust and MFS agree that the Shares will be sold only to
insurance companies which have entered into participation agreements
with the Trust and MFS (the "Participating Insurance Companies") and
their separate accounts, qualified pension and retirement plans and MFS
or its affiliates. The Trust and MFS will not sell Trust shares to any
insurance company or separate account unless an agreement containing
provisions substantially the same as Articles III and VII of this
Agreement is in effect to govern such sales. The Company will not
resell the Shares except to the Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed
by Policy owners on that Business Day),
-2-
<PAGE>
executing such requests on a daily basis at the net asset value next
computed after receipt by the Trust or its designee of the request for
redemption. For purposes of this Section 1.4, the Company shall be the
designee of the Trust for receipt of requests for redemption from
Policy owners and receipt by such designee shall constitute receipt by
the Trust; provided that the Trust receives notice of such request for
redemption by 9:30 a.m. New York time on the next following Business
Day.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted
with respect to any Portfolio. However, with respect to payment of the
purchase price by the Company and of redemption proceeds by the Trust,
the Company and the Trust shall net purchase and redemption orders with
respect to each Portfolio and shall transmit one net payment for all of
the Portfolios in accordance with Section 1.6 hereof.
1.6. In the event of net purchases, the Company shall pay for the
Shares by 2:00 p.m. New York time on the next Business Day after an
order to purchase the Shares is made in accordance with the provisions
of Section 1.1. hereof. In the event of net redemptions, the Trust
shall pay the redemption proceeds by 2:00 p.m. New York time on the
next Business Day after an order to redeem the shares is made in
accordance with the provisions of Section 1.4. hereof. All such
payments shall be in federal funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts.
The Shares ordered from the Trust will be recorded in an appropriate
title for the Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any dividends or
capital gain distributions payable on the Shares. The Company hereby
elects to receive all such dividends and distributions as are payable
on a Portfolio's Shares in additional Shares of that Portfolio. The
Trust shall notify the Company of the number of Shares so issued as
payment of such dividends and distributions.
1.9. The Trust or its custodian shall make the net asset value per
share for each Portfolio available to the Company on each Business Day
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 6:30 p.m. New York time. In the event that the
Trust is unable to meet the 6:30 p.m. time stated herein, it shall
provide additional time for the Company to place orders for the
purchase and redemption of Shares. Such additional time shall be equal
to the additional time which the Trust takes to make the net asset
value available to the Company. If the Trust provides materially
incorrect share net asset value information, the Trust shall make an
adjustment to the number of shares purchased or redeemed for the
Accounts to reflect the correct net asset value per share. Any material
error in the calculation or reporting of net asset value per share,
dividend or capital gains information shall be reported promptly upon
discovery to the Company.
ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will
be registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold,
and distributed in compliance in all material respects with all
applicable state and federal laws, including without limitation the
1933 Act, the Securities Exchange Act of 1934, as
-3-
<PAGE>
amended (the "1934 Act"), and the 1940 Act. 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 as a segregated asset account under
applicable law and has registered or, prior to any issuance or sale of
the Policies, will register the Accounts as unit investment trusts in
accordance with the provisions of the 1940 Act (unless exempt
therefrom) to serve as segregated investment accounts for the
Policies, and that it will maintain such registration for so long as
any Policies are outstanding. The Company shall amend the registration
statements under the 1933 Act for the Policies and the registration
statements under the 1940 Act for the Accounts from time to time as
required in order to effect the continuous offering of the Policies or
as may otherwise be required by applicable law. The Company shall
register and qualify the Policies for sales in accordance with the
securities laws of the various states only if and to the extent deemed
necessary by the Company.
2.2. The Company represents and warrants that the Policies are
currently and at the time of issuance will be treated as life
insurance, endowment or annuity contract under applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), that it
will maintain such treatment and that it will notify the Trust or MFS
immediately upon having a reasonable basis for believing that the
Policies have ceased to be so treated or that they might not be so
treated in the future.
2.3. The Company represents and warrants that Allmerica Investments,
Inc., the underwriter for the individual variable annuity and the
variable life policies, is a member in good standing of the NASD and is
a registered broker-dealer with the SEC. The Company represents and
warrants that the Company and Allmerica Investments, Inc. will sell and
distribute such policies in accordance in all material respects with
all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.4. The Trust and MFS represent and warrant that the 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 Trust is and shall remain registered under
the 1940 Act. The Trust 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
Trust shall register and qualify the Shares for sale in accordance with
the laws of the various states only if and to the extent deemed
necessary by the Trust.
2.5. MFS represents and warrants that the Underwriter is a member in
good standing of the NASD and is registered as a broker-dealer with the
SEC. The Trust and MFS represent that the Trust and the Underwriter
will sell and distribute the Shares in accordance in all material
respects with all applicable state and federal securities laws,
including without limitation the 1933 Act, the 1934 Act, and the 1940
Act.
2.6. The Trust 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 and
any applicable regulations thereunder.
2.7. MFS represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it
shall perform its obligations for the Trust in compliance in all
material respects with any applicable federal securities laws and with
the securities laws of The
-4-
<PAGE>
Commonwealth of Massachusetts. MFS represents and warrants that it is
not subject to state securities laws other than the securities laws of
The Commonwealth of Massachusetts and that it is exempt from
registration as an investment adviser under the securities laws of The
Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably
request so that it may carry out fully the obligations imposed upon it
by the conditions contained in the exemptive application pursuant to
which the SEC has granted exemptive relief to permit mixed and shared
funding (the "Mixed and Shared Funding Exemptive Order").
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the
Shares as the Company may reasonably request for distribution to
existing Policy owners whose Policies are funded by such Shares. The
Trust or its designee shall provide the Company, at the Company's
expense, with as many copies of the current prospectus for the Shares
as the Company may reasonably request for distribution to prospective
purchasers of Policies. If requested by the Company in lieu thereof,
the Trust or its designee shall provide such documentation (including a
"camera ready" copy of the new prospectus as set in type or, at the
request of the Company, as a diskette in the form sent to the financial
printer) and other assistance as is reasonably necessary in order for
the parties hereto once each year (or more frequently if the prospectus
for the Shares is supplemented or amended) to have the prospectus for
the Policies and the prospectus for the Shares printed together in one
document; the expenses of such printing to be apportioned between (a)
the Company and (b) the Trust or its designee in proportion to the
number of pages of the Policy and Shares' prospectuses, taking account
of other relevant factors affecting the expense of printing, such as
covers, columns, graphs and charts; the Trust or its designee to bear
the cost of printing the Shares' prospectus portion of such document
for distribution to owners of existing Policies funded by the Shares
and the Company to bear the expenses of printing the portion of such
document relating to the Accounts; PROVIDED, however, that the Company
shall bear all printing expenses of such combined documents where used
for distribution to prospective purchasers or to owners of existing
Policies not funded by the Shares. In the event that the Company
requests that the Trust or its designee provides the Trust's prospectus
in a "camera ready" or diskette format, the Trust shall be responsible
for providing the prospectus in the format in which it or MFS is
accustomed to formatting prospectuses and shall bear the expense of
providing the prospectus in such format (E.G., typesetting expenses),
and the Company shall bear the expense of adjusting or changing the
format to conform with any of its prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or
its designee. The Trust or its designee, at its expense, shall print
and provide such statement of additional information to the Company (or
a master of such statement suitable for duplication by the Company) for
distribution to any owner of a Policy funded by the Shares. The Trust
or its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser
who requests such statement or to an owner of a Policy not funded by
the Shares.
-5-
<PAGE>
3.3. The Trust or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Trust's
proxy materials, reports to Shareholders and other communications to
Shareholders in such quantity as the Company shall reasonably require
for distribution to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3
above, or of Article V below, the Company shall pay the expense of
printing or providing documents to the extent such cost is considered a
distribution expense. Distribution expenses would include by way of
illustration, but are not limited to, the printing of the Shares'
prospectus or prospectuses for distribution to prospective purchasers
or to owners of existing Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate
to include in the prospectus pursuant to which a Policy is offered
disclosure regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions
received from Policy owners; and
(c) vote the Shares for which no instructions have been
received in the same proportion as the Shares of such
Portfolio for which instructions have been received
from Policy owners;
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. The Company will in no way recommend action in
connection with or oppose or interfere with the solicitation of proxies
for the Shares held for such Policy owners. The Company reserves the
right to vote 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 holding Shares calculates voting privileges in the manner
required by the Mixed and Shared Funding Exemptive Order. The Trust and
MFS will notify the Company of any changes of interpretations or
amendments to the Mixed and Shared Funding Exemptive Order.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other
promotional material in which the Trust, MFS, any other investment
adviser to the Trust, or any affiliate of MFS are named, at least three
(3) Business Days prior to its use. No such material shall be used if
the Trust, MFS, or their respective designees reasonably objects to
such use within three (3) Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statement on behalf of the Trust, MFS, any other
investment adviser to the Trust, or any affiliate of MFS or concerning
the Trust or any other such entity in connection with the sale of the
Policies other than the information or representations contained in the
registration statement, prospectus or statement of additional
information for the Shares, as such registration statement, prospectus
and statement of
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additional information may be amended or supplemented from time to
time, or in reports or proxy statements for the Trust, or in sales
literature or other promotional material approved by the Trust, MFS or
their respective designees, except with the permission of the Trust,
MFS or their respective designees. The Trust, MFS or their respective
designees each agrees to respond to any request for approval on a
prompt and timely basis. The Company shall adopt and implement
procedures reasonably designed to ensure that information concerning
the Trust, MFS or any of their affiliates which is intended for use
only by brokers or agents selling the Policies (I.E., information that
is not intended for distribution to Policy owners or prospective
Policy owners) is so used, and neither the Trust, MFS nor any of their
affiliates shall be liable for any losses, damages or expenses
relating to the improper use of such broker only materials.
4.3. The Trust 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
the Accounts is named, at least three (3) Business Days prior to its
use. No such material shall be used if the Company or its designee
reasonably objects to such use within three (3) Business Days after
receipt of such material.
4.4. The Trust and MFS shall not give, and agree that the Underwriter
shall not give, any information or make any representations on behalf
of the Company or concerning the Company, the Accounts, or the Policies
in connection with the sale of the Policies other than the information
or representations contained in a registration statement, prospectus,
or statement of additional information for the Policies, as such
registration statement, prospectus and statement of additional
information may be amended or supplemented from time to time, or in
reports for the Accounts, or in sales literature or other promotional
material approved by the Company or its designee, except with the
permission of the Company. The Company or its designee agrees to
respond to any request for approval on a prompt and timely basis. The
parties hereto agree that this Section 4.4. is neither intended to
designate nor otherwise imply that MFS is an underwriter or distributor
of the Policies.
4.5. The Company and the Trust (or its designee in lieu of the Company
or the Trust, as appropriate) will each provide to the other 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 Policies, or to the Trust or its
Shares, prior to or contemporaneously with the filing of such document
with the SEC or other regulatory authorities. The Company and the Trust
shall also each promptly inform the other of the results of any
examination by the SEC (or other regulatory authorities) that relates
to the Policies, the Trust or its Shares, and the party that was the
subject of the examination shall provide the other party with a copy of
relevant portions of any "deficiency letter" or other correspondence or
written report regarding any such examination.
4.6. The Trust and MFS will provide the Company with as much notice as
is reasonably practicable of any proxy solicitation for any Portfolio,
and of any material change in the Trust's registration statement,
particularly any change resulting in change to the registration
statement or prospectus or statement of additional information for any
Account. The Trust and MFS will cooperate with the Company so as to
enable the Company to solicit proxies from Policy owners or to make
changes to its prospectus, statement of additional information or
registration statement, in an orderly manner. The Trust and MFS will
make reasonable efforts to attempt to have changes
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affecting Policy prospectuses become effective simultaneously with the
annual updates for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, 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), and sales literature (such as
brochures, circulars, reprints or excerpts or any other advertisement,
sales literature, or published articles), distributed or made generally
available to customers or the public, educational or training materials
or communications distributed or made generally available to some or
all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company
under this Agreement, and the Company shall pay no fee or other
compensation to the Trust, except that if the Trust or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act
to finance distribution and Shareholder servicing expenses, then,
subject to obtaining any required exemptive orders or regulatory
approvals, the Trust may make payments to the Company or to the
underwriter for the Policies if and in amounts agreed to by the Trust
in writing. Each party, however, shall, in accordance with the
allocation of expenses specified in Articles III and V hereof,
reimburse other parties for expenses initially paid by one party but
allocated to another party. In addition, nothing herein shall prevent
the parties hereto from otherwise agreeing to perform, and arranging
for appropriate compensation for, other services relating to the Trust
and/or to the Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable
federal and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration
fees; preparation and filing of the Trust's proxy materials and reports
to Shareholders; setting in type and printing its prospectus and
statement of additional information (to the extent provided by and as
determined in accordance with Article III above); setting in type and
printing the proxy materials and reports to Shareholders (to the extent
provided by and as determined in accordance with Article III above);
the preparation of all statements and notices required of the Trust by
any federal or state law with respect to its Shares; all taxes on the
issuance or transfer of the Shares; and the costs of distributing the
Trust's prospectuses and proxy materials to owners of Policies funded
by the Shares and any expenses permitted to be paid or assumed by the
Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act.
The Trust shall not bear any expenses of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares'
prospectus or prospectuses in connection with new sales of the Policies
and of distributing the Trust's Shareholder reports to Policy owners.
The Company shall bear all expenses associated with the registration,
qualification, and filing of the Policies under applicable federal
securities and state insurance laws; the cost of preparing, printing
and distributing the Policy prospectus and statement of additional
information; and the cost of preparing, printing and distributing
annual individual account statements for Policy owners as required by
state insurance laws.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
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6.1. The Trust and MFS represent and warrant that each Portfolio of the
Trust will meet the diversification requirements of Section 817 (h) (1)
of the Code and Treas. Reg. 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance
contracts, as they may be amended from time to time (and any revenue
rulings, revenue procedures, notices, and other published announcements
of the Internal Revenue Service interpreting these sections), as if
those requirements applied directly to each such Portfolio.
6.2. The Trust and MFS represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the
Code and that they will maintain such qualification (under Subchapter M
or any successor or similar provision).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for
the existence of any material irreconcilable conflict between the
interests of the variable annuity contract owners and the variable life
insurance policy owners of the Company and/or affiliated companies
("contract owners") investing in the Trust. The Board shall have the
sole authority to determine if a material irreconcilable conflict
exists, and such determination shall be binding on the Company only if
approved in the form of a resolution by a majority of the Board, or a
majority of the disinterested trustees of the Board. The Board will
give prompt notice of any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set
forth in the Trust's exemptive application pursuant to which the SEC
has granted the Mixed and Shared Funding Exemptive Order by providing
the Board, as it may reasonably request, with all information necessary
for the Board to consider any issues raised and agrees that it will be
responsible for promptly reporting any potential or existing conflicts
of which it is aware to the Board including, but not limited to, an
obligation by the Company to inform the Board whenever contract owner
voting instructions are disregarded. The Company also agrees that, if a
material irreconcilable conflict arises, it will at its own cost remedy
such conflict up to and including (a) withdrawing the assets allocable
to some or all of the Accounts from the Trust or any Portfolio and
reinvesting such assets in a different investment medium, including
(but not limited to) another Portfolio of the Trust, or submitting to a
vote of all affected contract owners whether to withdraw assets from
the Trust or any Portfolio and reinvesting such assets in a different
investment medium and, as appropriate, segregating the assets
attributable to any appropriate group of contract owners that votes in
favor of such segregation, or offering to any of the affected contract
owners the option of segregating the assets attributable to their
contracts or policies, and (b) establishing a new registered management
investment company and segregating the assets underlying the Policies,
unless a majority of Policy owners materially adversely affected by the
conflict have voted to decline the offer to establish a new registered
management investment company.
7.3. A majority of the disinterested trustees of the Board shall
determine whether any proposed action by the Company adequately
remedies any material irreconcilable conflict. In the event that the
Board determines that any proposed action does not adequately remedy
any material irreconcilable conflict, the Company will withdraw from
investment in the Trust each of the Accounts designated by the
disinterested trustees and terminate this Agreement within six (6)
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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 to remedy any such material
irreconcilable conflict as determined by a majority of the
disinterested trustees of the Board.
7.4. 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 Mixed and Shared Funding
Exemptive Order) on terms and conditions materially different from
those contained in the Mixed and Shared Funding Exemptive Order, then
(a) the Trust and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with
Rule 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2,
7.3 and 7.4 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
The Company agrees to indemnify and hold harmless the Trust,
MFS, any affiliates of MFS, and each of their respective
directors/trustees, officers and each person, if any, who controls the
Trust or MFS within the meaning of Section 15 of the 1933 Act, and any
agents or employees of the foregoing (each an "Indemnified Party," or
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 expenses (including reasonable counsel fees) to which any
Indemnified Party 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 Shares or the Policies
and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained
in the registration statement, prospectus or statement
of additional information for the Policies or contained
in the Policies or sales literature or other promotional
material for the Policies (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 reasonable reliance upon and in
conformity with information furnished to the Company or
its designee by or on behalf of the Trust or MFS for use
in the registration statement, prospectus or statement
of additional information for the Policies or in the
Policies or sales literature or other promotional
material (or any amendment or supplement) or otherwise
for use in connection with the sale of the Policies or
Shares; or
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<PAGE>
(b) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration statement,
prospectus, statement of additional information or sales
literature or other promotional material of the Trust
not supplied by the Company or its designee, or persons
under its control and on which the Company has
reasonably relied) or wrongful conduct of the Company or
persons under its control, with respect to the sale or
distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the
registration statement, prospectus, statement of
additional information, or sales literature or other
promotional literature of the Trust, 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 Trust by or on behalf of
the Company; or
(d) 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; or
(e) arise as a result of any failure by the Company to
provide the services and furnish the materials under the
terms of this Agreement;
as limited by and in accordance with the provisions of this Article
VIII.
8.2. INDEMNIFICATION BY THE TRUST
The Trust 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,
and any agents or employees of the foregoing (each an "Indemnified
Party," or 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
Trust) or expenses (including reasonable counsel fees) to which any
Indemnified Party 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 Shares or the Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained
in the registration statement, prospectus, statement of
additional information or sales literature or other
promotional material of the Trust (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 statement 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 reasonable reliance upon and in
conformity with information furnished to the Trust, MFS,
the Underwriter or their respective designees by or on
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behalf of the Company for use in the registration
statement, prospectus or statement of additional
information for the Trust or in sales literature or
other promotional material for the Trust (or any
amendment or supplement) or otherwise for use in
connection with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration statement,
prospectus, statement of additional information or sales
literature or other promotional material for the
Policies not supplied by the Trust, MFS, the Underwriter
or any of their respective designees or persons under
their respective control and on which any such entity
has reasonably relied) or wrongful conduct of the Trust
or persons under its control, with respect to the sale
or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the
registration statement, prospectus, statement of
additional information, or sales literature or other
promotional literature of the Accounts or relating to
the Policies, 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 Trust, MFS or the Underwriter; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in 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 arise out of or result from any other
material breach of this Agreement by the Trust; or
(e) arise out of or result from the materially incorrect or
untimely calculation or reporting of the daily net asset
value per share or dividend or capital gain distribution
rate; or
(f) arise as a result of any failure by the Trust to provide
the services and furnish the materials under the terms
of the Agreement;
as limited by and in accordance with the provisions of this Article
VIII.
8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating
Insurance Company or any Policy holder, with respect to any losses,
claims, damages, liabilities or expenses that arise out of or result
from (i) a breach of any representation, warranty, and/or covenant made
by the Company hereunder or by any Participating Insurance Company
under an agreement containing substantially similar representations,
warranties and covenants; (ii) the failure by the Company or any
Participating Insurance Company to maintain its segregated asset
account (which invests in any Portfolio) as a legally and validly
established segregated asset account under applicable state law and as
a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) the failure by the Company
or any Participating Insurance Company to maintain its variable annuity
and/or variable life insurance
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contracts (with respect to which any Portfolio serves as an underlying
funding vehicle) as life insurance, endowment or annuity contracts
under applicable provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to
any losses, claims, damages, liabilities or expenses to which an
Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, willful misconduct, 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.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of notice of commencement of any action, such Indemnified Party
will, if a claim in respect thereof is to be made against the
indemnifying party under this section, notify the indemnifying party of
the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any Indemnified Party otherwise than under this section. In
case any such action is brought against any Indemnified Party, and it
notified the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the
extent that it may wish, assume the defense thereof, with counsel
satisfactory to such Indemnified Party. After notice from the
indemnifying party of its intention to assume the defense of an action,
the Indemnified Party shall bear the expenses of any additional counsel
obtained by it, and the indemnifying party shall not be liable to such
Indemnified Party under this section for any legal or other expenses
subsequently incurred by such Indemnified Party in connection with the
defense thereof other than reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of
the commencement of any litigation or proceeding against it or any of
its respective officers, directors, trustees, employees or 1933 Act
control persons in connection with the Agreement, the issuance or sale
of the Policies, the operation of the Accounts, or the sale or
acquisition of Shares.
8.7. 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 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 SEC may grant and the terms hereof shall be
interpreted and construed in accordance therewith.
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ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the purchase of the Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts, or
one, some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance
written notice to the other parties; or
(b) at the option of the Company to the extent that the Shares
of Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate funding
vehicles" for the Policies, as reasonably determined by the
Company. Without limiting the generality of the foregoing,
the Shares of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet the
diversification or other requirements referred to in Article
VI hereof; or if the Company would be permitted to disregard
Policy owner voting instructions pursuant to Rule 6e-2 or
6e-3(T) under the 1940 Act. Prompt notice of the election to
terminate for such cause and an explanation of such cause
shall be furnished to the Trust by the Company; or
(c) at the option of the Trust or MFS upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding
the Company's duties under this Agreement or related to the
sale of the Policies, the operation of the Accounts, or the
purchase of the Shares; provided that the party terminating
this Agreement under this provision shall give notice of
such termination to the other parties to this Agreement; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body regarding the Trust's or MFS' duties under
this Agreement or related to the sale of the Shares;
provided that the party terminating this Agreement under
this provision shall give notice of such termination to the
other parties to this Agreement; or
(e) at the option of the Company, the Trust or MFS upon receipt
of any necessary regulatory approvals and/or the vote of the
Policy owners having an interest in the Accounts (or any
subaccounts) to substitute the shares of another investment
company for the corresponding Portfolio Shares in accordance
with the terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying
investment media. The Company will give thirty (30) days'
prior
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written notice to the Trust of the Date of any proposed vote
or other action taken to replace the Shares; or
(f) termination by either the Trust or MFS by written notice to
the Company, if either one or both of the Trust or MFS
respectively, shall determine, in their sole judgment
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
(g) termination by the Company by written notice to the Trust
and MFS, if the Company shall determine, in its sole
judgment exercised in good faith, that the Trust or MFS has
suffered a material adverse change in this business,
operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse
publicity; or
(h) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement;
or
(i) upon assignment of this Agreement, unless made with the
written consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies
and, if applicable, the Accounts as to which the Agreement is to be
terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised
for cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations,
the Company shall not redeem the Shares attributable to the Policies
(as opposed to the Shares attributable to the Company's assets held in
the Accounts), and the Company shall not prevent Policy owners from
allocating payments to a Portfolio that was otherwise available under
the Policies, until thirty (30) days after the Company shall have
notified the Trust of its intention to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and
MFS shall, at the option of the Company, continue to make available
additional shares of the Portfolios pursuant to the terms and
conditions of this Agreement, for all Policies in effect on the
effective date of termination of this Agreement (the "Existing
Policies"), except as otherwise provided under Article VII of this
Agreement. Specifically, without limitation, the owners of the Existing
Policies shall be permitted to transfer or reallocate investment under
the Policies, redeem investments in any Portfolio and/or invest in the
Trust upon the making of additional purchase payments under the
Existing Policies.
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ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail, overnight courier or facsimile 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 Trust:
MFS VARIABLE INSURANCE TRUST
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, Secretary
If to the Company:
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, MA 01653
Facsimile No.: (508) 853-6332
Attn: Richard M. Reilly, President
If to MFS:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and,
except as permitted by this Agreement or as otherwise required by
applicable law or regulation, 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 it may come into the public domain.
13.2. 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.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
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13.4. 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.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby.
13.7. 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.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Company
acknowledges that the obligations of or arising out of this instrument
are not binding upon any of the Trust's trustees, officers, employees,
agents or shareholders individually, but are binding solely upon the
assets and property of the Trust in accordance with its proportionate
interest hereunder. The Company further acknowledges that the assets
and liabilities of each Portfolio are separate and distinct and that
the obligations of or arising out of this instrument are binding solely
upon the assets or property of the Portfolio on whose behalf the Trust
has executed this instrument. The Company also agrees that the
obligations of each Portfolio hereunder shall be several and not joint,
in accordance with its proportionate interest hereunder, and the
Company agrees not to proceed against any Portfolio for the obligations
of another Portfolio.
-17-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
/s/ Richard M. Reilly
---------------------
By its authorized officer,
By: /s/ Richard M. Reilly
-------------------------
Title: President
---------
MFS VARIABLE INSURANCE TRUST,
ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not
individually,
By: /s/ James R. Bordewick, Jr.
-----------------------------
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES
COMPANY
By its authorized officer,
By: /s/ Jeffrey L. Shames
----------------------
Jeffrey L. Shames
Chairman and Chief Executive
Officer
-18-
<PAGE>
As of August 1, 1998
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
=================================================================================================================================
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED PORTFOLIOS
ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT APPLICABLE TO POLICIES
=================================================================================================================================
<S> <C> <C>
FULCRUM ACCOUNT OF ALLMERICA VARIABLE ANNUITY MFS EMERGING GROWTH
FINANCIAL LIFE INSURANCE AND ANNUITY MFS GROWTH WITH INCOME
COMPANY
'33 ACT #: 333-11377
'40 ACT #811-7799
FULCRUM VARIABLE LIFE ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE VARIABLE LIFE
AND ANNUITY COMPANY
'33 ACT #333-15569
'40 ACT #: 811-07913
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-19-
<PAGE>
AMENDMENT TO PARTICIPATION AGREEMENT
Pursuant to the Participation Agreement, made and entered into as of
the 1st day of August, 1998, by and among MFS Variable Insurance Trust,
Allmerica Financial Life Insurance and Annuity Company and Massachusetts
Financial Services Company, the parties do hereby agree to an amended Schedule A
as attached hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to the Participation Agreement to be executed in its name and on its
behalf by its duly authorized representative. The Amendment shall take effect on
February 8, 2000.
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
/s/ Richard M. Reilly
---------------------
By its authorized officer,
By: /s/ Richard M. Reilly
----------------------
Title: President
---------
MFS VARIABLE INSURANCE TRUST,
ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not
individually,
By: /s/ James R. Bordewick, Jr.
----------------------------
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES
COMPANY
By its authorized officer,
By: /s/ Jeffrey L. Shames
----------------------
Jeffrey L. Shames
Chairman and Chief Executive
Officer
<PAGE>
As of February 8, 2000
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
=================================================================================================================================
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED PORTFOLIOS
ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT APPLICABLE TO POLICIES
=================================================================================================================================
<S> <C> <C>
FULCRUM ACCOUNT OF ALLMERICA VARIABLE ANNUITY MFS EMERGING GROWTH
FINANCIAL LIFE INSURANCE AND ANNUITY MFS GROWTH WITH INCOME
COMPANY
'33 ACT #: 333-11377
'40 ACT #811-7799
FULCRUM VARIABLE LIFE ACCOUNT OF MFS EMERGING GROWTH
ALLMERICA FINANCIAL LIFE INSURANCE VARIABLE LIFE MFS GROWTH WITH INCOME
AND ANNUITY COMPANY
'33 ACT #333-15569
'40 ACT #: 811-07913
FUVUL SEPARATE ACCOUNT OF VARIABLE LIFE MFS GROWTH WITH INCOME
ALLMERICA FINANCIAL LIFE INSURANCE MFS UTILITIES
AND ANNUITY COMPANY
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
AMENDMENT TO PARTICIPATION AGREEMENT
Pursuant to the Participation Agreement, made and entered into as of the
1st day of August, 1998, by and among MFS Variable Insurance Trust, First
Allmerica Financial Life Insurance Company and Massachusetts Financial Services
Company, the parties do hereby agree that the following provisions amended to
reflect the following:
1. Schedule A is deleted in its entirety and replaced with the Schedule
A as attached hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to
the Participation Agreement to be executed in its name and on its behalf by its
duly authorized representative. The Amendment shall take effect on March 31,
2000.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
By its authorized officer and not individually
By:
-----------------------------------------
Richard M. Reilly
President
MFS VARIABLE INSURANCE TRUST,
ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not individually,
By:
-----------------------------------------
James R. Bordewick, Jr.
Assistant Secretary
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By:
-----------------------------------------
Jeffrey L. Shames
Chairman and Chief Executive Officer
37169
<PAGE>
As of March 31, 2000
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED PORTFOLIOS
ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT APPLICABLE TO POLICIES
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FULCRUM ACCOUNT OF FIRST ALLMERICA VARIABLE ANNUITY MFS EMERGING GROWTH
FINANCIAL LIFE INSURANCE COMPANY MFS GROWTH WITH INCOME
'33 ACT #: 333-11377
'40 ACT #811-7799
FUVUL SEPARATE ACCOUNT OF FIRST VARIABLE LIFE MFS GROWTH WITH INCOME
ALLMERICA FINANCIAL LIFE MFS UTILITIES
INSURANCE COMPANY
EXEMPT FROM REGISTRATION
FR1 SEPARATE ACCOUNT OF VARIABLE LIFE MFS UTILITIES
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
EXEMPT FROM REGISTRATION
FQ1 SEPARATE ACCOUNT OF VARIABLE LIFE MFS GROWTH WITH INCOME
FIRST ALLMERICA FINANCIAL LIFE MFS UTILITIES
INSURANCE COMPANY
EXEMPT FROM REGISTRATION
- -------------------------------------------------------------------------------------------------------------
</TABLE>
#3719
-2-
<PAGE>
PARTICIPATION AGREEMENT
AMONG
OPPENHEIMER VARIABLE ACCOUNT FUNDS
OPPENHEIMERFUNDS, INC.
AND
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DATED AS OF
AUGUST 1, 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 9
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A -1
SCHEDULE B Portfolios of Oppenheimer Variable Account Funds B -1
SCHEDULE C Proxy Voting Procedures C -1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 1st day of August, 1998 by and
among: ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (hereinafter the
"Company"), a Delaware corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); OPPENHEIMER VARIABLE ACCOUNT FUNDS, an unincorporated Massachusetts
business trust (hereinafter the "Fund"), and oppenheimerfunds, inc. (hereinafter
the "Adviser"), a Colorado 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 obtained 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 (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 portfolios of the Fund; and
WHEREAS, Allmerica Investments, Inc. (the "Underwriter") 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 the "NASD"); and
WHEREAS, the Company has registered or will register certain Variable
Products under the 1933 Act; and
3
<PAGE>
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has registered or will register
each Account as a unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee shall constitute receipt by the Fund; provided that the Fund receives
notice of such order by 9:30 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, 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 (i)
Participating Insurance Companies and their separate accounts, (ii) to certain
Qualified Plans, or (iii) to such other persons as are permitted under
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code") and regulations promulgated thereunder, the sale of which will not
impair the tax treatment currently afforded the Variable Products.
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 shall constitute
receipt by the Fund, provided that the Fund receives notice of such request for
redemption by 9:30 a.m. Eastern time 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 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.
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 fax, e-mail or telephone,
followed by written confirmation, if by telephone) 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 upon 60
days written notice 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 reasonable 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 Code, and that it will make every
effort to maintain such qualification (under Subchapter M or any successor or
similar provision) and that it will notify the Company promptly upon
5
<PAGE>
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 its board of Trustees, a majority of whom are
not interested persons of the Fund, has approved the Fund's plans under Rule
12b-1 to finance distribution expenses.
2.6. 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.
2.7. 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.
2.8. 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.
2.9. 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 Underwriter 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 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 such 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 during the year) to have the prospectus for the Variable Products and
the Fund's prospectus printed together in one document. Alternatively, the
Company may print the Fund's prospectus in combination with other fund
companies' prospectuses.
6
<PAGE>
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses shall be the expense of the Company. For any
prospectuses 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 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 other
than those actually distributed to existing owners of the Variable Products.
3.3. The Fund prospectus shall state that the statement of additional
information for the Fund is available from the Fund or its designee. The Fund or
its designee, at its expense, shall print and provide such statement of
additional information to the Company (or a master of such statement suitable
for duplication by the Company) for distribution to any owner of a contract
funded by the Fund. The Fund or its designee, at the Company's expense, shall
print and provide such statement to the Company (or a master of such statement
suitable for duplication by the Company) for distribution to a prospective
purchaser who requests such statement or to an owner of a contract not funded by
the Fund.
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, which are covered in Section 3.1) to shareholders in such quantity
as the Company shall reasonably require for distribution to contract owners. The
Fund or its designee shall bear the cost of printing, duplicating, and mailing
of these documents to current contract owners, and the Company shall bear the
cost for such documents used for purposes other than distribution to current
contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions
received from contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of
such Portfolio for which instructions have been
received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies, if any.
7
<PAGE>
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 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.
3.8. In the event the Company or its agent shall receive requests for the
Fund's Prospectus, statement of additional information or annual or semi-annual
report, the Company shall send the requested document within three business days
of receipt of such request, by first-class mail or other means to ensure prompt
delivery, or as otherwise required by Rule 498 under the Securities Act of 1933
or any successor provision, at the Company's expense.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Adviser 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.
8
<PAGE>
4.5. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Variable Products.
4.6. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, solicitations for voting 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 or electronic 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.
5.2. All expenses incident to performance by each party of their respective
duties under this Agreement shall be paid by that party, 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
section 2.2 hereof. 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 applicable taxes on the issuance
or transfer of the Fund's shares to the Company.
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 material irreconclable 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 material
irreconclable 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 SEC rules and regulations and the conditions of any
Shared Funding Exemptive Order obtained by the Fund, 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, by
confirming in writing, at the Fund's request, that the Company is unaware of any
such potential or existing material irreconclable conflicts, and, upon request,
submitting to the Board at least annually (or more frequently if deemed
appropriate by the Board) such reports, materials or data as the Board may
reasonably request so that the Board may fully carry out the duties imposed upon
it as delineated in the Shared Funding Exemptive Order.
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 directors), take whatever steps are necessary to remedy or
eliminate the material irreconclable 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 material irreconclable 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, subject
to applicable regulations.
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 material irreconclable 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
material irreconclable 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 Underwriter 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 material failure by the Adviser 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 material 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 thisAgreement 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 and/or the Adviser by written notice to the
Company if (i) the Fund and/or the Adviser 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, is the subject of
material adverse publicity, (ii) upon institution of formal proceedings against
the Company by the NASD, the Securities and Exchange Commission, any state
insurance regulator or any other regulatory body regarding the Company's duties
under this Agreement or related to the sale of the Variable Products, the
administration of the Variable Products, the operation of the Account, or the
purchase of Fund shares, which would have a material adverse effect on the
Company's ability to perform its obligations under this Agreement, (iii) upon a
determination by a majority of the Board, or a majority of the disinterested
Board members, that an material irreconclable conflict exists among the
interests of (a) all contract owners of variable insurance products of all
separate accounts or (b) the interests of the Participating Insurance Companies
investing in the Fund as delineated in Article VII hereof, or (iv) upon the
Company's material breach of any provision of this Agreement.
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 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
16
<PAGE>
Products, the Company shall not prevent contract owners from allocating payments
to a Portfolio that was otherwise available under the Variable Products without
first giving the Fund 90 days prior written notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
If to the Fund:
Oppenheimer Variable Account Funds
6803 South Tuscon Way
Englewood, CO 80112
Attn: George Bowen, Vice President, Secretary and Treasurer
If to the Adviser:
OppenheimerFunds, Inc.
2 World Trade Center
Suite 3400
New York, NY 10048-0203
Attn: Andrew J. Donohue, Esq.
Executive Vice President and General Counsel
If to the Company:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
12.1. A copy of the Fund's 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 bind only the Fund and the Fund's property; the Company and the
Adviser each represent that it has notice of the provisions of the Declaration
of Trust of the Fund disclaiming shareholder and trustee liability for acts or
obligations of the Trust.
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.
17
<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
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
---------------------------
NAME: Richard M. Reilly
TITLE: President
OPPENHEIMER VARIABLE ACCOUNT FUNDS
By:
--------------------------------
NAME:
TITLE:
18
<PAGE>
OPPENHEIMERFUNDS, INC.
By:
--------------------------------
NAME:
TITLE:
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
- --------------------------------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
<S> <C> <C> <C>
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ------------------------
Fulcrum Variable Life Separate Account Fulcrum SPVUL 333-15569 811-07913
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ------------------------
Fulcrum Separate Account Fulcrum Annuity 333-11377 811-7799
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE B
PORTFOLIOS OF
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Aggressive Growth Fund
Oppenheimer Growth & Income 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, which shall complete and sign the Fund's
Affidavit of Mailing.
* 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-3
<PAGE>
- - The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) The Fund must review
and approve tabulation format.
- - Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The Fund
may request an earlier deadline if reasonable and if required to calculate
the vote in time for the meeting.
- - A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
- - The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
- - All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
C-3
<PAGE>
AMENDMENT TO PARTICIPATION AGREEMENT
The Participation Agreement dated as of August 1, 1998, by and among
OPPENHEIMER VARIABLE ACCOUNT FUNDS, OPPENHEIMERFUNDS, INC. and ALLMERICA
FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (the "Agreement") is hereby amended
as follows:
Schedules A and B of the Agreement are hereby deleted in their entirety and
replaced with the Schedules A and B attached hereto, respectively.
All other terms and provisions of the Agreement not amended herein shall
remain in full force and effect.
Effective Date: February ____, 2000
OPPENHEIMER VARIABLE ACCOUNT OPPENHEIMERFUNDS, INC.
FUNDS
By: _________________________________ By:_________________________________
Name: _____________________________ Name: ______________________________
Title: _____________________________ Title: ___________________________
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By: ________________________________
Name: _____________________________
Title: _____________________________
legag\allmerica
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
- --------------------------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- --------------- ------------- ---------- ----------
<S> <C> <C> <C>
Fulcrum Variable Life Separate Account Fulcrum SPVUL 333-15569 811-07913
FUVUL Separate Account of Allmerica Financial TO BE DETERMINED 333-93031 811-09731
Life Insurance and Annuity Company
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
Fulcrum Separate Account Fulcrum Annuity 333-11377 811-7799
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE B
PORTFOLIOS OF
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Aggressive Growth Fund/VA
Oppenheimer Main Street Growth & Income Fund/VA
Oppenheimer Small Cap Growth Fund/VA
Oppenheimer Strategic Bond Fund/VA
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
- --------------------------------------------------------------------------------------------------
VARIABLE LIFE PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- --------------- ------------- ---------- ----------
<S> <C> <C> <C>
Fulcrum Variable Life Separate Account Fulcrum SPVUL 333-15569 811-07913
VARIABLE ANNUITY PRODUCTS
SEPARATE ACCOUNT PRODUCT NAME 1933 ACT # 1940 ACT #
- ---------------- ------------ ---------- ----------
Fulcrum Separate Account Fulcrum Annuity 333-11377 811-7799
- --------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE>
SCHEDULE B
PORTFOLIOS OF
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Oppenheimer Aggressive Growth Fund
Oppenheimer Growth & Income 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 Participating 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 not 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, which shall complete and sign the Fund's
Affidavit of Mailing.
* 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.
- - 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.
C-2
<PAGE>
- - 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.
