<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 1996
REGISTRATION STATEMENT 33-79808
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
------------------
A. Exact name of trust: FKLA VARIABLE SEPARATE ACCOUNT
B. Name of depositor: FEDERAL KEMPER LIFE ASSURANCE COMPANY
C. Complete address of depositor's principal executive offices:
1 Kemper Drive
Long Grove, Illinois 60049
D. Name and complete address of agent for service:
DEBRA P. REZABEK, ESQ.
Federal Kemper Life Assurance Company
1 Kemper Drive
Long Grove, Illinois 60049
COPIES TO:
FRANK JULIAN, ESQ. JOAN E. BOROS, ESQ.
Federal Kemper Life Assurance Company Katten Muchin & Zavis
1 Kemper Drive 1025 Thomas Jefferson Street, N.W.
Long Grove, Illinois 60049 Washington, D.C. 20007
It is proposed that this filing will become effective (check appropriate
box)
[X] immediately upon filing pursuant to paragraph (b), or
[ ] on (date) pursuant to paragraph (b), or
[ ] 60 days after filing pursuant to paragraph (a)(1), or
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485.
If appropriate, check the following box:
[ ] this post effective amendment designates a new effective date for a
previously filed post-effective amendment.
E. Title and amount of securities being registered:
Units of Interests in the Separate Account under
Flexible Premium Variable Life Insurance Policies.
F. Proposed maximum aggregate offering price to the public of the
securities being registered.
Registration of Indefinite Amount of Securities pursuant to Rule 24f-2
under the Investment Company Act of 1940. (See G. Below)
G. Amount of filing Fee: An indefinite amount of the Registrant's
securities has been registered pursuant to a declaration under Rule
24f-2 under the Investment Company Act of 1940, set out in Form S-6
Registration Statement filed on June 3, 1994 contained in File No.
33-79808. The Rule 24f-2 Notice for the Registrant's most recent fiscal
year was filed on or about February 23, 1996.
H. Approximate date of proposed public offering:
Continuous.
[ ] Check box if it is proposed that this filing will become effective
on (date) at (time) pursuant to Rule 487.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REGISTRANT ELECTS TO BE GOVERNED BY THE PROVISIONS OF RULE 6E-3(T)(B)(13)(I)(B)
<PAGE> 2
PROSPECTUS--DECEMBER 31, 1996
- --------------------------------------------------------------------------------
FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICY
- --------------------------------------------------------------------------------
ISSUED BY
FEDERAL KEMPER LIFE ASSURANCE COMPANY
THROUGH ITS FKLA VARIABLE SEPARATE ACCOUNT
HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500
This Prospectus describes a variable life insurance policy (the "Policy")
offered by Federal Kemper Life Assurance Company ("FKLA"). The Policy provides
for life insurance and for the accumulation of Cash Value on a variable basis.
Premiums under the Policy are flexible, subject to certain restrictions. The
Death Benefit and Cash Value of the Policy may vary to reflect the investment
experience of the FKLA Variable Separate Account (the "Separate Account").
The Policy meets the definition of "life insurance" under Section 7702 of
the Internal Revenue Code. The Policy may be issued as or become a modified
endowment contract. For a Policy treated as a modified endowment contract,
certain distributions will be includable in gross income for Federal income tax
purposes.
See "Federal Tax Matters", page 20 for a discussion of laws that affect the
tax treatment of the Policy.
An Owner may allocate premiums under a Policy to one or more of the
Subaccounts of the Separate Account and the Fixed Account. Each Subaccount
invests in shares of one Portfolio of an underlying mutual fund. The underlying
mutual funds (and the Portfolios of the underlying mutual funds) currently
available under the Policy are: (a) Kemper Investors Fund (Portfolios--Money
Market, Total Return, High Yield, Growth, Government Securities, International
and Small Cap Growth); (b) Janus Aspen Series (Portfolios--Growth, Aggressive
Growth and Worldwide Growth); (c) Warburg Pincus Trust (Portfolios--Small
Company Growth, Post-Venture Capital and International Equity); (d) Fidelity
Variable Insurance Products Fund (Portfolios--Equity-Income and Growth); and (e)
Fidelity Variable Insurance Products Fund II (Portfolios--Asset Manager: Growth
and Investment Grade Bond). The other Portfolios of the Funds are not currently
available for investment under the Policy. The accompanying Prospectuses for the
Funds describe the investment objectives and the attendant risks of the
portfolios of the Funds. The Cash Value in the Fixed Account will accrue
interest at a rate that is guaranteed by FKLA.
The Policy permits the Owner to choose from two death benefit options. FKLA
guarantees that prior to the Maturity Date the Death Benefit payable for a
Policy will never be less than the Death Benefit stated in the Policy
Specifications, less Debt, as long as the Policy is in force. There is no
guaranteed Cash Value. If the Surrender Value is insufficient to cover the
charges under the Policy, the Policy will lapse. A guarantee premium and
guarantee period are stated in the Policy Specifications. Payment of the
guarantee premium is not required but if paid as specified under the Policy will
guarantee that the Policy will not lapse during the guarantee period.
The Owner may examine the Policy and return it to FKLA for a refund during
the Free-Look Period.
It may not be advantageous to purchase a Policy as a replacement for
another type of life insurance policy, or to obtain additional insurance
protection if a flexible premium variable life insurance policy is already
owned.
This Prospectus generally describes only that portion of the Cash Value
allocated to the Separate Account. For a brief summary of the Fixed Account
option see "Fixed Account Option" on page 7.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED
BY A CURRENT PROSPECTUS FOR THE FUNDS. ALL PROSPECTUSES
SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
THE POLICIES ARE NOT INSURED BY THE FDIC. THEY ARE
OBLIGATIONS OF THE ISSUING INSURANCE COMPANY AND ARE NOT A
DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR SAVINGS
INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
-----
<S> <C>
DEFINITIONS................................................................................. 1
SUMMARY..................................................................................... 2
FKLA AND THE SEPARATE ACCOUNT............................................................... 4
THE FUNDS................................................................................... 5
FIXED ACCOUNT OPTION........................................................................ 7
THE POLICY.................................................................................. 8
POLICY BENEFITS AND RIGHTS.................................................................. 10
CHARGES AND DEDUCTIONS...................................................................... 15
GENERAL PROVISIONS.......................................................................... 17
DOLLAR COST AVERAGING....................................................................... 19
SYSTEMATIC WITHDRAWAL PLAN.................................................................. 20
DISTRIBUTION OF POLICIES.................................................................... 20
FEDERAL TAX MATTERS......................................................................... 20
LEGAL CONSIDERATIONS........................................................................ 22
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................................................ 22
VOTING INTERESTS............................................................................ 22
STATE REGULATION OF FKLA.................................................................... 22
DIRECTORS AND OFFICERS OF FKLA.............................................................. 23
LEGAL MATTERS............................................................................... 26
LEGAL PROCEEDINGS........................................................................... 26
EXPERTS..................................................................................... 26
REGISTRATION STATEMENT...................................................................... 26
FINANCIAL STATEMENTS........................................................................ 26
APPENDICES.................................................................................. 44
</TABLE>
<PAGE> 4
DEFINITIONS
ACCUMULATION UNIT--An accounting unit of measure used to calculate the
value of each Subaccount.
AGE--The Insured's age on his or her nearest birthday.
BENEFICIARY--The person to whom the proceeds due on the Insured's death are
paid.
CASH VALUE--The sum of the value of Policy assets in the Separate Account,
Fixed Account and Loan Account.
DATE OF RECEIPT--Date of receipt means the valuation date during which a
request, form or payment is received at FKLA's Home Office. FKLA is deemed to
have received any request, form or payment on the date it is actually received
at the Home Office, provided that it is received before the close of the New
York Stock Exchange (which is normally 3:00 p.m. Chicago time) on any date when
the New York Stock Exchange is open. Otherwise, it will be deemed to be received
on the next such day.
DEBT--Debt means (1) the principal of any outstanding loan, plus (2) any
loan interest due or accrued to FKLA.
DEDUCTION DAY--The same day in each month as the Policy Date.
FIXED ACCOUNT--The amount of assets held in the General Account
attributable to the fixed portion of the Policy.
FREE-LOOK PERIOD--The period of time in which an Owner may cancel the
Policy and receive a refund. The applicable period of time will depend on the
state in which the Policy is issued; however, it will be at least 10 days from
the date the Policy is received by the Owner.
FUND OR FUNDS--Kemper Investors Fund, Janus Aspen Series, Warburg Pincus
Trust, and Variable Insurance Products Fund and Variable Insurance Products Fund
II (referred to herein as Fidelity Variable Insurance Products Fund and Fidelity
Variable Insurance Products Fund II).
GENERAL ACCOUNT--The assets of FKLA other than those allocated to the
Separate Account or any other separate account.
GUIDELINE SINGLE PREMIUM--The maximum initial amount of premium that can be
paid while retaining qualification as a life insurance policy under the Internal
Revenue Code.
INSURED--The person whose life is covered by the Policy and who is named in
the Policy Specifications.
ISSUE DATE--The date shown in the Policy Specifications. Incontestability
and suicide periods are measured from the Issue Date.
LOAN ACCOUNT--The amount of assets transferred from the Separate Account
and the Fixed Account and held in the General Account as collateral for Policy
Loans.
MATURITY DATE--The Policy Date anniversary nearest the Insured's 100th
birthday.
MORTALITY AND EXPENSE RISK CHARGE--A charge deducted in the calculation of
the Accumulation Unit Value for the assumption of mortality risks and expense
guarantees.
PLANNED PREMIUM--The scheduled premium specified by the Owner in the
application.
POLICY DATE--The date shown in the Policy Specifications. The Policy Date
is the date used to determine Policy Years and Deduction Days. The Policy Date
is the date that insurance coverage takes effect subject to any principles of
conditional receipt under applicable law.
POLICY YEAR--Each year commencing with the Policy Date and each Policy Date
anniversary thereafter.
PORTFOLIO--A series of a Fund with its own objectives and policies which
represents shares of beneficial interest in a separate portfolio of securities
and other assets.
SEPARATE ACCOUNT VALUE--The portion of the Cash Value in the Subaccount(s)
of the Separate Account.
SPECIFIED AMOUNT--The amount chosen by the Owner and used to calculate the
death benefit. The Specified Amount is shown in the Policy Specifications.
SUBACCOUNT--A subdivision of the Separate Account.
SURRENDER VALUE--The surrender value of a Policy is (1) the Cash Value
minus (2) any applicable Surrender Charge; minus (3) any Debt.
TRADE DATE--The date 30 days following the date all requirements for
coverage have been completed by the Owner and coverage under the Policy is
recorded by FKLA as in force.
VALUATION DATE--Each business day on which valuation of the assets of the
Separate Account is required by applicable law, which currently is each day that
the New York Stock Exchange is open for trading.
VALUATION PERIOD--The period that starts at the close of a Valuation Date
and ends at the close of the next succeeding Valuation Date.
1
<PAGE> 5
SUMMARY
The following summary should be read in conjunction with the detailed
information in this prospectus. You should refer to the heading "Definitions"
for the meaning of certain terms. Variations from the information appearing in
this prospectus due to individual state requirements are described in
supplements which are attached to this prospectus, or in endorsements to the
Policy, as appropriate. Unless otherwise indicated, the description of the
Policy contained in this prospectus assumes that the Policy is in force, that
there is no indebtedness, and that current Federal tax laws apply.
The Owner of a Policy pays a premium for life insurance coverage on the
person insured. The Policy is a flexible premium policy, so subject to certain
limitations, a Policy Owner may choose the amount and frequency of premium
payments. The Policy provides for a Surrender Value which is payable if the
Policy is terminated during an Insured's lifetime. The Death Benefit and Cash
Value of the Policy may increase or decrease to reflect investment experience.
There is no guaranteed Cash Value. If the Surrender Value is insufficient to pay
charges under the Policy, the Policy will lapse unless an additional premium
payment or loan repayment is made. A guarantee premium and a guarantee period
are stated in the Policy Specifications. The Policy is guaranteed to remain in
force during the guarantee period provided the sum of the premiums paid less
withdrawals and debt is equal to or greater than the sum of the guarantee
premiums. (See "The Policy--Premiums and Allocation of Premiums and Separate
Account Value," pages 8 and 9, "Charges and Deductions," page 15, and "Policy
Benefits and Rights," page 10.)
Under certain circumstances, a Policy may be issued as or become a modified
endowment contract as a result of a material change or reduction in benefits as
defined by the Internal Revenue Code. Excess premiums paid may also cause the
Policy to become a modified endowment contract. For a Policy treated as a
modified endowment contract, certain distributions will be included in the
Owner's gross income for purposes of Federal income tax (See "Federal Tax
Matters," page 20.)
The purpose of the Policy is to provide insurance protection for the
beneficiary named therein. No claim is made that the Policy is in any way
similar or comparable to a systematic investment plan of a mutual fund.
POLICY BENEFITS
CASH VALUE. The Policy provides for a Cash Value. The Cash Value will
reflect the amount and frequency of premium payments, the investment experience
of the selected Subaccounts, any values in the Fixed Account and Loan Account,
and charges imposed in connection with the Policy. The Owner bears the entire
investment risk on that portion of the net premiums and Cash Value allocated to
the Separate Account. FKLA does not guarantee a minimum Separate Account Value.
(See "Policy Benefits and Rights--Cash Value," page 12.)
The Owner may surrender a Policy at any time and receive the Surrender
Value, which equals the Cash Value less any applicable surrender charge and
outstanding Debt. Partial withdrawals are also available. (See "Policy Benefits
and Rights--Surrender Privilege," page 14.)
POLICY LOANS. After the first Policy Year, the Owner may borrow up to 95%
of the Policy's Cash Value minus applicable surrender charges, subject to the
requirements of the Internal Revenue Code. The minimum amount of a loan is $500.
Interest at an effective annual rate of 5.00% in the first nine Policy Years and
3.00% thereafter will be charged on outstanding loan amounts. (See "Federal Tax
Matters," page 20.)
When a loan is made, a portion of the Policy's Cash Value equal to the
amount of the loan will be transferred from the Separate Account and the Fixed
Account (proportionately, unless the Owner requests otherwise) to the Loan
Account. Cash Values within the Loan Account will earn 3.00% annual interest.
Such earnings will be allocated to the Loan Account. (See "Policy Benefits and
Rights--Policy Loans," page 14.)
If the Policy is treated as a modified endowment contract, a loan will be
treated as a distribution for Federal income tax purposes and may be subject to
tax, withholding and penalties. (See "Federal Tax Matters," page 20.)
DEATH BENEFITS. As long as the Policy remains in force, the Policy provides
a death benefit payment upon the death of the Insured. The Policy contains two
death benefit options prior to the Maturity Date. Under Option A, the death
benefit is the Specified Amount stated in the Policy Specifications. Under
Option B, the death benefit is the Specified Amount stated in the Policy
Specifications plus the Cash Value. In either case, the death benefit will not
be less than a specified multiple of the Cash Value. The death benefit payable
will be reduced by any Debt. (See "Policy Benefits and Rights--Death Benefits,"
page 10.)
2
<PAGE> 6
PREMIUMS
The Owner has flexibility concerning the amount and frequency of premium
payments. At the time of application, the Owner will determine a scheduled
premium. However, the Owner will not be required to adhere to the schedule and,
subject to certain restrictions, may make premium payments in any amount and at
any frequency. The amount, frequency, and period of time over which an Owner
pays premiums may affect whether the Policy will be classified as a modified
endowment contract. The minimum premium payment is $50.
Payment of the scheduled premium will not guarantee that a Policy will
remain in force. Instead, the duration of the Policy depends on the Policy's
Surrender Value. A guarantee premium and a guarantee period are stated in the
Policy Specifications. A policy will remain in force during the guarantee period
provided the sum of the premiums paid less withdrawals and Debt is equal to or
greater than the sum of the guarantee premiums. (See "The Policy--Premiums,"
page 8.)
THE SEPARATE ACCOUNT
ALLOCATION OF PREMIUMS. The portion of the premium available for allocation
equals the premium paid less applicable charges. An Owner indicates in the
application for the Policy the percentages of premium to be allocated among the
Subaccounts of the Separate Account and the Fixed Account. The Separate Account
currently consists of seventeen Subaccounts, each of which invests in shares of
a designated Portfolio of the Kemper Investors Fund, Janus Aspen Series, Warburg
Pincus Trust, Fidelity Variable Insurance Products Fund or Fidelity Variable
Insurance Products Fund II.
On the day following the date of receipt, the initial premium less
applicable charges will be allocated to the Money Market Subaccount. On the
Trade Date, the Separate Account Value in the Money Market Subaccount will be
allocated among the Subaccounts and the Fixed Account in accordance with the
Owner's instructions in the application. (See "The Policy -- Policy Issue," page
8.)
TRANSFERS. An Owner may transfer Separate Account Value among the
Subaccounts. One transfer of all or part of the Separate Account Value may be
made within a fifteen day period. Transfers are also permitted between the Fixed
Account and the Subaccounts, subject to restrictions. (See "Allocation of
Premiums and Separate Account Value--Transfers," page 9.)
THE FUNDS
The following Portfolios of the Funds are currently available for
investment by the Separate Account:
KEMPER INVESTORS FUND -- Money Market Portfolio, Total Return Portfolio,
High Yield Portfolio, Growth Portfolio, Government Securities Portfolio,
International Portfolio and Small Cap Growth Portfolio.
JANUS ASPEN SERIES -- Growth Portfolio, Aggressive Growth Portfolio and
Worldwide Growth Portfolio.
WARBURG PINCUS TRUST -- Small Company Growth Portfolio, Post-Venture
Capital Portfolio and International Equity Portfolio.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND -- Equity-Income Portfolio and
Growth Portfolio.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II -- Asset Manager: Growth
Portfolio and Investment Grade Bond Portfolio.
For a more detailed description of the Funds, see "The Funds," page 5, the
Funds' prospectuses, and Statements of Additional Information available upon
request.
CHARGES
A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Policy prior to allocation of the net premium. In addition, a
charge of 1% of each premium payment will be deducted to compensate FKLA for
higher corporate income tax liability resulting from changes in the tax law made
by the Omnibus Budget Reconciliation Act of 1990. (See Charges and
Deductions--Deductions from Premiums, page 15.)
No other charges are currently made from premium or the Separate Account
for Federal, state or other taxes. Should FKLA determine that such taxes may be
imposed, it may make deductions from the Separate Account to pay those taxes.
(See "Federal Tax Matters," page 20.)
3
<PAGE> 7
Deductions will be made from the Policy's Cash Value in each Subaccount and
the Fixed Account on the Policy Date and on each Deduction Day for the cost of
providing life insurance coverage for the Insured. In addition, FKLA deducts an
asset charge from each Subaccount on a daily basis for the assumption by FKLA of
certain mortality and expense risks incurred in connection with the Policy, at
an annual rate of .60%. This charge may be increased but is guaranteed not to
exceed .90%. (See "Charges and Deductions--Cost of Insurance Charge and
Mortality and Expense Risk Charge," pages 15 and 16.)
A $6 per month administrative expense charge is deducted from the Policy's
Cash Value on each Deduction Day. (See "Charges and Deductions--Monthly
Administrative Charges," page 16.)
If the Policy is surrendered or if the Cash Value is applied under a
Settlement Option, a surrender charge on the premiums paid under the Policy will
be deducted from the amount payable. A surrender charge may also apply to a
partial withdrawal. The surrender charge starts at 6% in the first five Policy
Years and reduces by 1% in Policy Years 6 through 9 and by 2% in Policy Year 10
so that there is no charge in the tenth and later Policy Years. During the first
nine Policy Years following an increase in Specified Amount, an additional
surrender charge will apply. The additional charge will be calculated as
described above based on the amount of the increase, the number of years since
the date of the increase and premium associated with the increase. In addition,
a $25 withdrawal charge may be deducted for each withdrawal. (See "Policy
Benefits and Rights--Surrender Privilege," page 14.)
In addition, the Subaccounts of the Separate Account purchase shares of the
Funds. For fees and expenses of the Funds, see the prospectuses for the Funds.
TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW
The Cash Value, while it remains in the Policy, and the Death Benefit
should be subject to the same Federal income tax treatment as the cash value
under a conventional fixed benefit life insurance policy. Under existing tax
law, if the Policy is not treated as a modified endowment contract, the Owner is
generally not deemed to be in receipt of the Cash Value under a Policy until a
distribution occurs through a withdrawal or surrender. If the Policy is treated
as a modified endowment contract, a loan will also be treated as a distribution.
A change of Owners, an assignment, a loan or a surrender of the Policy may have
tax consequences.
Death Benefits payable under the Policy should be completely excludable
from the gross income of the Beneficiary. As a result, the Beneficiary generally
will not be subject to income tax on the Death Benefit. (See "Federal Tax
Matters," page 20.)
FREE-LOOK PERIOD
The Owner is granted a period of time to examine a Policy and return it for
a refund. The applicable period of time will depend on the state in which the
Policy is issued; however, it will be at least 10 days from the date the Policy
is received by the Owner. (See "Policy Benefits and Rights--Free-Look Period,"
page 15.)
ILLUSTRATIONS OF CASH VALUES, SURRENDER VALUES, DEATH BENEFITS
Tables in the Appendix illustrate the Separate Account Values, Surrender
Values and Death Benefits based upon certain hypothetical assumed rates of
return for the Separate Account and the charges deducted under the Policy.
FKLA AND THE SEPARATE ACCOUNT
FEDERAL KEMPER LIFE ASSURANCE COMPANY
Federal Kemper Life Assurance Company ("FKLA") is a stock life insurance
company organized under the laws of the State of Illinois. FKLA offers life
insurance and annuity products and is admitted to do business in the District of
Columbia and in all states except New York. FKLA is a wholly owned subsidiary of
Kemper Corporation, a non-operating holding company. Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly
own 80 percent and 20 percent, respectively, of Kemper Corporation.
4
<PAGE> 8
FKLA Variable Separate Account (the "Separate Account") was established by
FKLA as a separate investment account on May 27, 1994. The Separate Account will
receive and invest the net premiums under the Policy. In addition, the Separate
Account may receive and invest net premiums for other variable life insurance
policies offered by FKLA.
The Separate Account is administered and accounted for as part of the
general business of FKLA, but the income, capital gains or capital losses of the
Separate Account are credited to or charged against the assets held in the
Separate Account, without regard to any other income, capital gains or capital
losses of any other separate account or arising out of any other business which
FKLA may conduct. The benefits provided under the Policy are obligations of
FKLA.
The Separate Account is currently divided into seventeen Subaccounts. Each
Subaccount invests exclusively in shares of the Portfolios designated by the
Policy Owner. Income and both realized and unrealized gains or losses from the
assets of each Subaccount generally are credited to or charged against that
Subaccount without regard to income, gains or losses from any other Subaccount
of the Separate Account or arising out of any business FKLA may conduct. No
funds have been invested in the Separate Account as of the date of this
Prospectus.
The Separate Account has been registered with the Securities and Exchange
Commission ("Commission") as a unit investment trust under the Investment
Company Act of 1940 (the "1940 Act"). Such registration does not involve
supervision by the Commission of the management, investment practices or
policies of the Separate Account or FKLA.
THE FUNDS
The Separate Account invests in shares of the Kemper Investors Fund, Janus
Aspen Series, Warburg Pincus Trust, Fidelity Variable Insurance Products Fund
and Fidelity Variable Insurance Products Fund II, series type mutual funds
registered with the Commission as open-end, diversified management investment
companies. Registration of the Funds does not involve supervision of their
management, investment practices or policies by the Commission. The Funds are
designed to provide investment vehicles for variable life insurance and variable
annuity contracts and, except for Kemper Investors Fund, certain qualified
retirement plans. Shares of the Funds currently are sold only to insurance
company separate accounts and qualified retirement plans. In addition to the
Separate Account, shares of the Funds may be sold to variable life insurance and
variable annuity separate accounts of insurance companies not affiliated with
FKLA. It is conceivable that in the future it may be disadvantageous for
variable life insurance separate accounts of companies unaffiliated with FKLA,
or for both variable life insurance separate accounts, variable annuity separate
accounts and qualified retirement plans, to invest simultaneously in the Funds.
Currently neither FKLA nor the Funds foresee any such disadvantages to variable
life insurance owners, variable annuity owners or qualified retirement plans.
Management of the Funds has an obligation to monitor events to identify material
conflicts between such owners and determine what action, if any, should be
taken. In addition, if FKLA believes that a Fund's response to any of those
events or conflicts insufficiently protects the Owners, it will take appropriate
action on its own.
The Separate Account invests in the underlying Portfolios of the Funds. The
assets of each Portfolio are held separate from the assets of the other
Portfolios, and each Portfolio has its own distinct investment objective and
policies. Each Portfolio operates as a separate investment fund, and the income,
gains or losses of one Portfolio has no effect on investment performance of any
other Portfolio.
The seventeen Portfolios are summarized below.
KEMPER INVESTORS FUND
MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in twelve months or less.
TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income
and capital appreciation, by investing in a combination of debt securities and
common stocks.
HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.
GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
5
<PAGE> 9
GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.
INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth
and income, principally through an internationally diversified portfolio of
equity securities.
SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors'
capital.
Zurich Kemper Investments, Inc. ("ZKI" or the "Adviser"), an affiliate of
FKLA, is the investment manager of each Portfolio of the Kemper Investors Fund
specified above. For its services to the Portfolios, the Adviser receives
compensation monthly at annual rates equal to .50 of 1%, .55 of 1%, .60 of 1%,
.60 of 1%, .55 of 1%, .75 of 1% and .65 of 1% of the average daily net asset
values of the Money Market Portfolio, the Total Return Portfolio, the High Yield
Portfolio, the Growth Portfolio, the Government Securities Portfolio, the
International Portfolio and the Small Cap Growth Portfolio, respectively. Zurich
Investment Management Limited ("ZIML"), an affiliate of ZKI, serves as
sub-advisor with respect to foreign securities investments of the Total Return,
High Yield, Growth, International and Small Cap Growth Portfolios. ZIML is
compensated by ZKI for its services.
JANUS ASPEN SERIES
GROWTH PORTFOLIO seeks long-term growth of capital in a manner consistent
with the preservation of capital. It is a diversified Portfolio that pursues its
objective by investing in common stocks of companies of any size. This Portfolio
generally invests in larger, more established issuers.
AGGRESSIVE GROWTH PORTFOLIO seeks long-term growth of capital. It is a
nondiversified Portfolio that pursues its investment objective by normally
investing at least 50% of its equity assets in securities issued by medium-sized
companies as described in the Fund's prospectus.
WORLDWIDE GROWTH PORTFOLIO seeks long-term growth of capital in a manner
consistent with the preservation of capital. It is a diversified Portfolio that
pursues its objective primarily through investments in common stocks of foreign
and domestic issuers.
Janus Capital Corporation is the investment adviser to each Portfolio of
the Janus Aspen Series specified above and receives a monthly advisory fee based
on the following schedule (expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
----------------------------------- -----------
<S> <C>
First $30,000,000.................. 1.00%
Next $270,000,000.................. .75%
Next $200,000,000.................. .70%
Over $500,000,000.................. .65%
</TABLE>
However, Janus Capital Corporation has agreed to reduce each of the above
Portfolios' advisory fees to the extent that such fee exceeds the effective rate
of a fund managed by Janus Capital Corporation with similar investment objective
and policies.
WARBURG PINCUS TRUST
SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity
securities of small-sized U.S. companies.
POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers.
Warburg, Pincus Counsellors, Inc. ("Warburg") is the investment adviser to
each Portfolio of the Warburg Pincus Trust specified above. For its advisory
services, Warburg receives compensation at annual rates equal to the following
percentages of average daily net asset values: Small Company Growth Portfolio
0.90%; Post-Venture Capital Portfolio 1.25%; and International Equity Portfolio
1.00%.
6
<PAGE> 10
FIDELITY VARIABLE INSURANCE PRODUCTS FUND (VIP) AND VARIABLE INSURANCE PRODUCTS
FUND II (VIPII)
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income-producing equity securities.
VIP GROWTH PORTFOLIO seeks to achieve capital appreciation.
VIPII ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return by
allocating its assets among stocks, bonds, short-term instruments and other
investments.
VIPII INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current
income as is consistent with the preservation of capital.
Fidelity Management & Research Company ("FMR") receives a monthly advisory
fee for each Portfolio of the Variable Insurance Products Fund and Variable
Insurance Products Fund II specified above. The fee for each Portfolio is
calculated by adding a group fee rate to an individual fund fee rate and
multiplying the result by each Portfolio's average net assets. The group fee
rate, which is based on the average net assets of all the mutual funds advised
by FMR, cannot rise above 0.52% for each of these Portfolios, and it drops as
total assets under management increase. The individual fund fee rates are as
follows: Equity-Income Portfolio 0.20%; Growth Portfolio 0.30%; Asset Manager:
Growth Portfolio 0.40% and Investment Grade Bond Portfolio 0.30%.
There is no assurance that any of the Portfolios of the Funds will achieve
its objective as stated in the prospectus for the Fund. More detailed
information, including a description of the risks involved in investing in each
of the Portfolios, may be found in the prospectuses for the Funds, which must
accompany or precede this Prospectus, and the Funds' Statements of Additional
Information available upon request from Federal Kemper Life Assurance Company, 1
Kemper Drive, Long Grove, Illinois 60049.
CHANGE OF INVESTMENTS
FKLA reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares held by the Separate Account or
that the Separate Account may purchase. FKLA reserves the right to eliminate the
shares of any of the Portfolios of the Funds and to substitute shares of another
Portfolio of the Funds or of another investment company, if the shares of a
Portfolio are no longer available for investment, or if in its judgment further
investment in any Portfolio becomes inappropriate in view of the purposes of the
Policy or the Separate Account. FKLA may also eliminate or combine one or more
subaccounts, transfer assets, or it may substitute one subaccount for another
subaccount, if, in its sole discretion, marketing, tax or investment conditions
warrant. FKLA will not substitute any shares attributable to an Owner's interest
in a Subaccount of the Separate Account without notice to the Owner and prior
approval of the Commission, to the extent required by the 1940 Act or other
applicable law. Nothing contained in this Prospectus shall prevent the Separate
Account from purchasing other securities for other series or classes of
policies, or from permitting a conversion between series or classes of policies
on the basis of requests made by Owners.
FKLA also reserves the right to establish additional subaccounts of the
Separate Account, each of which would invest in a new portfolio of the Funds, or
in shares of another investment company, with specified investment objectives.
New subaccounts may be established when, in the sole discretion of FKLA,
marketing needs or investment conditions warrant, and any new subaccounts may be
made available to existing Owners as determined by FKLA.
If deemed by FKLA to be in the best interests of persons having voting
interests under the Policy, the Separate Account may be: (a) operated as a
management company under the 1940 Act; (b) deregistered under that Act in the
event such registration is no longer required; or (c) combined with other FKLA
separate accounts. To the extent permitted by law, FKLA may also transfer the
assets of the Separate Account associated with the Policy to another separate
account, or to the General Account.
FIXED ACCOUNT OPTION
NET PREMIUMS ALLOCATED BY POLICY OWNERS TO THE FIXED ACCOUNT OF THE POLICY
AND TRANSFERS TO THE FIXED ACCOUNT BECOME PART OF THE GENERAL ACCOUNT OF FKLA,
WHICH SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. BECAUSE OF EXEMPTIVE AND
EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED ACCOUNT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") NOR IS THE FIXED ACCOUNT
REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940
("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS THEREIN
GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS AND FKLA HAS
BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURES IN THIS PROSPECTUS
7
<PAGE> 11
WHICH RELATE TO THE FIXED PORTION. DISCLOSURES REGARDING THE FIXED ACCOUNT,
HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE
FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS
MADE IN PROSPECTUSES.
Under the Fixed Account Option offered under the Policies, FKLA allocates
payments to its General Account and pays a fixed interest rate for stated
periods. This Prospectus describes only the element of the Contract pertaining
to the Separate Account except where it makes specific reference to fixed
accumulation and settlement elements.
The Policies guarantee that payments allocated to the Fixed Account will
earn a minimum fixed interest rate of 3%. FKLA, at its discretion, may credit
interest in excess of 3%. FKLA reserves the right to change the rate of excess
interest credited as provided under the terms of the Policy. FKLA also reserves
the right to declare separate rates of excess interest for net premiums or
amounts transferred at designated times, with the result that amounts at any
given designated time may be credited with a higher or lower rate of excess
interest than the rate or rates of excess interest previously credited to such
amounts and net premiums or amounts transferred at any other designated time.
THE POLICY
POLICY ISSUE
Before FKLA will issue a Policy, it must receive a completed application
and a full initial premium at its Home Office. A Policy ordinarily will be
issued only for Insureds Age 1 through 75 who supply satisfactory evidence of
insurability to FKLA. Acceptance of an application is subject to underwriting by
FKLA.
After underwriting is complete and the Policy is delivered to the Owner,
insurance coverage under the Policy will be deemed to have begun as of the
Policy Date. (See "Premiums," below.)
PREMIUMS
Premiums are to be paid to FKLA at its Home Office. (See "Distribution of
Policies.") Checks ordinarily must be made payable to FKLA.
PLANNED PREMIUMS. When applying for a Policy, a Policy Owner will specify a
Planned Premium payment that provides for the payment of level premiums over a
specified period of time. However, the Policy Owner is not required to pay
Planned Premiums.
The minimum monthly premium that will be accepted by FKLA is $50. For modes
other than monthly the minimums are: annual $600; semi-annual $300; quarterly
$150. The amount, frequency and period of time over which a Policy Owner pays
premiums may affect whether the Policy will be classified as a modified
endowment contract, which is a type of life insurance contract subject to
different tax treatment than conventional life insurance contracts for certain
pre-death distributions. Accordingly, variations from the Planned Premiums on a
Policy that is not otherwise a modified endowment contract may result in the
Policy becoming a modified endowment contract for tax purposes.
Payment of the Planned Premium will not guarantee that a Policy will remain
in force. Instead, the duration of the Policy depends upon the Policy's
Surrender Value. Even if Planned Premiums are paid, the Policy will lapse any
time Surrender Value is insufficient to pay the current monthly deduction and a
Grace Period expires without sufficient payment. (See "Policy Lapse and
Reinstatement.")
A guarantee period and a monthly guarantee premium are specified in the
Policy Specifications. The guarantee period is the period that ends on the third
Policy anniversary. During the guarantee period, the policy will remain in force
and no grace period will begin provided that the total premiums received, less
any withdrawals and any outstanding loans, equals or exceeds the monthly
guarantee premium times the number of months since the Policy Date, including
the current month.
FKLA may reject or limit any premium payment that is below the current
minimum premium amount requirements, or that would increase the death benefit by
more than the amount of the premium. All or a portion of a premium payment will
be rejected and returned to the Owner if it would disqualify the Policy as life
insurance under the Internal Revenue Code.
Certain charges will be deducted from each premium payment. (See "Charges
and Deductions.") The remainder of the premium, known as the net premium, will
be allocated as described below under "Allocation of Premiums and Separate
Account Value."
8
<PAGE> 12
POLICY DATE. The Policy Date is the date used to determine Policy Years and
Deduction Days. The Policy Date will be the date that coverage on the Insured
takes effect. If such date is the 29th, 30th, or 31st of a month, the Policy
Date will be the first of the following month.
In the event an application is declined by FKLA, the Cash Value in the
Money Market Subaccount plus the total amount of monthly deductions and
deductions against premiums will be refunded.
The full initial premium is the only premium required to be paid under a
Policy. However, additional premiums may be necessary to keep the Policy in
force. (See "The Policy--Policy Lapse and Reinstatement.")
ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE
ALLOCATION OF PREMIUMS. The initial net premium will be allocated to the
Money Market Subaccount. The Separate Account Value will remain in the Money
Market Subaccount until the Trade Date. On the Trade Date, the Separate Account
Value in the Money Market Subaccount will be allocated to the Subaccounts and
the Fixed Account elected by the Owner in the application for the Policy.
Additional premiums received will continue to be allocated in accordance with
the Owner's instructions in the application unless contrary written instructions
are received. Once a change in allocation is made, all future premiums will be
allocated in accordance with the new allocation, unless contrary written
instructions are received. The minimum amount of any premium that may be
allocated to a Subaccount is $50. Premium may be allocated to a maximum of ten
Subaccounts.
The Separate Account Value will vary with the investment experience of the
chosen Subaccounts. The Owner bears the entire investment risk.
TRANSFERS. After the Trade Date, Separate Account Value may be transferred
among the Subaccounts and into the Fixed Account. One transfer of all or a part
of the Separate Account Value may be made within a fifteen day period. All
transfers made during a business day will be treated as one request.
Fixed Account Value may be transferred to one or more Subaccounts. One
transfer of part of the Fixed Account Value may be made once each Policy Year in
the thirty day period following the end of a Policy Year.
Transfer requests must be in writing in a form acceptable to FKLA, or by
telephone authorization under forms authorized by FKLA. (See "General
Provisions--Written Notices and Requests.") The minimum partial transfer amount
is $500. No partial transfer may be made if the value of the Owner's remaining
interest in a Subaccount or the Fixed Account, from which amounts are to be
transferred, would be less than $500 after such transfer. Transfers will be
based on the Accumulation Unit values next determined following receipt of
valid, complete transfer instructions by FKLA. The transfer provision may be
suspended, modified or terminated at any time by FKLA. FKLA disclaims all
liability for acting in good faith in following instructions which are given in
accordance with procedures established by FKLA, including requests for personal
identifying information, that are designed to limit unauthorized use of the
privilege. Therefore, a Policy Owner would bear this risk of loss in the event
of a fraudulent telephone transfer.
AUTOMATIC ASSET REALLOCATION. A Policy Owner may elect to have transfers
made automatically among the Subaccounts of the Separate Account on an annual or
a quarterly basis so that Cash Value is reallocated to match the Policy Owner's
predefined asset allocation program. An election to participate in the automatic
asset reallocation program must be in writing in the form prescribed by FKLA and
returned to FKLA at its home office.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Lapse will occur when the Surrender Value of a Policy is
insufficient to cover the monthly deductions, and a grace period expires without
a sufficient payment being made. (See "Charges and Deductions.")
A grace period of 61 days will be given to the Owner. It begins when notice
is sent that the Surrender Value of the Policy is insufficient to cover the
monthly deductions. Failure to make a premium payment or loan repayment during
the grace period sufficient to keep the Policy in force for three months will
cause the Policy to lapse and terminate without value.
If payment is received within the grace period, the premium or loan
repayment will be allocated to the Subaccounts and the Fixed Account in
accordance with the most current allocation instructions, unless
9
<PAGE> 13
otherwise requested. Amounts over and above the amounts necessary to prevent
lapse may be paid as additional premiums, however, to the extent otherwise
permitted. (See "The Policy--Premiums.")
FKLA will not accept any payment that would cause the total premium payment
to exceed the maximum payment permitted by the Code for life insurance under the
guideline premium limits. However, the Owner may voluntarily repay a portion of
Debt to avoid lapse. (See "Federal Tax Matters.")
If premium payments have not exceeded the maximum payment permitted by the
Code, the Owner may choose to make a larger payment than the minimum required
payment to avoid the recurrence of the potential lapse of coverage. The Owner
may also combine premium payments with Debt repayments.
The death benefit payable during the grace period will be the Death Benefit
in effect immediately prior to the grace period, less any Debt and any unpaid
monthly deductions.
REINSTATEMENT. If a Policy lapses because of insufficient Surrender Value
to cover the monthly deductions, and it has not been surrendered for its
Surrender Value, it may be reinstated at any time within three years after the
date of lapse. Tax consequences may affect the decision to reinstate.
Reinstatement is subject to:
(1) receipt of evidence of insurability satisfactory to FKLA;
(2) payment of a minimum premium sufficient to cover monthly deductions for
the grace period and to keep the Policy in force three months; and
(3) payment or reinstatement of any Debt against the Policy which existed
at the date of termination of coverage.
The effective date of reinstatement of a Policy will be the Deduction Day
that coincides with or next follows the date the application for reinstatement
is approved by FKLA. Suicide and incontestability provisions will apply from the
effective date of reinstatement.
POLICY BENEFITS AND RIGHTS
DEATH BENEFITS
While the Policy is in force (see "Policy Lapse and Reinstatement--Lapse,"
above) and prior to the Maturity Date, the death benefit is based on the death
benefit option, the Specified Amount and the table of death benefit percentages
applicable at the time of death. The death benefit proceeds will be equal to the
death benefit minus any debt and minus any monthly deductions due during the
grace period.
A Policy Owner may select one of two death benefit options: Option A or
Option B. An applicant designates the death benefit option in the application.
Subject to certain restrictions, the Owner can change the death benefit option
selected. So long as the Policy remains in force, the death benefit under either
option will never be less than the Specified Amount.
The Specified Amount is chosen by the Owner on the application and is
stated in the Policy Specifications. The minimum Specified Amount permitted
under the Policy is $25,000. However, a lesser Specified Amount may be permitted
in the case of a single premium.
OPTION A. Under Option A, the death benefit will be equal to the Specified
Amount or, if greater, the Cash Value (determined as of the end of the Valuation
Period during which the Insured dies) multiplied by a death benefit percentage.
The death benefit percentages vary according to the age of the Insured and will
be at least equal to the cash value corridor in Section 7702 of the Internal
Revenue Code. The death benefit percentage is 250% for an Insured at Age 40 or
under, and it declines for older Insureds. A table showing the death benefit
percentages is in the Appendix B to this Prospectus and in the Policy.
OPTION B. Under Option B, the death benefit will be equal to the Specified
Amount plus the Cash Value (determined as of the end of the Valuation Period
during which the Insured dies) or, if greater, the Cash Value multiplied by a
death benefit percentage. The specified percentage is the same as that used in
connection with Option A and as stated in the Appendix. The death benefit under
Option B will always vary as Cash Value varies.
EXAMPLES OF OPTIONS A AND B. The following examples demonstrate the
determination of death benefits under Options A and B. The examples show three
Policies--Policies I, II, and III--with the same Specified
10
<PAGE> 14
Amount, but Cash Values that vary as shown, and which assume an Insured is Age
35 at the time of death and that there is no outstanding Debt.
<TABLE>
<CAPTION>
POLICY POLICY
POLICY I II III
-------- -------- --------
<S> <C> <C> <C>
Specified Amount........................ $100,000 $100,000 $100,000
Cash Value on Date of Death............. $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage................ 250% 250% 250%
Death Benefit Under Option A............ $100,000 $125,000 $187,500
Death Benefit Under Option B............ $125,000 $150,000 $187,500
</TABLE>
Under Option A, the death benefit for Policy I is equal to $100,000 since
the death benefit is the greater of the Specified Amount ($100,000) or the Cash
Value at the date of death multiplied by the death benefit percentage ($25,000 X
250% = $62,500). For both Policies II and III under Option A, the Cash Value
multiplied by the death benefit percentage ($50,000 X 250% = $125,000 for Policy
II; $75,000 X 250% = $187,500 for Policy III) is greater than the Specified
Amount ($100,000), so the death benefit is equal to the higher value. Under
Option B, the death benefit for Policy I is equal to $125,000 since the death
benefit is the greater of Specified Amount plus Cash Value ($100,000 + $25,000 =
$125,000) or the Cash Value multiplied by the death benefit percentage ($25,000
X 250% = $62,500). Similarly, in Policy II, Specified Amount plus Cash Value
($100,000 + $50,000 = $150,000) is greater than Cash Value multiplied by the
death benefit percentage ($50,000 X 250% = $125,000). In Policy III, the Cash
Value multiplied by the death benefit percentage ($75,000 X 250% = $187,500) is
greater than the Specified Amount plus Cash Value ($100,000 + $75,000 =
$175,000), so the death benefit is equal to the higher value.
All calculations of death benefit will be made as of the end of the
Valuation Period during which the Insured dies. Death benefit proceeds may be
paid to a Beneficiary in a lump sum or under a payment plan offered under the
Policy. The Policy should be consulted for details.
Death benefits under the Policy will ordinarily be paid within seven days
after FKLA receives all documentation required for such a payment. Payments may
be postponed in certain circumstances. (See "General Provisions -- Postponement
of Payments")
CHANGES IN DEATH BENEFIT OPTION
After the first Policy Year, a Policy Owner may request that the death
benefit under the Policy be changed from Option A to Option B, or from Option B
to Option A. Changes in the death benefit option may be made only once per
Policy Year and should be made in writing to FKLA's Home Office. The effective
date of any such change is the next Monthly Processing Date after the change is
accepted.
A change in the death benefit from Option A to Option B will result in a
reduction in the Specified Amount of the Policy by the amount of the Policy's
Cash Value, with the result that the death benefit payable under Option B at the
time of the change will equal that which would have been payable under Option A
immediately prior to the change. The change in option will affect the
determination of the death benefit since Cash Value will then be added to the
new Specified Amount, and the death benefit will then vary with Cash Value.
A change in the death benefit from Option B to Option A will result in an
increase in the Specified Amount of the Policy by the amount of the Policy's
Cash Value, with the result that the death benefit payable under Option A at the
time of the change will equal that which would have been payable under Option B
immediately prior to the change. However, the change in option will affect the
determination of the death benefit since the Cash Value will no longer be added
to the Specified Amount in determining the death benefit. From that point on,
the death benefit will equal the new Specified Amount (or, if higher, the Cash
Value times the applicable specified percentage).
A change in death benefit option may affect the future monthly cost of
insurance charge since this charge varies with the net amount at risk, which
generally is the amount by which the death benefit exceeds Cash Value. (See
"Charges and Deductions--Cost of Insurance Charge.") Assuming that the Policy's
death benefit would not be equal to Cash Value times a death benefit percentage
under either Option A or B, changing from Option B to Option A will generally
decrease the future net amount at risk, and therefore decrease the future cost
of insurance charges. Changing from Option A to Option B will generally result
in a net amount at risk that remains level. Such a change, however, will result
in an increase in the cost of insurance charges over time, since the cost of
insurance rates increase with the insured's Age.
11
<PAGE> 15
CHANGES IN SPECIFIED AMOUNT
After the first Policy Year, a Policy Owner may request an increase or
decrease in the Specified Amount under a Policy subject to approval from FKLA. A
change in Specified Amount may only be made once per Policy Year and must be in
an amount at least equal to $10,000. Increases are not allowed after the Insured
attains age 85. Increasing the Specified Amount could increase the death benefit
under a Policy, and decreasing the Specified Amount could decrease the death
benefit. (See "Federal Tax Matters.") The amount of change in the death benefit
will depend, among other things, upon the death benefit option chosen by the
Owner and the degree to which the death benefit under a Policy exceeds the
Specified Amount prior to the change. Changing the Specified Amount could affect
the subsequent level of the death benefit while the Policy is in force and the
subsequent level of Policy values. An increase in Specified Amount may increase
the net amount at risk under a Policy, which will increase an Owner's cost of
insurance charge and the guarantee premium amount. However, the guarantee period
will not be extended as a result of an increase in Specified Amount. Conversely,
a decrease in Specified Amount may decrease the net amount at risk, which will
decrease an Owner's cost of insurance charge. A decrease in Specified Amount
will not decrease the guarantee premium.
INCREASES. Additional evidence of insurability satisfactory to FKLA will be
required for an increase in Specified Amount.
DECREASES. Any decrease in Specified Amount will first be applied to the
most recent increases successively, then to the original Specified Amount. A
decrease will not be permitted if the Specified Amount would fall below the
lesser of the initial Specified Amount or $25,000. If a decrease in the
Specified Amount would result in total premiums paid exceeding the premium
limitations prescribed under tax law to qualify the Policy as a life insurance
contract, FKLA will refund the Policy Owner the amount of such excess above the
premium limitations.
FKLA reserves the right to disallow a requested decrease, and will not
permit a requested decrease, among other reasons, (1) if compliance with the
guideline premium limitations under tax law resulting from the requested
decrease would result in immediate termination of the Policy, or (2) if, to
effect the requested decrease, payments to the Owner would have to be made from
Cash Value for compliance with the guideline premium limitations, and the amount
of such payments would exceed the Surrender Value under the Policy.
Any request for an increase or decrease in Specified Amount must be made by
written application to FKLA's Home Office. It will become effective on the
Deduction Day on or next following FKLA's acceptance of the request. If the
Owner is not the Insured, FKLA will also require the consent of the Insured
before accepting a request.
BENEFITS AT MATURITY
If the Insured is living on the Policy Date anniversary nearest the
Insured's Age 100, FKLA will pay the Owner the Surrender Value of the Policy, on
surrender of the Policy to FKLA. On the Maturity Date, the Policy will terminate
and FKLA will have no further obligations under the Policy.
CASH VALUE
The Policy's Cash Value will reflect the investment experience of the
selected Subaccounts, the frequency and amount of premiums paid, transfers
between Subaccounts, any Fixed Account or Loan Account values, and any charges
assessed in connection with the Policy. An Owner may make partial withdrawals of
Cash Value or surrender the Policy and receive the Policy's Surrender Value,
which equals the Cash Value less surrender charges and Debt. (See "Surrender
Privilege.") There is no minimum guaranteed Cash Value.
CALCULATION OF CASH VALUE. The Cash Value of the Policy is the total of the
Policy's Separate Account Value, Fixed Account Value and Loan Account value. The
Cash Value is determined on each Valuation Date. It will first be calculated on
the Policy Date. On that date, the Cash Value equals the initial premium, less
the monthly deductions for the first Policy Month. (See "Charges and
Deductions.")
12
<PAGE> 16
On any Valuation Date during the Policy Year, the Policy's Separate Account
Value in any Subaccount will equal:
(1) The Policy's Separate Account Value in the Subaccount at the end
of the preceding Valuation Period, multiplied by the Investment Experience
Factor (defined below) for the current Valuation Period; plus
(2) Any net premiums received during the current Valuation Period
which are allocated to the Subaccount; plus
(3) All amounts transferred to the Subaccount, either from another
Subaccount or the Fixed Account or from the Loan Account in connection with
the repayment of a Policy loan (see "Policy Benefits and Rights--Policy
Loans,") during the current Valuation Period; minus
(4) The pro rata portion of the monthly cost of insurance charge,
administrative charge, and any other charges assessed to the Subaccount.
(See "Charges and Deductions--Cost of Insurance Charge."); minus
(5) All amounts transferred from the Subaccount during the current
Valuation Period; minus
(6) All amounts withdrawn from the Subaccount during the current
Valuation Period; minus
(7) All amounts loaned from the Subaccount during the current
Valuation Period.
There will also be Cash Value in the Loan Account if there is a Policy loan
outstanding. The Loan Account is credited with amounts transferred from
Subaccounts in connection with Policy loans. The Loan Account balance accrues
daily interest at an effective annual rate of 3.00%. (See "Policy Benefits and
Rights--Policy Loans.")
The Cash Value in the Fixed Account is credited with interest at the annual
rate declared by FKLA. The annual rate will never be less than 3%.
ACCUMULATION UNIT VALUE. Each Subaccount has a distinct Accumulation Unit
Value. When net premiums or other amounts are allocated to a Subaccount, a
number of units are purchased based on the Accumulation Unit Value of the
Subaccount at the end of the Valuation Period during which the allocation is
made. When amounts are transferred out of, or deducted from, a Subaccount, units
are redeemed in a similar manner.
For each Subaccount, the Accumulation Unit Value was initially set at the
same unit value as the net asset value of a share of the underlying Portfolio.
The Accumulation Unit Value for each subsequent Valuation Period is the
Investment Experience Factor for that Valuation Period multiplied by the
Accumulation Unit Value for the immediately preceding period. Each Valuation
Period has a single Accumulation Unit Value which applies for each day in the
period. The number of Accumulation Units will not change as a result of
investment experience. The Investment Experience Factor may be greater or less
than one; therefore, the Accumulation Unit Value may increase or decrease.
INVESTMENT EXPERIENCE FACTOR. The investment experience of the Separate
Account is calculated by applying the Investment Experience Factor to the
Separate Account Value in each Subaccount during a Valuation Period. Each
Subaccount has its own distinct Investment Experience Factor. The Investment
Experience Factor of a Subaccount for any Valuation Period is determined by
dividing (1) by (2) and subtracting (3) from the result, where:
(1) is the net result of:
a. the net asset value per share of the investment held in the
Subaccount determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain distributions
made by the investment held in the Subaccount division, if the
"ex-dividend" date occurs during the current Valuation Period; plus or
minus
c. a charge or credit for any taxes reserved for the current valuation
period which we determine to have resulted from the investment
operations of the Subaccount;
(2) is the net asset value per share of the investment held in the
Subaccount, determined at the end of the last prior Valuation Period;
(3) is the factor representing the Mortality and Expense Risk Charge. (See
"Charges and Deductions --Mortality and Expense Risk Charge.")
13
<PAGE> 17
POLICY LOANS
After the first Policy Year, the Owner may by written request to FKLA
borrow all or part of the maximum loan amount of the Policy. The maximum loan
amount is 95% of the Policy's Cash Value minus applicable surrender charges,
subject to the requirements of the Internal Revenue Code. The amount of any new
loan may not exceed the maximum loan amount less Debt on the date a loan is
granted. The minimum amount of a loan is $500. Any amount due an Owner under a
Policy Loan ordinarily will be paid within 7 days after FKLA receives a loan
request at its Home Office, although payments may be postponed under certain
circumstances. (See "Postponement of Payments," and "Federal Tax Matters.")
On the date a Policy loan is made, an amount equal to the loan amount will
be transferred from the Separate Account and Fixed Account to the Loan Account.
Unless the Owner directs otherwise, the loaned amount will be deducted from the
Subaccounts and the Fixed Account in proportion to the values that each bears to
the Separate Account Value of the Policy in all of the Subaccounts plus the
Fixed Account Value at the end of the Valuation Period during which the request
is received.
The loan interest will be assessed at an effective annual rate of 5.00% in
the first nine Policy Years and 3.00% thereafter. Interest not paid when due
will be added to the loan amount due upon the earlier of the next Policy Date
Anniversary or when coverage ceases upon lapse, surrender, death or maturity and
bear interest at the same rate. When interest is added to the loan amount, a
transfer in this amount will be made from the Separate Account and the Fixed
Account to the Loan Account.
Cash Value in the Loan Account will earn 3.00% annual interest. Earnings
will be allocated to the Loan Account.
LOAN REPAYMENT. While the Policy is in force, policy loans may be repaid
at any time, in whole or in part. At the time of repayment, Cash Value in the
Loan Account equal to the amount of the repayment which exceeds the difference
between interest due and interest earned will be allocated to the Subaccounts
and the Fixed Account according to the Owner's current allocation instructions,
unless otherwise requested by the Owner. Transfers from the Loan Account to the
Separate Account or the Fixed Account as a result of the repayment of Debt will
be allocated at the end of the Valuation Period during which the repayment is
received. Such transfers will not be counted in determining the transfers made
within a 15 day period.
EFFECTS OF POLICY LOAN. Policy loans decrease Surrender Value and,
therefore, the amount available to pay the charges necessary to keep the Policy
in force. If Surrender Value on the day immediately preceding a Deduction Day is
less than the monthly deductions for the next month, FKLA will notify the Owner.
(See "General Provisions--Written Notices and Requests.") The Policy will lapse
and terminate without value, unless a sufficient payment is made to FKLA within
61 days of the date such notice is sent to the Owner. (See "The Policy--Policy
Lapse and Reinstatement.")
EFFECT ON INVESTMENT EXPERIENCE. A Policy Loan will have an effect on the
Cash Value of a Policy. The collateral for the loan (the amount held in the Loan
Account) does not participate in the experience of the Subaccounts or the
current interest rate of the Fixed Account while the loan is outstanding. If the
amount credited to the Loan Account is more than the amount that would have been
earned in the Subaccounts or the Fixed Account, the Cash Value will, and the
Death Benefit may, be higher as a result of the loan. Conversely, if the amount
credited to the Loan Account is less than would have been earned in the
Subaccounts or the Fixed Account, the Cash Value, as well as the Death Benefit,
may be less.
TAX TREATMENT. If the Policy is treated as a modified endowment contract, a
loan will be taxed in the same way as a loan from an annuity. Therefore, a loan
may be subject to Federal income tax and a 10% tax penalty may apply. (See
"Federal Tax Matters.")
SURRENDER PRIVILEGE
While the Insured is living and the Policy is in force, the Owner may
surrender the Policy for its Surrender Value. To surrender the Policy, the Owner
must make written request to FKLA at its Home Office and return the Policy to
FKLA. The Surrender Value is equal to the Cash Value less any applicable
Surrender Charge and any Debt. (See "Surrender Charge," below.)
SURRENDER CHARGE. A contingent deferred sales charge ("Surrender Charge")
is imposed to cover expenses relating to the sale of the Policy including
commissions paid to sales personnel, and other promotion and acquisition
expenses. If this Policy is surrendered or if the Cash Value is applied under a
Settlement Option (see "General Provisions--Settlement Options"), the amount
payable may reflect a
14
<PAGE> 18
deduction for applicable Surrender Charges. A Surrender Charge will not be
assessed against Cash Values applied under a settlement option if the Policy has
been in force for five or more years and the settlement option elected provides
for benefit payments of at least five years. The amount of the Surrender Charge
will be calculated as a percentage of the total premiums paid under the Policy.
During the period from the Policy Date to the fifth Policy Anniversary, the rate
is 6%; on the fifth Policy Anniversary, the rate decreases to 5%, and on each of
the next three Policy Anniversaries it will decrease an additional 1% with a
final decrease of 2% on the ninth Policy Anniversary. During the first nine
Policy Years following an increase in Specified Amount, an additional surrender
charge will apply. The additional charge will be calculated as described above
based on the amount of the increase, the number of years since the date of the
increase and premiums associated with the increase. The Surrender Charge in any
Policy Year will never exceed $60 per $1,000 of initial Death Benefit.
The applicable Surrender Charge will be determined based upon the date of
receipt of the written request for surrender.
PARTIAL WITHDRAWALS. After the first Policy Year, a Policy Owner may make
withdrawals of amounts less than the Surrender Value. The minimum amount of each
withdrawal is $500. Surrender charges will apply to partial withdrawals, but
only to the extent the withdrawal (plus all previous withdrawals made under the
Policy) exceeds Cash Value less total premiums paid into the Policy. For
purposes of determining the surrender charge assessed against a partial
withdrawal, amounts in excess of the total premiums paid under the Policy will
be considered to have been withdrawn first. A $25 withdrawal charge may be
imposed for processing each withdrawal. (See "Charges and Deductions.") A
withdrawal will decrease the Cash Value by the amount of the withdrawal and, if
Death Benefit Option A is in effect, will reduce the Specified Amount by the
amount of the withdrawal (before the withdrawal charge and any applicable
surrender charge.)
FREE-LOOK PERIOD
The Owner may, until the end of the period of time specified in the Policy,
examine the Policy and return it for a refund. The applicable period of time
will depend on the state in which the Policy is issued; however, it will be at
least 10 days from the date the Policy is received by the Owner. The amount of
the refund will be the sum of the Cash Value in the Money Market Subaccount plus
the total amount of monthly deductions and deductions made against Premiums. An
Owner seeking a refund should return the Policy to FKLA at its Home Office or to
the agent who sold the Policy.
CHARGES AND DEDUCTIONS
DEDUCTIONS FROM PREMIUMS
A state and local premium tax charge of 2.5% is deducted from each premium
payment under the Policy prior to allocation of the net premium. This charge is
to reimburse FKLA for the payment of state premium taxes. FKLA expects to pay an
average state premium tax rate of approximately 2.5% but the actual premium tax
attributable to a Policy may be more or less. In addition, a charge for federal
taxes equal to 1% of each premium payment will be deducted to compensate FKLA
for a higher corporate income tax liability resulting from changes made to the
Internal Revenue Code by the Omnibus Budget Reconciliation Act of 1990.
COST OF INSURANCE CHARGE
A monthly deduction is made from the Subaccounts and the Fixed Account for
the cost of insurance to cover FKLA's anticipated mortality costs. The cost of
insurance charge is deducted monthly in advance and is allocated among the
Subaccounts and the Fixed Account in proportion each bears to the Cash Value of
the Policy less Debt.
The cost of insurance will be deducted on the Policy Date and on each
Deduction Day thereafter by the cancellation of units. If the Deduction Day
falls on a day other than a Valuation Date, the charge will be determined on the
next Valuation Date. The cost of insurance charge is determined by multiplying
the applicable cost of insurance rate (see below) by the "net amount at risk"
for each policy month. The net amount at risk is equal to the Death Benefit
minus the Cash Value on the Deduction Day.
COST OF INSURANCE RATE. The monthly cost of insurance rates are based on
the issue age, sex, rate class of the Insured and Policy Year. The monthly cost
of insurance rates will be determined by FKLA based on
15
<PAGE> 19
its expectations as to future mortality experience. Any change in the schedule
of rates will apply to all individuals of the same class as the Insured. The
cost of insurance rate may never exceed those shown in the table of guaranteed
maximum cost of insurance rates in the Policy. The guaranteed maximum cost of
insurance rates are based on the 1980 Commissioner's Standard Ordinary Smoker
and Non-Smoker Mortality Tables, Age Nearest Birthday, published by the National
Association of Insurance Commissioners.
RATE CLASS. The rate class of an Insured will affect the cost of insurance
rate. FKLA currently places Insureds in preferred rate classes and rate classes
involving a higher mortality risk. The cost of insurance rates for rate classes
involving a higher mortality risk are multiples of the preferred rates. (See
"Charges and Deductions--Cost of Insurance Rate," above.)
MORTALITY AND EXPENSE RISK CHARGE
A daily charge is deducted from the Subaccounts of the Separate Account for
mortality and expense risks assumed by FKLA. This charge will be at an annual
rate of 0.60%. This charge may be increased in the future but in no event will
it exceed an annual rate of 0.90%. FKLA may profit from this charge.
The mortality and expense risk assumed is that FKLA's estimates of
longevity and of the expenses incurred over the lengthy period the Policy may be
in effect--which estimates are the basis for the level of other charges FKLA
makes under the Policy--will not be correct.
MONTHLY ADMINISTRATIVE CHARGE
FKLA deducts a monthly administrative expense charge to reimburse it for
certain expenses related to maintenance of the Policies, accounting and record
keeping and periodic reporting to owners. Currently, this charge is $6 per
month.
OTHER CHARGES
SURRENDER CHARGE. During the first nine Policy Years, if the Policy is
surrendered or if the Cash Value is applied under a Settlement Option, a
Surrender Charge is imposed against the total premium paid. In addition, the
Surrender Charge may apply against a partial withdrawal if the withdrawal (plus
all prior partial withdrawals) exceeds Cash Value less total premiums paid. The
charge decreases from 6% to 0%, depending on the Policy Year of the date of
surrender or application under a Settlement Option. During the first nine Policy
Years following an increase in Specified Amount, an additional surrender charge
will apply. The additional charge will be calculated as described above based on
the amount of the increase, the number of years since the date of the increase
and premium associated with the increase. A Surrender Charge will not be
assessed against Cash Values applied under a Settlement Option if the Policy has
been in force for five or more years and the Settlement Option elected provides
for the payment of benefits for at least five years. The Surrender Charges are
intended to compensate FKLA for expenses in connection with the distribution of
the Policy. Under current assumptions FKLA anticipates Surrender Charges will
not fully cover distribution expenses. To the extent that distribution expenses
are not recovered from Surrender Charges, those expenses may be recovered from
other sources, including the cost of insurance and the mortality and expense
risk charges described above. Surrender Charges are described in more detail
under "Policy Benefits--Surrender Privilege."
WITHDRAWAL CHARGE. A charge of $25 may be imposed for each partial
withdrawal. This charge is designed to reimburse FKLA for the administrative
expenses related to the withdrawal. FKLA does not expect to recover any amount
in excess of aggregate expenses. A Surrender Charge may also apply to a partial
withdrawal. (See "Surrender Charge" above.)
TAXES. Currently, no charges are made against the Separate Account for
Federal, state or other taxes that may be attributable to the Separate Account.
FKLA may, however, in the future impose charges for Federal income taxes
attributable to the Separate Account. Charges for other taxes, if any,
attributable to the Policy may also be made. (See "Federal Tax Matters.")
CHARGES AGAINST THE FUNDS. Under the investment advisory agreements between
the Funds, on behalf of the Portfolios, and the investment managers and/or
advisers for the Portfolios, such entities provide investment advisory services
for the Portfolios. The Funds are responsible for the advisory fees and all
their other expenses. The investment advisory fees differ with respect to each
of the Portfolios of the Funds and are described on pages 6 and 7 of this
Prospectus. FKLA may receive compensation from the investment advisers of the
Funds for services related to the Funds. Such compensation will be consistent
with the services rendered or the cost savings resulting from the arrangement.
For more information concerning the
16
<PAGE> 20
investment advisory fees and other charges against the Portfolios of the Funds,
see the prospectuses for the Funds and the Statements of Additional Information
available upon request.
SYSTEMATIC WITHDRAWAL PLAN. A charge of $50 is imposed to enter into a
Systematic Withdrawal Plan (SWP.) In addition, a $25 charge will be imposed each
time a change is made to the SWP. These charges are to reimburse FKLA for
expenses related to the administration of the SWP. (See "Systematic Withdrawal
Plan.")
REDUCTION OF CHARGES. FKLA may reduce certain charges and the minimum
initial premium in special circumstances that result in lower sales,
administrative, or mortality expenses. For example, special circumstances may
exist in connection with group or sponsored arrangements, sales to FKLA
policyowners, or sales to employees or clients of members of the Zurich Kemper
group of companies. The amounts of any reductions will reflect the reduced sales
effort and administrative costs resulting from, or the different mortality
experience expected as a result of, the special circumstances. Reductions will
not be unfairly discriminatory against any person, including the affected Owners
and owners of all other policies funded by the Separate Account.
GENERAL PROVISIONS
SETTLEMENT OPTIONS
The Owner, or Beneficiary at the death of the Insured if no election by the
Owner is in effect, may elect to have all of the Death Benefit or Surrender
Value of this Policy paid in a lump sum or have the amount applied to one of the
Settlement Options. Payments under these options will not be affected by the
investment experience of the Separate Account after proceeds are applied under a
Settlement Option. Payment will be made as elected by the payee on a monthly,
quarterly, semi-annual or annual basis. The option selected must result in a
payment that is at least equal to FKLA's required minimum, according to rules in
effect at the time the option is chosen. If at any time the payments are less
than the minimum payment, FKLA may increase the period between payments to
quarterly, semi-annual or annual so that the payment is at least equal to our
minimum payment or make the payment in one lump sum.
The Cash Value on the day immediately preceding the date on which the first
benefit payment is due will first be reduced by any applicable Surrender Charge
and Debt. The Surrender Value will be used to determine the benefit payment. The
payment will be based on the settlement option elected in accordance with the
appropriate settlement option table.
OPTION 1--INCOME FOR SPECIFIED PERIOD. FKLA will pay income for the period
and payment mode elected but not less than 5 years nor more than 30 years.
OPTION 2--LIFE INCOME. FKLA will pay a monthly income to the payee during
the payee's lifetime. If this Option is elected, annuity payments terminate
automatically and immediately on the death of the annuitant without regard to
the number or total amount of payments made. Thus, it is possible for an
individual to receive only one payment if death occurred prior to the date the
second payment was due.
OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED. FKLA will pay a monthly
income for the guaranteed period elected and thereafter for the remaining
lifetime of the payee. The period elected may only be 5, 10, 15 or 20 years.
OPTION 4--JOINT AND SURVIVOR ANNUITY. FKLA will pay the full monthly income
while both payees are living. Upon the death of either payee, the income will
continue during the lifetime of the surviving payee. The surviving payee's
income shall be the percentage of such full amount chosen at the time of
election of this option. The percentages available are 50%, 66 2/3%, 75% and
100%. Annuity payments terminate automatically and immediately upon the death of
the surviving payee without regard to the number or total amount of payments
received.
FKLA's consent is necessary for any other payment methods.
The guaranteed monthly payments are based on an interest rate of 2.50% per
year and, where mortality is involved, the "1983 Table a" individual mortality
table developed by the Society of Actuaries, with a 5 year setback.
17
<PAGE> 21
POSTPONEMENT OF PAYMENTS
GENERAL. Payment of any amount due upon: (a) Policy termination at the
Maturity Date, (b) surrender of the Policy, (c) payment of any Policy loan, or
(d) death of the Insured, may be postponed whenever:
(1) The New York Stock Exchange is closed other than customary weekend
and holiday closings, or trading on the New York Stock Exchange is
restricted as determined by the SEC;
(2) The SEC by order permits postponement for the protection of
Owners; or
(3) An emergency exists, as determined by the SEC, as a result of
which disposal of securities of the Funds is not reasonably practicable or
it is not reasonably practicable to determine the value of the net assets
of the Separate Account.
Transfers may also be postponed under these circumstances.
PAYMENT NOT HONORED BY BANK. The portion of any payment due under the
Policy which is derived from any amount paid to FKLA by check or draft may be
postponed until such time as FKLA determines that such instrument has been
honored by the bank upon which it was drawn.
THE CONTRACT
The Policy, any endorsements, and the application constitute the entire
contract between FKLA and the Owner. All statements made by the Insured or
contained in the application will, in the absence of fraud or misrepresentation,
be deemed representations and not warranties.
Only the President, the Secretary, or an Assistant Secretary of FKLA is
authorized to change or waive the terms of a Policy. Any change or waiver must
be in writing and signed by one of those persons.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured is misstated, the Death Benefit will be
changed to what the cost of insurance on the previous Deduction Day would have
purchased based on the correct sex and age.
INCONTESTABILITY
FKLA may contest the validity of a Policy if any material
misrepresentations are made in the application. However, a Policy will be
incontestable after it has been in force during the lifetime of the Insured for
two years from the Issue Date. A new two year contestability period will apply
to increases in insurance, and to reinstatements beginning with the effective
date of the increase or reinstatement.
SUICIDE
Suicide by the Insured, while sane or insane, within two years from the
Issue Date of the Policy is a risk not assumed under the Policy. FKLA's
liability for such suicide is limited to the premiums paid less any withdrawals
and Debt. When the laws of the state in which a Policy is delivered require less
than a two year period, the period or amount paid will be as stated in such
laws.
ASSIGNMENT
No assignment of a Policy is binding on FKLA until it is received by FKLA
at its Home Office. FKLA assumes no responsibility for the validity of the
assignment. Any claim under an assignment is subject to proof of the extent of
the interest of the assignee. If this Policy is assigned, the rights of the
Owner and Beneficiary are subject to the rights of the assignee of record.
NONPARTICIPATING
This Policy will not pay dividends. It will not participate in any of
FKLA's surplus or earnings.
OWNER AND BENEFICIARY
The Owner may, at any time during the life of the Insured and while the
Policy is in force, designate a new Owner.
Primary and secondary Beneficiaries may be designated by the Owner in the
application. If changed, the primary or secondary Beneficiary is as shown in the
latest change filed with FKLA. If no Beneficiary
18
<PAGE> 22
survives the Insured, the Insured's estate will be the Beneficiary. The interest
of any Beneficiary may be subject to that of an assignee.
Any change of Owner or Beneficiary must be made in writing in a form
acceptable to FKLA. The change will take effect as of the date the request is
signed. FKLA will not be liable for any payment made or other action taken
before the notice has been received at FKLA's Home Office.
RECORDS AND REPORTS
FKLA will maintain all records relating to the Separate Account. FKLA will
send Owners, at their last known address of record, an annual report stating the
Death Benefit, the Accumulation Unit Value, the Cash Value and Surrender Value
under the Policy, and indicating any additional premium payments, partial
withdrawals, transfers, Policy loans and repayments and charges made during the
Policy Year. In addition, Owners will be sent confirmations and acknowledgments
of various transactions. Owners will also be sent annual and semi-annual reports
for the Fund to the extent required by the 1940 Act.
WRITTEN NOTICES AND REQUESTS
Any written notice or request to be sent to FKLA should be sent to its Home
Office, 1 Kemper Drive, Long Grove, Illinois 60049. The notice or request should
include the Policy number and the Insured's full name. Any notice sent by FKLA
to an Owner will be sent to the address shown in the application unless an
address change has been filed with FKLA.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, a Policy Owner may elect to add one or
more of the following optional insurance benefits to the Policy by a Rider at
the time of application for a Policy. These optional benefits are: waiver of all
monthly deductions against the Policy in the event of total disability of the
Insured; term insurance on the Insured's dependent children; acceleration of the
payment of a portion of the death benefit when the Insured is terminally ill;
term insurance on an additional insured specified by the Owner; and extension of
the Maturity Date under the Policy. If the Maturity Date is extended, the death
benefit after the Maturity Date will be equal to the Cash Value multiplied by
the death benefit factor in Appendix B to this Prospectus. The cost of any
additional insurance benefits will be deducted as part of the monthly
deductions. Certain restrictions may apply. Restrictions and provisions related
to these benefits are more fully described in the applicable rider. Samples of
the provisions are available from FKLA upon written request.
DOLLAR COST AVERAGING
A Policy Owner may predesignate a portion of the Cash Value under a Policy
attributable to the Money Market or Government Securities Subaccount to be
automatically transferred on a monthly basis to one or more of the other
Subaccounts and the Fixed Account. A Policy Owner may enroll in this program at
the time the Policy is issued or anytime thereafter by properly completing the
Dollar Cost Averaging enrollment form and returning it to FKLA at its home
office at least five (5) business days prior to the effective date that all
Dollar Cost Averaging transfers will be made ("Transfer Date").
Transfers will commence on the first Transfer Date following the Trade
Date. Transfers will be made in the amounts designated by the Policy Owner and
must be at least $500 per Subaccount. The total Cash Value in the Money Market
or Government Securities Subaccount at the time Dollar Cost Averaging is elected
must be at least equal to the greater of $10,000 or the amount designated to be
transferred on each Transfer Date multiplied by the duration selected. Dollar
Cost Averaging will cease automatically if the Cash Value does not equal or
exceed the amount designated to be transferred on each Transfer Date and the
remaining amount will be transferred.
Dollar Cost Averaging will terminate when (i) the number of designated
monthly transfers has been completed, (ii) the Cash Value attributable to the
Money Market or Government Securities Subaccount is insufficient to complete the
next transfer, (iii) the Policy Owner requests termination in writing and such
writing is received by FKLA at its home office at least five business days prior
to the next Transfer Date in order to cancel the transfer scheduled to take
effect on such date, or (iv) the Policy is surrendered. FKLA reserves the right
to amend Dollar Cost Averaging on thirty days notice or terminate it at any
time.
19
<PAGE> 23
A Policy Owner may initiate, reinstate or change Dollar Cost Averaging or
change existing Dollar Cost Averaging terms by properly completing the new
enrollment form and returning it to FKLA at its home office at least five (5)
business days, (ten (10) business days for Fixed Account transfers), prior to
the next Transfer Date such transfer is to be made.
SYSTEMATIC WITHDRAWAL PLAN
FKLA administers a Systematic Withdrawal Plan ("SWP") which allows certain
Policy Owners to preauthorize periodic withdrawals. Policy Owners entering into
a SWP agreement instruct FKLA to withdraw selected amounts from the Fixed
Account, or from a maximum of two Subaccounts on a monthly, quarterly,
semi-annual or annual basis. Currently the SWP is available to Policy Owners who
request a minimum $500 periodic payment. The amounts distributed under the SWP
are partial withdrawals and will be subject to surrender charges, if applicable.
(See "Policy Benefits and Rights--Surrender Privileges.") A charge of $50 will
be imposed at the time a SWP is established. In addition, a $25 charge will be
imposed each time a change is made to the SWP. These charges are designed to
reimburse FKLA for expenses related to the administration of the SWP.
Withdrawals taken under the SWP may be subject to income taxes, withholding and
tax penalties. See "Federal Tax Matters." Policy Owners interested in the SWP
may obtain an application and full information concerning this program and its
restrictions from their representative or FKLA's home office. The right is
reserved to amend the SWP on thirty days' notice. The SWP may be terminated at
any time by the Contract Owner or FKLA.
DISTRIBUTION OF POLICIES
The Policy is sold by licensed insurance representatives who represent FKLA
and who are registered representatives of broker-dealers which are registered
under the Securities Exchange Act of 1934 and are members of the National
Association of Securities Dealers, Inc. The Policy is distributed through the
principal underwriter, Investors Brokerage Services, Inc. ("IBS"), an affiliate
of FKLA.
Gross commissions paid by FKLA on the sale of the Policy plus fees for
marketing services provided by affiliates of FKLA are not more than 10% in the
first year and on increases in subsequent years and 6% in renewal years. A
service fee at an annual rate of 0.10% on assets which have been maintained and
serviced may also be paid. Firms to which service fees and commissions may be
paid include affiliated broker-dealers.
IBS is engaged in the sale and distribution of other variable life policies
and annuities.
FEDERAL TAX MATTERS
The ultimate effect of Federal income taxes on the Policy, on settlement
options and on the economic benefit to the Owner, Beneficiary or payee depends
on FKLA's tax status, and upon the tax status of the individual concerned.
FKLA'S TAX STATUS
Under current interpretations of Federal income tax law, FKLA is taxed as a
life insurance company and the operations of the Separate Account are treated as
part of the total operations of FKLA. The operations of the Separate Account do
not materially affect FKLA's Federal income tax liability because FKLA is
allowed a deduction to the extent that net investment income of the Separate
Account is applied to increase Owners' equity. FKLA may incur state and local
taxes attributable to the Separate Account. At present, these taxes are not
significant. Accordingly, FKLA does not charge or credit the Separate Account
for Federal, state or local taxes. Thus, the Separate Account may realize net
investment income, such as interest, dividends or capital gains, and reinvest
such income all without tax consequences to the Separate Account.
If there is a material change in applicable Federal, state or local law,
however, charges or credits may be made to the Separate Account for Federal,
state or local taxes, or reserves for such taxes, if any, attributable to the
Separate Account. Such charges or credits will be determined independent of the
taxes actually paid by FKLA.
20
<PAGE> 24
TAX STATUS OF THE POLICY
Section 7702 of the Internal Revenue Code ("Code") provides that if certain
tests are met, a Policy will be treated as a life insurance policy for federal
tax purposes. FKLA will monitor compliance with these tests. The Policy should
thus receive the same federal income tax treatment as fixed benefit life
insurance. As a result, the death benefit payable under a Policy is excludable
from gross income of the beneficiary under Section 101 of the Code.
Section 7702A of the Code defines modified endowment contracts as those
policies issued or materially changed on or after June 21, 1988 on which the
total premiums paid during the first seven years exceed the amount that would
have been paid if the policy provided for paid up benefits after seven level
annual premiums. The Code provides for taxation of surrenders, partial
surrenders, loans, collateral assignments and other pre-death distributions from
modified endowment contracts in the same way annuities are taxed. Modified
endowment contract distributions are defined by the Code as amounts not received
as an annuity and are taxable to the extent the cash value of the policy
exceeds, at the time of distribution, the premiums paid into the policy. A 10%
tax penalty also applies to the taxable portion of such distributions unless the
Policy Owner is over age 59 1/2 or disabled, or if other exceptions apply.
It may not be advantageous to replace existing insurance with Policies
described in this prospectus. It may also be disadvantageous to purchase a
policy to obtain additional insurance protection if the purchaser already owns
another variable life insurance policy.
The Policies offered by this prospectus may or may not be issued as
modified endowment contracts. FKLA will monitor premiums paid and will notify
the Policy Owner when the Policy's non-modified endowment status is in jeopardy.
If a policy is not a modified endowment contract, a cash distribution during the
first 15 years after a policy is issued which causes a reduction in death
benefits may still become fully or partially taxable to the Owner pursuant to
Section 7702(f)(7) of the Code. The Policy Owner should carefully consider this
potential effect and seek further information before initiating any changes in
the terms of the Policy. Under certain conditions, a Policy may become a
modified endowment as a result of a material change or a reduction in benefits
as defined by Section 7702A(c) of the Code.
In addition to meeting the tests required under Section 7702 and Section
7702A, Section 817(h) of the Code requires that the investments of separate
accounts such as the FKLA Variable Separate Account be adequately diversified.
Regulations issued by the Secretary of the Treasury, set the standards for
measuring the adequacy of this diversification. A variable life policy that is
not adequately diversified under these regulations would not be treated as life
insurance under Section 7702 of the Code. To be adequately diversified, each
Subaccount of the Separate Account must meet certain tests. FKLA believes that
the investments of the Separate Account meet the applicable diversification
standards.
Should the Secretary of the Treasury issue additional rules or regulations
limiting the number of funds, transfers between funds, exchanges of funds or
changes in investment objectives of funds such that the Policy would no longer
qualify as life insurance under Section 7702 of the Code, FKLA will take
whatever steps are available to remain in compliance.
FKLA will monitor compliance with these regulations and, to the extent
necessary, will change the objectives or assets of the sub-account investments
to remain in compliance.
A total surrender or cancellation of the Policy by lapse may have adverse
tax consequences depending on the circumstances.
Federal estate and state and local estate, inheritance and other tax
consequences of ownership or receipt of Policy proceeds depend on the
circumstances of each Policy Owner or Beneficiary.
OTHER CONSIDERATIONS
Because of the complexity of the law in its application to a specific
individual, tax advice may be needed by a person contemplating purchase of a
Policy or the exercise of elections under a Policy. The above comments
concerning the Federal income tax consequences are not exhaustive and are not
intended as tax advice. Counsel and other competent advisers should be consulted
for more complete information. This discussion is based on FKLA's understanding
of Federal income tax laws as they are currently interpreted by the Internal
Revenue Service. No representation is made as to the likelihood of continuation
of these current laws and interpretations. FKLA also believes the Policy meets
other requirements concerning Owner control over investments. However, the
Secretary of Treasury has not issued regulations on this subject. Such
regulations, if adopted, could include requirements not included in
21
<PAGE> 25
the Policy. Because the guidance has not been published, there can be no
assurance as to content or even whether application will be prospective only. If
possible, FKLA will make modifications to the Policy to comply with such
regulations.
LEGAL CONSIDERATIONS
On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V.
NORRIS that certain annuity benefits provided by employers' retirement and
fringe benefit programs may not vary between men and women on the basis of sex.
The Policy described in this Prospectus contains cost of insurance rates that
distinguish between men and women. Accordingly, employers and employee
organizations should consider, in consultation with legal counsel, the impact of
federal, state and local laws, including Title VII of the Civil Rights Act, the
Equal Pay Act, and Norris and subsequent cases on any employment-related
insurance or fringe benefit program before purchasing this Policy.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
FKLA holds the assets of the Separate Account. The assets are kept
segregated and held separate and apart from the general funds of FKLA. FKLA
maintains records of all purchases and redemptions of the shares of each
portfolio of the Fund by each of the Subaccounts.
VOTING INTERESTS
To the extent required by law, FKLA will vote a Fund's shares held in the
Separate Account at regular and special shareholder meetings of the Fund in
accordance with instructions received from persons having voting interests in
the corresponding Subaccounts of the Separate Account. If, however, the 1940 Act
or any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result FKLA determines that it is permitted to
vote a Fund's shares in its own right, it may elect to do so.
Owners of all Policies participating in each Subaccount shall have voting
interests with respect to that Subaccount, based upon each Owner's proportionate
interest in that Subaccount as measured by units.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio of
a Fund.
FKLA will vote shares of a Fund for which it has not received timely
instructions in proportion to the voting instructions that FKLA has received
with respect to all variable policies participating in a Portfolio. FKLA will
also vote any Fund shares attributed to amounts it has accumulated in the
Subaccounts in the same proportions that Owners vote.
FKLA may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as to cause a change in the subclassification or investment objective
of a Fund or of one or more of its Portfolios or to approve or disapprove an
investment advisory contract for a Portfolio of a Fund. In addition, FKLA itself
may disregard voting instructions in favor of changes initiated by an Owner in
the investment policy or the investment adviser of a Portfolio of a Fund if FKLA
reasonably disapproves of such changes. A proposed change would be disapproved
only if the change is contrary to state law or prohibited by state regulatory
authorities, or if FKLA determines that the change would have an adverse effect
on its General Account in that the proposed investment policy for a Portfolio
may result in overly speculative or unsound investments. In the event FKLA does
disregard voting instructions, a summary of that action and the reasons for such
action will be included in the next annual report to Owners.
STATE REGULATION OF FKLA
FKLA, a stock life insurance company organized under the laws of Illinois,
is subject to regulation by the Illinois Department of Insurance. An annual
statement is filed with the Director of Insurance on or before March 1st of each
year covering the operations and reporting on the financial condition of FKLA as
of December 31st of the preceding year. Periodically, the Director of Insurance
examines the liabilities and reserves of FKLA and the Separate Account and
certifies to their adequacy, and a full examination of FKLA's operations is
conducted by the National Association of Insurance Commissioners at least once
every three years.
In addition, FKLA is subject to the insurance laws and regulations of other
states within which it is licensed to operate. Generally, the insurance
department of any other state applies the laws of the state of domicile in
determining permissible investments.
22
<PAGE> 26
DIRECTORS AND OFFICERS OF FKLA
The directors and principal officers of FKLA are listed below together with
their current positions and their other business experience during the past five
years. The address of each officer and director is 1 Kemper Drive, Long Grove,
Illinois 60049.
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH FKLA
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ ------------------------------------------------------------------
<S> <C>
John B. Scott (51) Chief Executive Officer and President of Federal Kemper Life
Chief Executive Officer since Assurance Company and Fidelity Life Association since 1988. Chief
February 1992. President since Executive Officer and President of Zurich Life Insurance Company
November 1993. Director since of America since January 1996. Chairman of the Board of Federal
1992. Kemper Life Assurance Company from April 1988 to January 1996.
Chairman of the Board of KILICO from February 1992 to January
1996. Executive Vice President and director of Kemper Corporation
from January 1994 and March 1996, respectively. Executive Vice
President of Kemper Financial Companies, Inc. from January 1994 to
January 1996 and Director from 1992 to January 1996.
Jerome J. Cwiok (48) Executive Vice President of Federal Kemper Life Assurance Company
Executive Vice President since and Fidelity Life Association since 1995. Executive Vice President
1995. of Zurich Life Insurance Company of America since March 1996.
Senior Vice President of KILICO, Federal Kemper Life Assurance
Company and Fidelity Life Association from 1993 to 1995. Vice
President of Federal Kemper Life Assurance Company and Fidelity
Life Association since 1993. Executive Vice President of Academy
Insurance Group from 1986 to 1993.
Eliane C. Frye (47) Executive Vice President of Federal Kemper Life Assurance Company
Executive Vice President since and Fidelity Life Association since 1995. Executive Vice President
1995. of Zurich Life Insurance Company of America since March 1996.
Senior Vice President of KILICO from 1992 to 1995. Senior Vice
President of Federal Kemper Life Assurance Company and Fidelity
Life Association from 1993 to 1995. Vice President of Federal
Kemper Life Assurance Company and Fidelity Life Association from
1988 to 1993.
Frederick L. Blackmon (43) Senior Vice President and Chief Financial Officer of Federal
Senior Vice President and Kemper Life Assurance Company and Fidelity Life Association since
Chief Financial Officer since November 1995. Treasurer and Chief Financial Officer of Kemper
November 1995. Corporation since January 1996. Senior Vice President and Chief
Financial Officer of Zurich Life Insurance Company of America
since March 1996. Chief Financial Officer of Alexander Hamilton
Life Insurance Company from April 1989 to November 1995.
James E. Hohmann (40) Senior Vice President and Chief Actuary of Federal Kemper Life
Senior Vice President and Assurance Company and Fidelity Life Association since December
Chief Actuary since December 1995. Senior Vice President and Chief Actuary of Zurich Life
1995. Insurance Company of America since March 1996. Managing Principal
(Partner) of Tillinghast--Towers Perrin from January 1991 to
December 1995. Consultant/Principal (Partner) of
Tillinghast--Towers Perrin from November 1986 to January 1991.
</TABLE>
23
<PAGE> 27
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH FKLA
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ ------------------------------------------------------------------
<S> <C>
Debra P. Rezabek (40) Senior Vice President of Federal Kemper Life Assurance Company and
Senior Vice President since Fidelity Life Association since 1996. General Counsel of Federal
1996. General Counsel since Kemper Life Assurance Company and Fidelity Life Association since
1992. Corporate Secretary 1992. Corporate Secretary of Federal Kemper Life Assurance Company
since January 1996. and Fidelity Life Association since January 1996. Senior Vice
President and General Counsel of Zurich Life Insurance Company of
America since March 1996. Assistant General Counsel of Federal
Kemper Life Assurance Company and Fidelity Life Association from
1988 to 1992. Assistant Secretary of KILICO, Federal Kemper Life
Assurance Company and Fidelity Life Association from 1992 to 1996.
Assistant Secretary of Kemper Corporation since January 1996.
Loren J. Alter (57) Director of Federal Kemper Life Assurance Company, Fidelity Life
Director since January 1996. Association and Zurich Kemper Investments, Inc. since January
1996. Director of Zurich Life Insurance Company of America since
May 1979. Executive Vice President of Zurich Insurance Company
since 1979. President, Chief Executive Officer and Director of
Kemper Corporation since January 1996.
William H. Bolinder (52) Chairman of the Board and Director of Federal Kemper Life
Chairman of the Board and Assurance Company and Fidelity Life Association since January
Director since January 1996. 1996. Chairman of the Board and Director of Zurich Life Insurance
Company of America since March 1995. Chairman of the Board of
Kemper Corporation since January 1996. Vice Chairman and Director
of Zurich Kemper Investments, Inc. since January 1996. Chairman of
the Board of American Guarantee and Liability Insurance Company,
Zurich American Insurance Company of Illinois, American Zurich
Insurance Company and Steadfast Insurance Company since 1986.
Chief Executive Officer of American Guarantee and Liability
Company, Zurich American Insurance Company of Illinois, American
Zurich Insurance Company and Steadfast Insurance Company from 1986
to June 1995. President of Zurich Holding Company of America since
1986. U.S. Manager of Zurich Insurance Company, U.S. Branch since
1986. Underwriter for Zurich American Lloyds since 1986.
Daniel L. Doctoroff (37) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996. Managing
Partner of Insurance Partners Advisors, L.P. since February 1994.
Vice President of Keystone, Inc. since October 1992. Managing
Director of Rosecliff Inc./Oak Hill Partners, Inc. since August
1987. Director of Bell & Howell Company since 1989; National Re
Corporation since 1990; Specialty Foods Corporation since 1993;
and Transport Holdings Inc. since 1995.
Steven M. Gluckstern (45) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996. Chairman
of the Board and Director of Zurich Kemper Investments, Inc. since
January 1996. Chairman of the Board and Chief Executive Officer of
Zurich Reinsurance Centre, Inc. since May 1993. President of
Centre Re, Bermuda from December 1986 to May 1993.
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
NAME AND AGE
POSITION WITH FKLA
YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE
- ------------------------------ ------------------------------------------------------------------
<S> <C>
Michael P. Stramaglia (36) Director of Federal Kemper Life Assurance Company and Fidelity
Director since January 1996. Life Association since January 1996. Chief Executive Officer and
President of Zurich Life Insurance Company of Canada since June
1994. Executive Vice-President and Chief Operating Officer of
Zurich Life Insurance Company of Canada from June 1993 to June
1994. Senior Vice-President of the Corporate Division of Zurich
Life Insurance Company of Canada from November 1990 to January
1993. Director of Zurich Life Insurance Company of Canada, Zurich
Life of Canada Holdings Limited, Zurich Indemnity Company of
Canada, Zurich Canadian Holdings Limited, and Zurmex Canada
Holdings Limited.
Paul H. Warren (40) Director of Kemper Corporation, Federal Kemper Life Assurance
Director since January 1996. Company and Fidelity Life Association since January 1996. Partner
of Insurance Partners Advisors, L.P. since March 1994. Managing
Director of International Insurance Advisors since March 1992.
Vice President of J.P. Morgan from June 1986 to March 1992.
Director of Unionamerica Holdings plc since 1993; Unionamerica
Insurance Company since 1993; Tarquin plc since 1994; and Chairman
Underwriting Agencies Ltd. since 1994.
</TABLE>
25
<PAGE> 29
LEGAL MATTERS
All matters of Illinois law pertaining to the Policy, including the
validity of the Policy and FKLA's right to issue the Policy under Illinois
Insurance Law, have been passed upon by Frank J. Julian, Associate General
Counsel of FKLA. Katten Muchin & Zavis, Washington, D.C., has advised FKLA on
certain legal matters concerning federal securities laws applicable to the issue
and sale of Policies.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or
to which the assets of the Separate Account are subject. FKLA is not a party in
any litigation that is of material importance in relation to its total assets or
that relates to the Separate Account.
EXPERTS
The statutory financial statements of FKLA have been included in the
Prospectus in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
FKLA prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the Department of Insurance of
the State of Illinois. Because of the effects of the differences between
generally accepted accounting principles and these statutory accounting
practices, the statutory financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of FKLA as of December 31, 1995 and 1994, and its net income
and its cash flows for each of the years in the three-year period ended December
31, 1995. However after consideration of the adjustments included in Note 1 of
FKLA's statutory financial statements, KPMG Peat Marwick LLP is of the opinion
that the adjusted capital and surplus and net income present fairly, in all
material respects, capital and surplus as of December 31, 1995 and 1994, and net
income for each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
Actuarial matters included in this prospectus have been examined by
Christopher J. Nickele, FSA as stated in the opinion filed as an exhibit to the
Registration Statement.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Policies. For further information concerning the Separate Account, FKLA and the
Policy, reference is made to the Registration Statement as amended with
exhibits. Copies of the Registration Statement are available from the Commission
upon payment of a fee.
FINANCIAL STATEMENTS
The statutory financial statements of FKLA that are included should be
considered only as bearing upon FKLA's ability to meet its contractual
obligations under the Policy. FKLA's statutory financial statements do not bear
on the investment experience of the assets held in the Separate Account. No
financial statements are included for the Separate Account. As of the date of
this Prospectus, it has not yet commenced operations, has no assets or
liabilities and received no income nor incurred any expense.
26
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Federal Kemper Life Assurance Company:
We have audited the accompanying statutory statements of admitted assets,
liabilities, and capital stock and surplus of Federal Kemper Life Assurance
Company as of December 31, 1995 and 1994, and the related statutory statements
of operations, capital stock and surplus, and cash flow for each of the years in
the three-year period ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying statutory financial statements have been prepared in conformity
with accounting practices prescribed or permitted by the Department of Insurance
of the State of Illinois. The effects on the accompanying financial statements
of the variances between such practices and generally accepted accounting
principles are described in Note 1.
In our opinion, because of the effects of the differences between generally
accepted accounting principles and the accounting practices referred to in the
preceding paragraph, the statutory financial statements referred to above do not
present fairly, in conformity with generally accepted accounting principles, the
financial position of Federal Kemper Life Assurance Company as of December 31,
1995 and 1994, and its results of operations and its cash flow for each of the
years in the three-year period ended December 31, 1995. In our opinion, however,
after consideration of the adjustments included in Note 1, the adjusted capital
stock and surplus and net income present fairly, in all material respects,
capital stock and surplus as of December 31, 1995 and 1994, and net income for
each of the years in the three-year period ended December 31, 1995 in conformity
with generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the admitted assets, liabilities, and capital stock and
surplus of Federal Kemper Life Assurance Company as of December 31, 1995 and
1994, and the results of its operations and its cash flow for the years then
ended, on the basis of accounting described in note 1.
KPMG Peat Marwick LLP
March 15, 1996
27
<PAGE> 31
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES, AND CAPITAL STOCK AND
SURPLUS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
ADMITTED ASSETS
Bonds, principally at amortized cost $1,820,752,935 $1,829,755,748
Stocks:
Preferred, at cost 9,413,271 9,439,057
Common, at market 2,313,842 2,844,335
Mortgage loans 167,465,730 276,598,676
Real estate 60,710 5,887,029
Policy loans 109,345,358 105,761,724
Cash 66,679,909 1,452,934
Other invested assets 36,819,957 66,336,100
Short-term investments 49,723,678 84,563,397
-------------- --------------
Total cash and invested assets 2,262,575,390 2,382,639,000
Premiums deferred and uncollected 73,812,078 76,021,986
Investment income accrued 28,296,378 36,003,534
Receivable from affiliates 23,895,116 17,682,434
Federal income tax recoverable 16,691,530 8,731,819
Other assets and receivables 21,639,969 10,649,777
Separate account assets, at market value 76,035 363,792,154
-------------- --------------
Total admitted assets $2,426,986,496 $2,895,520,704
============== ==============
LIABILITIES AND CAPITAL STOCK AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts $2,006,464,269 $2,105,662,200
Supplementary contracts without life contingencies 45,386,898 37,445,784
Policy and contract claims 31,429,007 26,835,164
Other policyholders' funds 66,646,555 48,430,611
Interest maintenance reserve -- 1,397,630
Asset valuation reserve 27,092,372 46,035,900
Real estate valuation reserve 2,799,873 15,833,633
Cost of collection in excess of loading 31,633,645 32,230,492
Accrued taxes and expenses 14,765,045 13,661,794
Other liabilities 26,596,843 24,718,422
Separate account liabilities 76,035 363,792,154
-------------- --------------
Total liabilities 2,252,890,542 2,716,043,784
-------------- --------------
Capital stock and surplus:
Common stock, $20 par value. Authorized 500,000 shares;
issued 136,351 shares 2,727,020 2,727,020
Paid-in surplus 90,111,297 90,111,297
Unassigned surplus 81,257,637 86,638,603
-------------- --------------
Total capital stock and surplus 174,095,954 179,476,920
-------------- --------------
Total liabilities and capital stock and surplus $2,426,986,496 $2,895,520,704
============== ==============
</TABLE>
See accompanying notes to statutory financial statements.
28
<PAGE> 32
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Premiums and annuity considerations $299,996,378 $286,512,736 $308,149,786
Consideration for supplementary contracts 29,752,976 21,909,198 25,998,291
Investment income (net of expenses of $3,177,240,
$3,975,237 and $5,224,244 in 1995, 1994 and
1993, respectively) 165,210,467 166,397,527 161,419,695
Amortization of interest maintenance reserve (1,897,082) 2,456,160 2,360,875
Reinsurance ceding commissions and allowances 26,730,991 26,135,922 22,844,334
------------ ------------ ------------
Total income 519,793,730 503,411,543 520,772,981
------------ ------------ ------------
Benefits and expenses:
Death and other benefits 423,932,673 360,984,937 306,858,370
Increase (decrease) in aggregate reserves for
policies and supplementary contracts (91,256,817) (60,597,824) 41,312,831
Commissions 58,299,901 59,218,757 53,728,981
General expenses 37,467,455 29,293,195 26,836,092
Insurance taxes, licenses, and fees 14,601,891 11,663,019 11,387,157
------------ ------------ ------------
Total benefits and expenses 443,045,103 400,562,084 440,123,431
------------ ------------ ------------
Gain from operations before dividends to
policyholders and Federal income tax expense 76,748,627 102,849,459 80,649,550
Dividends to policyholders 74,263 74,943 83,278
------------ ------------ ------------
Gain from operations before Federal income tax
expense 76,674,364 102,774,516 80,566,272
Federal income tax expense 29,748,669 30,711,464 28,560,304
------------ ------------ ------------
Net gain from operations 46,925,695 72,063,052 52,005,968
Realized capital gains (losses):
Net realized capital gains (losses) (90,987,544) (22,346,824) 18,791,238
Related Federal income tax benefit (expense) 34,752,419 373,069 (9,399,004)
Net loss (gain) transferred to the interest
maintenance reserve 19,651,801 23,170,390 (20,201,126)
------------ ------------ ------------
Total realized capital gains (losses) (36,583,324) 1,196,635 (10,808,892)
------------ ------------ ------------
Net income $ 10,342,371 $ 73,259,687 $ 41,197,076
============ ============ ============
</TABLE>
See accompanying notes to statutory financial statements.
29
<PAGE> 33
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Capital stock--at beginning and end of year $ 2,727,020 $ 2,727,020 $ 2,727,020
------------ ------------ ------------
Paid-in surplus at beginning and end of year 90,111,297 90,111,297 90,111,297
------------ ------------ ------------
Unassigned surplus:
Balance at beginning of year 86,638,603 116,464,818 100,338,732
Net income 10,342,371 73,259,687 41,197,076
Unrealized capital gains (losses) (5,130,522) (8,253,188) 9,641,965
Change in non-admitted assets (179,259) 635,786 (53,003)
Cash dividends to Parent (13,000,000) (95,500,000) (31,682,552)
Change in asset valuation reserve 18,943,528 1,775,579 (6,160,273)
Reset of negative interest maintenance reserve (16,357,084) -- --
Noncash dividend to Parent -- -- 3,982,873
Prior period tax adjustment -- (1,744,079) (800,000)
------------ ------------ ------------
Balance at end of year 81,257,637 86,638,603 116,464,818
------------ ------------ ------------
Total capital stock and surplus $174,095,954 $179,476,920 $209,303,135
============ ============ ============
</TABLE>
See accompanying notes to statutory financial statements.
30
<PAGE> 34
FEDERAL KEMPER LIFE ASSURANCE COMPANY
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- -------------
<S> <C> <C> <C>
Cash provided (used):
From operations:
Premiums and considerations $ 331,038,287 $ 305,987,089 $ 328,933,891
Investment income received 170,536,907 172,081,442 169,823,433
Other income received 26,544,369 25,848,758 23,117,121
Benefits paid (419,972,943) (365,091,925) (305,630,269)
Commissions, other expenses, and taxes paid (108,123,222) (97,949,407) (90,627,701)
Federal income taxes paid (3,055,911) (40,388,205) (33,733,797)
Increase in policy loans (3,583,634) (4,991,357) (4,863,848)
------------- ------------- -------------
Net cash provided by (used in) operations (6,616,147) (4,503,605) 87,018,830
------------- ------------- -------------
Investments sold, matured, or repaid:
Bonds 298,350,352 989,936,952 851,873,743
Stocks 1,909,455 21,793,887 52,815,656
Mortgage loans 77,059,000 78,768,010 151,019,816
Real estate 5,258,566 2,500,380 35,076
Other invested assets 769,857 42,019,324 99,327,071
------------- ------------- -------------
Investments sold, matured, or repaid 383,347,230 1,135,018,553 1,155,071,362
------------- ------------- -------------
Other cash provided 45,929,590 15,816,221 48,498,457
------------- ------------- -------------
Total cash provided 422,660,673 1,146,331,169 1,290,588,649
------------- ------------- -------------
Cash applied:
Cost of investments acquired:
Bonds 295,948,178 993,424,320 1,033,025,829
Stocks 2,526,608 604,805 10,424,530
Mortgage loans 28,794,862 56,580,105 109,170,427
Other invested assets 18,361,481 44,118,032 25,222,333
------------- ------------- -------------
Total cost of investments acquired 345,631,129 1,094,727,262 1,177,843,119
------------- ------------- -------------
Other cash applied:
Dividends to Parent 13,000,000 95,500,000 27,699,679
Other 33,642,288 30,816,873 12,305,867
------------- ------------- -------------
Total other cash applied 46,642,288 126,316,873 40,005,546
------------- ------------- -------------
Total cash applied 392,273,417 1,221,044,135 1,217,848,665
------------- ------------- -------------
Net change in cash and short-term investments 30,387,256 (74,712,966) 72,739,984
Cash and short-term investments:
Beginning of year 86,016,331 160,729,297 87,989,313
------------- ------------- -------------
End of year $ 116,403,587 $ 86,016,331 $ 160,729,297
============= ============= =============
</TABLE>
See accompanying notes to statutory financial statements.
31
<PAGE> 35
FEDERAL KEMPER LIFE ASSURANCE COMPANY
NOTES TO STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Federal Kemper Life Assurance Company (the "Company") markets a selected range
of term and interest-sensitive life insurance and annuity products primarily
through brokerage general agents and other independent distributors. The Company
is licensed in the District of Columbia and all states except New York. The
Company is a wholly-owned subsidiary of Kemper Corporation ("Kemper"). On
January 4, 1996, an investors group comprised of Zurich Insurance Company
("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore
(Bermuda), L.P. (together with IP, "Insurance Partners") acquired all of the
issued and outstanding common stock of Kemper. As a result of the change in
control, Zurich and Insurance Partners indirectly and directly own 80 percent
and 20 percent, respectively, of Kemper and therefore the Company.
The accompanying statutory financial statements have been prepared in accordance
with the National Association of Insurance Commissioners ("NAIC") Annual
Statement Instructions, the Accounting Practices and Procedures Manual and in
conformity with accounting practices prescribed or permitted by the Department
of Insurance of the State of Illinois, which vary in some respects from
generally accepted accounting principles. The more significant of these
differences are as follows: (1) bonds are generally recorded at amortized cost,
and are not classified as either held-to-maturity securities, trading
securities, or available-for sale-securities; (2) acquisition costs, such as
commissions and other costs in connection with acquiring new business, are
charged to current operations as incurred; (3) policy reserves are based on
statutory mortality and interest requirements without consideration of
withdrawals, which may differ from reserves based on reasonably conservative
estimates of mortality, interest, and withdrawals; (4) assets and liabilities
are presented net of reinsurance in statutory basis financial statements; (5)
deferred income taxes are not provided for unrealized gains on investments and
temporary differences in the financial statement and tax basis of assets and
liabilities; (6) the asset valuation reserve is reported as a liability rather
than as an appropriation of surplus; (7) certain assets designated as
"nonadmitted assets" (principally furniture and equipment, agents' debit
balances, and certain other classes of receivables) have been charged to
surplus; (8) annuity considerations and other fund deposits are reflected as
revenue rather than as deposits; and (9) realized capital gains/losses resulting
from changes in interest rates are deferred and amortized over the life of the
bond or mortgage sold.
32
<PAGE> 36
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
The following schedule sets forth the adjustments to statutory net income and
capital stock and surplus necessary to present them in accordance with generally
accepted accounting principles (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net income--
As reported under statutory accounting practices........... $ 10,342 $ 73,260 $ 41,197
Deferred acquisition costs................................. 37,201 43,656 24,705
Change in reserves for policies and contracts.............. (20,586) (22,174) (13,498)
Interest maintenance reserve............................... (17,755) (25,627) 17,840
Deferred income taxes...................................... (6,027) (4,032) (1,840)
Other, net................................................. (1,407) (1,262) (2,670)
--------- --------- ---------
As reported under generally accepted accounting
principles.............................................. $ 1,768 $ 63,821 $ 65,734
========= ========= =========
Capital stock and surplus--
As reported under statutory accounting practices........... $ 174,096 $ 179,477 $ 209,303
Deferred acquisition costs................................. 408,016 386,338 334,494
Reserves for policies and contracts........................ (127,840) (145,090) (112,360)
Asset valuation reserve.................................... 27,092 46,036 47,811
Due and deferred premiums.................................. (67,260) (68,021) (65,758)
Cost of collection in excess of loading.................... 31,634 32,230 31,522
Interest maintenance reserve............................... -- 1,398 27,024
Unrealized appreciation (depreciation) of investments...... 48,004 (85,556) 59,639
Deferred income taxes...................................... (59,729) (30,720) (54,386)
Other, net................................................. (7,519) (11,927) 3,747
--------- --------- ---------
As reported under generally accepted accounting
principles.............................................. $ 426,494 $ 304,165 $ 481,036
========= ========= =========
</TABLE>
The preparation of financial statements in conformity with statutory accounting
principles requires management to make estimates and assumptions that could
affect the reported amounts of assets and liabilities as well as the disclosure
of contingent assets or liabilities at the date of the financial statements. As
a result, actual results reported as revenue and expenses could differ from the
estimates reported in the accompanying financial statements. As further
discussed in the accompanying notes to the statutory financial statements,
significant estimates and assumptions affect provisions for real estate-related
losses and reserves, other than temporary declines in values for bonds, and the
calculation of fair value disclosures for certain financial instruments. The
significant statutory accounting policies follow.
ACCOUNTING PRACTICES PRESCRIBED OR PERMITTED
During 1995 the Company sold, primarily through bulk sales, approximately $84
million of real estate-related investments as part of the Company's strategic
effort to reduce its overall exposure to real estate. As a result of these sales
the Company incurred realized capital losses which were required to be
transferred to the interest maintenance reserve ("IMR"). However, as a result of
the transfer to the IMR of these realized capital losses, the IMR became
negative resulting in a net charge to unassigned surplus. In connection with the
sale of the real estate-related investments and the acquisition of Kemper, the
Department of Insurance of the State of Illinois permitted the Company to reset
the IMR to zero as of December 31, 1995. Although this treatment does not change
the Company's total amount of reported capital and surplus as of December 31,
1995, it will favorably impact the future net gain from operations and net
income as the negative IMR will not have to be amortized against future income
over the remaining lives of the investments sold.
Accounting practices prescribed by the Department of Insurance of the State of
Illinois resulted in surplus being decreased by $442 thousand as of December 31,
1994. The decrease in surplus resulted from the Company treating certain repaid
mortgages and other real estate-related loans as still held by the Company for
the purpose of calculating the asset valuation reserve ("AVR"). This treatment
resulted from a December 1993 transaction in which the Company received $59.0
million in cash and $10.2 million of new second mortgages from certain borrowers
in exchange for previously existing loans. The cash was provided by a
third-party real estate mortgage investment conduit ("REMIC") which received
from the borrowers
33
<PAGE> 37
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
first mortgages on the subject properties. While the absolute amount of loans
was substantially reduced, the Company's subordinated position on the second
mortgages resulted in the Company's overall real estate exposure being
diminished to a lesser degree. As a result, the Department of Insurance of the
State of Illinois required the Company to calculate AVR and risk-based capital
("RBC") as if the Company still held the original loans. All of these second
mortgages were paid off or sold as of December 31, 1995.
REVENUE AND EXPENSES
Life and interest-sensitive life insurance contract premiums are recognized as
revenue when due, while annuity contract premiums are recognized as revenue when
paid. Expenses, including acquisition costs related to acquiring new business,
such as commissions, are charged to operations as incurred.
INVESTED ASSETS AND RELATED INCOME
Investments are valued as prescribed by the NAIC. Bonds are valued generally at
amortized cost. Preferred stocks are carried at cost. Common stocks are carried
at market values promulgated by the NAIC. Short-term investments are carried at
cost, which approximates market value. Mortgage loans are carried at their
unpaid principal balances net of unamortized discount and direct write-downs.
Real estate is carried at depreciated cost less encumbrances and specific
write-downs to fair value for real estate owned. Other real estate-related
investments included in other invested assets, net of any applicable
write-downs, include notes receivable from real estate ventures carried at cost
and investments in real estate ventures carried at cost, adjusted for the equity
in the operating income or loss of such ventures. Policy loans are carried at
their unpaid balance. Other invested assets also include venture capital
investments, a leveraged lease and surplus notes which are carried at cost.
The amortized cost of bonds is adjusted for amortization of premiums and
accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Such amortization is
included in investment income. Amortization of the discount or premium from
mortgage-backed securities is recognized using a level effective yield method
which considers the estimated timing and amount of prepayments of the underlying
mortgage loans and is adjusted to reflect differences which arise between the
prepayments originally anticipated and the actual prepayments received and
currently anticipated. To the extent that the estimated lives of mortgage-backed
securities change as a result of changes in prepayment rates, the adjustment is
also included in investment income. The Company does not accrue interest income
on bonds, mortgage loans, or on other real estate loans where the likelihood of
collection of interest is doubtful.
Realized gains or losses on sales of investments, determined on the basis of
identifiable cost on the disposition of the respective investment, which are not
transferred to IMR as discussed below, and changes in real estate-related
reserves and write-downs are credited or charged to income, net of applicable
Federal income tax. Unrealized gains and losses are credited or charged to
surplus.
Real estate reserves are established when declines in collateral values,
estimated in light of current economic conditions and calculated in conformity
with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. Prior to
year-end 1995, the Company evaluated its real estate-related assets (including
accrued interest) by estimating the probabilities of loss utilizing various
projections that included several factors relating to the borrower, property,
term of the loan, tenant composition, rental rates, other supply and demand
factors and overall economic conditions. Generally, at that time, the reserve
was based upon the excess of the loan amount over the estimated future cash
flows from the loan discounted at the loan's contractual rate of interest taking
into consideration the effects of recourse to, and subordination of loans held
by, affiliated non-life realty companies. At year-end 1995, reflecting the
Company's change in strategy with respect to its real estate portfolio, and the
disposition thereof, real estate-related investments were valued using an
estimate of each investment's observable market price, net of estimated costs to
sell.
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
The AVR provides for a standardized statutory investment valuation reserve for
losses from investments in bonds, preferred stocks, short-term investments,
mortgage loans, common stocks, real estate and other invested assets, with
related increases or decreases in the AVR recorded directly to surplus. The IMR
defers certain interest-related gains and losses (net of tax) on fixed income
securities, primarily bonds and
34
<PAGE> 38
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
mortgage loans, which are then amortized into income over the remaining lives of
the investments sold. Net deferred IMR gains are treated as a liability while
net deferred IMR losses are generally treated as a non-admitted asset with a
corresponding charge directly to unassigned surplus.
POLICY LIABILITIES
Liabilities for policy reserves on annuity contracts are calculated based on the
Commissioner's Annuity Reserve Valuation Method ("CARVM"). Interest crediting
rates guaranteed under the contracts' accumulation periods range from 4.5
percent to 8.35 percent. Guarantee periods range from one to six years with
minimum interest rate guarantees ranging from 3.0 percent to 4.5 percent.
Liabilities for policy reserves on interest-sensitive life insurance contracts
are based on statutory mortality and interest requirements without consideration
of withdrawals. Liabilities for the majority of these contracts are calculated
based on the 1980 Commissioner's Standard Ordinary ("CSO") table assuming
interest rates ranging from 4 percent to 6 percent. For contracts which have
annuitized, interest rates that are used in the determination of the present
value of future payments range from 3.0 percent to 11.25 percent.
SEPARATE ACCOUNT BUSINESS
The Company's separate accounts were for funds deposited with it on behalf of
the defined benefit retirement plans of Lumbermens Mutual Casualty Company
("Lumbermens"), a former affiliated company, and certain of its subsidiaries,
Kemper and the Company. The decrease in separate account assets during 1995
reflects the transfer of certain segregated assets and liabilities related to
the pension plans of Lumbermens and the termination of the Company's and
Kemper's pension plans during 1995. The Company did not receive administrative
fees for managing such assets, and therefore the decrease in separate account
assets had no financial impact on the Company's net income. The assets of the
separate accounts are carried at market value.
FEDERAL INCOME TAXES
Federal income taxes are charged to operations based on income that is currently
payable. No credit or charge to operations is made nor asset or liability
established for the tax effect of temporary differences between financial and
tax reporting. Prior period tax adjustments are credited or charged directly to
surplus.
NON-ADMITTED ASSETS
Certain assets designated as "non-admitted assets" have been excluded from the
statements of admitted assets, liabilities, and capital stock and surplus
through a direct charge against unassigned surplus.
CASH FLOW INFORMATION
The Company defines cash as cash in banks and considers all highly liquid
investments with a maturity of one year or less when purchased to be short-term
investments.
35
<PAGE> 39
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
(2) INVESTED ASSETS
BONDS
The amortized cost and estimated market value of bonds at December 31, 1995 and
1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government securities..................... $ 122,676 $ 1,700 $ (13) $ 124,363
Debt securities issued by foreign
governments.................................. 37,779 1,324 (168) 38,935
Corporate and other securities................. 691,829 37,514 (3,700) 725,643
Mortgage-backed securities..................... 968,469 44,473 (865) 1,012,077
---------- ------- -------- ----------
Total bonds............................... $1,820,753 $ 85,011 $ (4,746) $1,901,018
========== ======= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1994
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government securities..................... $ 2,384 $ -- $ (137) $ 2,247
Debt securities issued by foreign
governments.................................. 31,644 -- (4,015) 27,629
Corporate and other securities................. 781,202 6,342 (48,900) 738,644
Mortgage-backed securities..................... 1,014,526 220 (43,566) 971,180
---------- ------- -------- ----------
Total bonds............................... $1,829,756 $ 6,562 $ (96,618) $1,739,700
========== ======= ======== ==========
</TABLE>
The amortized cost and estimated market value of bonds at December 31, 1995, by
contractual maturity, are presented in the following table. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Maturities of mortgage-backed securities will be substantially shorter than
their contractual maturity because they may require monthly principal
installments and mortgagees may prepay principal.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less.............................................. $ 7,907 $ 8,054
Due after one year through five years................................ 247,009 258,972
Due after five years through ten years............................... 472,325 493,241
Due after ten years.................................................. 125,043 128,674
Securities not due at a single maturity date--primarily
mortgage-backed securities(1)...................................... 968,469 1,012,077
---------- ----------
Total bonds..................................................... $1,820,753 $1,901,018
========== ==========
</TABLE>
- ---------------
(1) Weighted average maturity of 5.5 years.
Mortgage-backed securities consist primarily of marketable mortgage pass-through
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association, or the Federal Home Loan Mortgage Corporation and
other investment-grade securities collateralized by mortgage pass-through
securities issued by these entities. The Company has not made any investments in
interest-only or other similarly volatile tranches of mortgage-backed
securities. The Company's mortgage-backed investments are generally of AAA
credit quality and the markets for these investments have been and are expected
to remain liquid.
Future investment income from mortgage-backed securities may be affected by the
timing of principal payments and the yields on reinvestment alternatives
available at the time of such payments. Due to the
36
<PAGE> 40
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
fact that the Company's investments in mortgage-backed securities predominately
date from recent years, the current interest rate environment is not expected to
cause any material extension of the average maturities of these investments.
Prepayment activity on securities purchased at a discount is not expected to
result in any material losses to the Company because prepayments would generally
accelerate the reporting of the discounts as investment income. Prepayment
activity resulting from a decline in interest rates on such securities purchased
at a premium would accelerate the amortization of the premiums which would
result in reductions of investment income related to such securities. At
December 31, 1995, the Company had unamortized discounts and premiums of $20.2
million and $479 thousand, respectively, related to mortgage-backed securities.
Given the credit quality, liquidity and anticipated payment characteristics of
the Company's investments in mortgage-backed securities, the Company believes
that the associated risk can be managed without material adverse consequences to
its financial statements.
Below investment-grade securities holdings (NAIC classes 3 through 6),
representing securities of 14 issuers at December 31, 1995, totaled 2.0 percent
of cash and invested assets at December 31, 1995, compared with 3.0 percent at
December 31, 1994. Below investment-grade securities are generally unsecured and
often subordinated to other creditors of the issuers. These issuers may have
relatively higher levels of indebtedness and be more sensitive to adverse
economic conditions than investment-grade issuers.
Proceeds from sales of investments in bonds during 1995 were $298.4 million.
Gross gains of $11.3 million and gross losses of $515 thousand were realized on
those sales. Proceeds from sales of investments in bonds during 1994 were $989.9
million. Gross gains of $6.1 million and gross losses of $41.9 million were
realized on those sales. Proceeds from sales of investments in bonds during 1993
were $851.9 million. Gross gains of $38.7 million and gross losses of $14.7
million were realized on those sales.
Bonds with amortized values of $2.5 million were on deposit with governmental
authorities as required by law at December 31, 1995.
EQUITY SECURITIES
The market value of preferred stock was $10.5 million and $9.3 million at
December 31, 1995 and 1994, respectively. The cost of common stock was $1.7
million and $1.3 million at December 31, 1995 and 1994, respectively.
REAL ESTATE-RELATED INVESTMENTS
The Company's real estate portfolio consists of joint venture and third-party
mortgage loans, real estate owned, other real estate-related investments and
real estate-related bonds and stocks.
The following table summarizes the Company's real estate-related investments at
December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Commercial mortgages...................................................... $167,466 $276,599
Real estate-related bonds................................................. 2,177 7,966
Real estate-related stocks................................................ 850 2,665
Real estate-related investments included in other invested assets:
Real estate loans and notes receivable.................................. 5,929 24,326
Real estate joint ventures and partnerships............................. 11,114 27,252
Real estate............................................................... 61 5,887
Real estate valuation reserve............................................. (2,800) (15,834)
-------- --------
Total(1)............................................................. $184,797 $328,861
======== ========
</TABLE>
- ---------------
(1) Excludes $2.1 million and $9.5 million of real estate-related accrued
interest at December 31, 1995 and 1994, respectively.
37
<PAGE> 41
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, total impaired loans amounted to $9.4 million and
$54.9 million, respectively. Impaired loans had corresponding reserves of $2.8
million and $9.3 million at December 31, 1995 and 1994, respectively.
The Company had an average balance of $53.3 million and $63.9 million in
impaired loans for 1995 and 1994, respectively. Cash payments received on
impaired loans are generally applied to reduce the outstanding loan balance. At
December 31, 1995 and 1994, loans on nonaccrual status amounted to $11.4 million
and $84.7 million, respectively. Impaired loans are generally included in the
Company's nonaccrual loans.
(3) CONCENTRATION OF CREDIT RISK
The Company generally strives to maintain a diversified invested asset
portfolio, however, certain concentrations of credit risk exist in
mortgage-backed securities (see note captioned "Invested Assets") and real
estate. The Company's real estate portfolio is distributed by geographic
location and property type as shown in the following two tables:
Geographic distribution as of December 31, 1995:
<TABLE>
<S> <C>
Illinois................................................................................. 54.9%
California............................................................................... 20.4
Texas.................................................................................... 5.7
Hawaii................................................................................... 4.8
Florida.................................................................................. 4.7
Oregon................................................................................... 2.4
Washington............................................................................... 2.1
Other(1)................................................................................. 5.0
-----
Total............................................................................... 100.0%
=====
</TABLE>
- ---------------
(1) No other single location exceeded 2.0 percent.
Distribution by property type as of December 31, 1995:
<TABLE>
<S> <C>
Office................................................................................... 53.8%
Hotel.................................................................................... 14.2
Land..................................................................................... 10.4
Apartment................................................................................ 5.5
Retail................................................................................... 5.1
Other.................................................................................... 11.0
-----
Total............................................................................... 100.0%
=====
</TABLE>
Real estate markets have been depressed in recent periods in areas where most of
the Company's real estate portfolio is located. California real estate market
conditions have continued to be worse than in many other areas of the country.
Real estate markets in northern California and Illinois currently reflect some
stabilization and improvement.
Undeveloped land represented approximately 10.4 percent of the Company's real
estate portfolio at December 31, 1995. To maximize the value of certain land and
other projects, additional development has been proceeding or has been planned.
Such development of existing projects would continue to require funding, either
from the Company or third parties. In the present real estate markets,
third-party financing can require credit enhancing arrangements (e.g., standby
financing arrangements and loan commitments) from the Company. The values of
development projects are dependent on a number of factors, including Kemper's
and the Company's plans with respect thereto, obtaining necessary permits and
market demand for the permitted use of the property. The values of certain
development projects have been written down as of December 31, 1995, reflecting
changes in plans in connection with the Zurich-led acquisition of Kemper. There
can be no assurance that such permits will be obtained as planned or at all, nor
that such expenditures will occur as scheduled, nor that Kemper's and the
Company's plans with respect to such projects may not change substantially.
38
<PAGE> 42
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
The majority of the Company's real estate loans are on properties or projects
where the Company, Kemper, or their respective affiliates have taken ownership
positions in joint ventures with a small number of partners.
At December 31, 1995, the Company's loans to and investments in projects with
the Prime Group, Inc. or its affiliates, totaled approximately $80.3 million, or
43.5 percent, of the Company's real estate portfolio. Prime Group-related
commitments accounted for $13.0 million of the off-balance-sheet legal
commitments at December 31, 1995, of which the Company expects to fund $3.5
million.
At December 31, 1995, loans to and investments in a master limited partnership
(the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens,
constituted approximately $22.5 million or 12.2 percent of the Company's real
estate portfolio. The Company's interest in the MLP is a less than one percent
limited partnership interest, and Kemper's interest is 75 percent at December
31, 1995. Prior to 1995, Kemper's interest was 50 percent. At December 31, 1995,
MLP-related commitments accounted for approximately $23.8 million of the
Company's off-balance-sheet legal commitments, of which the Company expects to
fund $5.3 million.
At December 31, 1995, loans to and investments in joint ventures in which
Patrick M. Nesbitt or his affiliates ("Nesbitt") have interests constituted
approximately $17.5 million, or 9.5 percent of the Company's real estate
portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At
December 31, 1995, the Company did not have any Nesbitt-related
off-balance-sheet legal funding commitments outstanding.
(4) FEDERAL INCOME TAXES
The actual Federal income tax expense on operations for 1995, 1994 and 1993
differed from "expected" tax expense ("expected" tax is computed by applying the
corporate tax rate of 35 percent to gain from operations before Federal income
tax expense for 1995, 1994 and 1993) as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense.................................... $26,836 $35,971 $28,198
Proxy tax on insurance acquisition costs........................... 5,495 4,637 4,942
Change in statutory reserves over tax reserves..................... (1,196) 337 (688)
Adjustment of prior year accrual................................... (3,430) (8,896) (6,408)
Lease agreement.................................................... (809) (1,003) (1,475)
Other, net......................................................... 2,853 (335) 3,991
------- ------- -------
Total Federal income tax expense................................... $29,749 $30,711 $28,560
======= ======= =======
</TABLE>
The operations of the Company are included in the consolidated Federal income
tax return of Kemper. Income taxes payable or refundable are determined on a
separate return basis by the Company and remitted to, or received from, Kemper.
Kemper's Federal income tax returns through the year 1986 have been examined by
the Internal Revenue Service ("IRS"). Changes proposed are not material to the
Company's financial position. The tax returns for the years 1987 through 1990
are currently under examination by the IRS.
(5) REINSURANCE
In the ordinary course of business, the Company enters into reinsurance
agreements for the purpose of limiting its exposure to loss on any one single
insured or to diversify its risk and limit its overall financial exposure. For
individual life products, the Company generally retains only the first $300
thousand (face amount) on the life of any one individual, with the excess
portions of life insurance risk ceded to reinsurers. Although these reinsurance
agreements contractually obligate the reinsurers to reimburse the Company, they
do not discharge the Company from its primary liability and obligations to
policyholders.
The Company has ceded a significant amount of life insurance premiums under
various reinsurance contracts for the portion of life insurance in excess of the
Company's retention limits on policies written before 1992 with Fidelity Life
Association, A Mutual Legal Reserve Company ("FLA"), an affiliated life
insurance company. Beginning in 1992, the Company began to reinsure the excess
of insurance risks over
39
<PAGE> 43
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
the Company's retention limits with other unaffiliated insurance companies,
primarily American United Life Insurance Company. At December 31, 1995 and 1994,
the deductions for reinsurance ceded to FLA and other unaffiliated insurance
companies were as follows (in millions):
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Reserves ceded to FLA........................................................ $38.2 $42.4
Reserves ceded to unaffiliated insurance companies........................... 24.5 20.4
----- -----
Total reserves ceded......................................................... $62.7 $62.8
===== =====
Premiums ceded to FLA........................................................ $41.6 $45.3
Premiums ceded to unaffiliated insurance companies........................... 42.7 35.5
----- -----
Total premiums ceded......................................................... $84.3 $80.8
===== =====
</TABLE>
Such amounts related to life insurance in force at December 31, 1995 and 1994 as
follows (in billions):
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Direct and assumed........................................................... $98.0 $95.9
===== =====
Ceded to:
FLA........................................................................ $11.6 $13.6
Unaffiliated insurance companies........................................... 17.2 15.2
</TABLE>
(6) EMPLOYEE BENEFIT PLANS
Prior to November 30, 1994, the Company actively maintained a defined benefit
pension plan. The plan was noncontributory and benefits were based upon an
employee's career average benefit accrual, with an alternative minimum benefit
formula based upon years of participation and final average pay. Vesting
occurred after five years of service. The Company's funding policy for qualified
pension plans was to contribute, at a minimum, the equivalent of the amount
required under the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code. At November 30, 1994, the Company's retirement plan
ceased accruing benefits and all employees participating in the plan became
fully vested. During 1995, the Company's employees received their vested
benefits in connection with the termination of the plan as either a lump-sum
payment or a nonparticipating annuity contract issued by a third-party insurance
company.
The Company also has a savings and profit-sharing plan for all eligible
employees and a deferred compensation plan for certain senior officers.
Contributions by the Company to the plans for the years ended December 31, 1995,
1994 and 1993 amounted to $553 thousand, $338 thousand and $57 thousand,
respectively.
(7) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors a welfare plan that provides medical and life insurance
benefits to its retired and active employees. The Company is self insured with
respect to medical benefits and the plan is not funded except with respect to
certain disability-related medical claims. The medical plan provides for medical
insurance benefits at retirement, with eligibility based upon age and the
participant's number of years of participation attained at retirement. The plan
is contributory for pre-Medicare retirees, and will be contributory for all
retiree coverage for most current employees, with contributions generally
adjusted annually. Postretirement life insurance benefits are noncontributory
and are limited to $10,000 per participant.
Effective January 1, 1993, the Company changed its method of accounting for the
costs of its retiree benefit plans to the accrual method and elected to amortize
its transition obligation for retirees and fully eligible or vested employees as
an expense over a period of ten years. The unrecognized transition obligation
was $500 thousand as of December 31, 1995.
Net postretirement benefit costs for the years ended December 31, 1995 and 1994
amounted to $233 thousand and $132 thousand, respectively, and include the
expected cost of such benefits for newly
40
<PAGE> 44
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
eligible or vested employees, interest cost, gains and losses arising from
differences between actuarial assumptions and actual experience, and
amortization of the transition obligation.
At December 31, 1995 and 1994, the accumulated and unfunded postretirement
benefit obligation for retirees and other fully eligible or vested participants
was $331 thousand and $264 thousand, respectively. The discount rate used in
determining the allocated postretirement benefit obligation was 7.25 percent and
8 percent in 1995 and 1994, respectively. The health care trend rate was based
on projected experience for 1995 and 1996, 10 percent in 1997, gradually
declining to 6 percent by the year 2000, and remaining at that level thereafter.
A one percentage point increase in assumed health care cost trend rate for each
year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 and 1994 by $125 thousand and $92 thousand, respectively, and
the net postretirement benefit health care interest and service costs for the
years ended December 31, 1995 and 1994 by $20 thousand and $10 thousand,
respectively.
(8) RELATED-PARTY TRANSACTIONS
During 1995, 1994, and 1993 the Company paid cash dividends to Kemper of $13.0
million, $95.5 million, and $31.7 million, respectively.
The Company shares its employees and certain operations with FLA and Kemper
Investors Life Insurance Company ("KILICO"), an affiliated company. The Company
allocates expenses for the utilization of its employees and certain facilities
to KILICO based upon KILICO's share of administrative, legal, marketing, and
operation and support services. The Company has a formal management services
agreement with FLA which charges FLA based upon certain fixed and variable
charges. Expenses allocated to KILICO during 1995, 1994 and 1993 amounted to
$14.3 million, $11.1 million and $13.1 million, respectively. Expenses charged
to FLA during 1995, 1994, and 1993 under the terms of the agreement, amounted to
$8.6 million, $9.0 million and $7.2 million, respectively. The Company is also
charged investment management fees from the Company's portfolio manager, Zurich
Kemper Investors, Inc. ("ZKI"), an affiliated company, which amounted to $2.1
million during both 1995 and 1994 and $2.7 million during 1993.
The Company reinsures certain risks with FLA. The Company receives a ceding
commission allowance from FLA under the reinsurance agreements. Premiums ceded
to and the related commission allowance received from this business amounted to
$41.6 million and $7.6 million in 1995, $45.3 million and $8.0 million in 1994,
and $44.2 million and $8.2 million in 1993, respectively.
The Company has loans to joint ventures, consisting primarily of mortgage loans
on real estate, in which the Company and/or one of its affiliates has an
ownership interest. At December 31, 1995 and 1994, joint venture mortgage loans
totaled approximately $118.4 million and $189.0 million, respectively. During
1995, 1994, and 1993 the Company earned interest income on these joint venture
loans of $8.8 million, $7.5 million, and $20.6 million respectively.
During 1995, 1994, and 1993 the Company sold $1.4 million, $68.8 million and
$103.4 million of certain mortgages and real estate-related investments, net of
reserves, to Kemper Portfolio Corp., an affiliated company, in exchange for
cash. No gain or loss was recognized on the sales.
(9) CAPITAL STOCK AND SURPLUS
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Illinois to shareholders without prior approval of
regulatory authorities is restricted if such dividend, together with other
distributions during the twelve preceding months would exceed the greater of ten
percent of statutory surplus as regards policyholders as of the preceding
December 31, or statutory net income for the preceding calendar year. If the
limitation is exceeded, then such proposed dividend must be reported to the
Director of Insurance at least 30 days prior to the proposed payment date and
may be paid only if not disapproved. Illinois insurance laws also permit payment
of dividends only out of earned surplus, exclusive of most unrealized capital
gains. The maximum amount of dividends which can be paid by the Company without
prior approval in 1996 is $17.4 million. The Company paid dividends of $13.0
million and $95.5 million during 1995 and 1994, respectively.
Under asset adequacy and risk-based capital rules adopted in 1993 in the State
of Illinois, state regulators may mandate remedial action for inadequately
reserved or inadequately capitalized companies. The new
41
<PAGE> 45
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
asset adequacy rules are designed to assure that reserves and assets are
adequate to cover liabilities under a variety of economic scenarios. The focus
of the new capital rules is a risk-based formula that applies prescribed factors
to various risk elements in an insurer's business and investments to develop a
minimum capital requirement designed to be proportional to the amount of risk
assumed by the insurer. The Company has capital levels substantially exceeding
any which would mandate action under the risk-based capital rules and is in
compliance with applicable asset adequacy rules.
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various legal actions for which it establishes
liabilities where appropriate. In the opinion of the Company's management, based
upon the advice of legal counsel, the resolution of such litigation is not
expected to have a material adverse effect on the Company's financial
statements.
Although none of the Company or its joint venture projects have been identified
as a "potentially responsible party" under Federal environmental guidelines,
inherent in the ownership of or lending to real estate projects is the
possibility that environmental pollution conditions may exist on or near or
relate to properties owned or previously owned or properties securing loans.
Where the Company has presently identified remediation costs, they have been
taken into account in determining the cash flows and resulting valuations of the
related real estate assets. Based on the Company's and Kemper's receipt and
review of environmental reports on most of the projects in which it is involved,
the Company believes its environmental exposure would be immaterial to its
results of operations. However, the Company may be required in the future to
take actions to remedy environmental exposures, and there can be no assurance
that material environmental exposures will not develop or be identified in the
future. The amount of future environmental costs is impossible to estimate due
to, among other factors, the unknown magnitude of possible exposures, the
unknown timing and extent of corrective actions that may be required, the
determination of the Company's liability in proportion to others and the extent
such costs may be covered by insurance or various environmental indemnification
agreements.
At December 31, 1995, the Company had loan commitments and stand-by financing
agreements totaling $47.1 million to support the financing needs of various real
estate investments. To the extent these arrangements are called upon, amounts
loaned would be secured by assets of the joint ventures, including first
mortgage liens on the real estate. The Company's criteria in making these
arrangements are the same as for its mortgage loans and other real estate
investments. The Company presently expects to fund approximately $19.2 million
of these arrangements. The disparity between total legal commitments and the
amount expected to be funded relates principally to standby financing
arrangements that provide credit enhancements to certain tax-exempt bonds, which
the Company does not presently expect to fund. These commitments are included in
the Company's analysis of real estate-related reserves and write-downs. The fair
values of loan commitments and standby financing agreements are estimated in
conjunction with and using the same methodology as the fair value estimates of
mortgage loans and other real estate-related investments.
The Company is liable for guaranty fund assessments related to certain
unaffiliated insurance companies that have become insolvent during the years
1995 and prior. The Company's financial statements include provisions for all
known assessments that are expected to be levied against the Company as well as
an estimate of amounts (net of estimated future premium tax recoveries) that the
Company believes it will be assessed in the future for which the life insurance
industry has estimated the cost to cover losses to policyholders. Accrued
guaranty fund assessments amounted to $4.7 million and $1.6 million as of
December 31, 1995 and 1994, respectively. The Company is also contingently
liable for any future guaranty fund assessments related to insolvencies of
unaffiliated insurance companies, for which the life insurance industry has been
unable to estimate the cost to cover losses to policyholders. No specific amount
can be reasonably estimated for such insolvencies as of December 31, 1995.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at specific points in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Fair value estimates for financial instruments not carried at fair
value are generally determined using discounted cash flow models and assumptions
that are based on judgments regarding current and future economic conditions and
the risk characteristics of the investments. Although fair value estimates are
calculated using assumptions that management believes are appropriate, changes
in assumptions could significantly affect the estimates and such estimates
should be used with care.
42
<PAGE> 46
NOTES TO STATUTORY FINANCIAL STATEMENTS--(CONTINUED)
Fair value estimates are determined for existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and certain liabilities that are not
considered financial instruments. Accordingly, the aggregate fair value
estimates presented do not represent the underlying value of the Company. In
addition, tax ramifications related to the realization of unrealized gains and
losses can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Bonds: Fair values for bonds were determined by using market quotations, or
independent pricing services that use prices provided by market makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics, or fair value as determined in good
faith by the Company's portfolio manager, ZKI.
Equity securities: Fair values for equity securities were based upon quoted
market prices.
Cash and short-term investments: The carrying amounts reported for these
instruments approximate fair values.
Mortgage loans and other real estate-related investments: Fair values for
mortgage loans and other real estate-related investments for year-end 1994 were
estimated on a project-by-project basis. Generally, the projected cash flows of
the collateral were discounted using a discount rate of 10 to 12 percent. The
resulting collateral estimates were then used to determine the value of the
Company's real estate-related investments. Fair values for mortgage loans and
other real estate-related investments for year-end 1995 were estimated based
upon each investment's observable market price, net of estimated costs to sell.
The estimate of fair value should be used with care given the inherent
difficulty of estimating the fair value of real estate due to the lack of a
liquid quotable market.
Other loans and investments: The fair values of policy loans were estimated by
discounting the expected future cash flows using an interest rate charged on
policy loans for similar policies currently being issued. The fair values for
other invested assets were primarily based upon quoted market prices.
Life policy benefits: Fair values of the life policy benefits regarding
investment contracts (primarily deferred annuities) and universal life contracts
were estimated by discounting gross benefit payments, net of contractual
premiums, using the average crediting rate currently being offered in the
marketplace for similar contracts with maturities consistent with those
remaining for the contracts being valued. The Company had projected its future
average crediting rate in 1995 and 1994 to be 5.0 percent and 5.5 percent,
respectively, while the assumed average market crediting rate was 5.5 percent in
1995 and 6.5 percent in 1994.
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial instruments recorded as assets:
Bonds........................................ $1,820,753 $1,901,018 $1,829,756 $1,739,700
Equity securities............................ 11,727 12,843 12,283 12,101
Cash and short-term investments.............. 116,404 116,404 86,016 86,016
Mortgage loans and other real estate-related
investments............................... 184,797 184,797 328,861 271,093
Policy loans................................. 109,345 109,345 105,762 105,762
Other invested assets (excluding real estate-
related investments)...................... 19,777 15,705 14,758 14,758
Financial instruments recorded as liabilities--
aggregate reserves for policies and
supplementary contracts excluding term and
ordinary life reserves....................... $1,959,373 $1,835,838 $1,953,397 $1,831,339
</TABLE>
43
<PAGE> 47
APPENDIX A
ILLUSTRATIONS OF CASH VALUES,
CASH SURRENDER VALUES,
DEATH BENEFITS
The tables in this Prospectus have been prepared to help show how values
under a Policy change with investment experience. The tables illustrate how Cash
Values, Surrender Values (reflecting the deduction of Surrender Charges, if any)
and Death Benefits under a Policy issued on an insured of a given age would vary
over time if the hypothetical gross investment rates of return were a uniform,
after tax, annual rate of 0%, 6%, and 12%. If the hypothetical gross investment
rate of return averages 0%, 6%, or 12%, but fluctuates over or under those
averages throughout the years, the Cash Values, Surrender Values and Death
Benefits may be different.
The amounts shown for the Cash Value, Surrender Value and Death Benefit as
of each Policy Anniversary reflect the fact that the net investment return on
the assets held in the Subaccounts is lower than the gross return. This is
because of a daily charge to the Subaccounts for assuming mortality and expense
risks, which is equivalent to an effective annual charge of 0.60% on a current
basis. This charge is guaranteed not to exceed an effective annual rate of
0.90%. In addition, the net investment returns also reflect the deduction of the
Fund investment advisory fees and other Fund expenses, (.85%, the average of the
fees and expenses). The tables also reflect applicable charges and deductions
including a 3.5% deduction against premiums, a monthly administrative charge of
$6 and monthly charges for providing insurance protection. For each hypothetical
gross investment rate of return, tables are provided reflecting current and
guaranteed cost of insurance charges. Hypothetical gross average investment
rates of return of 0%, 6% and 12% correspond to the following approximate net
annual investment rate of return of -1.45%, 4.55% and 10.55%, on a current
basis. On a guaranteed basis, these rates of return would be -1.75%, 4.25% and
10.25%, respectively. Cost of insurance rates vary by issue age, sex, rating
class and Policy Year and, therefore, are not reflected in the approximate net
annual investment rate of return above.
The values shown are for Policies which are issued to a male preferred
nonsmoker. Values for Policies issued on a basis involving a higher mortality
risk would result in lower Cash Values, Surrender Values and Death Benefits than
those illustrated. Females generally have a more favorable rate structure than
males.
The tables also reflect the fact that no charges for federal, state or
other income taxes are currently made against the Separate Account. If such a
charge is made in the future, it will take a higher gross rate of return than
illustrated to produce the net after-tax returns shown in the tables.
Upon request, FKLA will furnish an illustration based on the proposed
Insured's age, sex and premium payment requested.
44
<PAGE> 48
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $1,000 ANNUAL PREMIUM ISSUE AGE 35
$100,000 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS --------------------------- ---------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ----- --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 711 651 100,000 761 701 100,000 811 751 100,000
2 2,153 1,402 1,282 100,000 1,547 1,427 100,000 1,699 1,579 100,000
3 3,310 2,072 1,892 100,000 2,358 2,178 100,000 2,668 2,488 100,000
4 4,526 2,720 2,480 100,000 3,192 2,952 100,000 3,726 3,486 100,000
5 5,802 3,345 3,045 100,000 4,050 3,750 100,000 4,880 4,580 100,000
6 7,142 3,945 3,645 100,000 4,932 4,632 100,000 6,141 5,841 100,000
7 8,549 4,520 4,240 100,000 5,835 5,555 100,000 7,517 7,237 100,000
8 10,027 5,068 4,828 100,000 6,763 6,523 100,000 9,020 8,780 100,000
9 11,578 5,589 5,409 100,000 7,712 7,532 100,000 10,661 10,481 100,000
10 13,207 6,083 6,083 100,000 8,685 8,685 100,000 12,456 12,456 100,000
11 14,917 6,546 6,546 100,000 9,679 9,679 100,000 14,419 14,419 100,000
12 16,713 6,978 6,978 100,000 10,694 10,694 100,000 16,566 16,566 100,000
13 18,599 7,377 7,377 100,000 11,730 11,730 100,000 18,916 18,916 100,000
14 20,579 7,743 7,743 100,000 12,786 12,786 100,000 21,491 21,491 100,000
15 22,657 8,071 8,071 100,000 13,861 13,861 100,000 24,314 24,314 100,000
16 24,840 8,362 8,362 100,000 14,953 14,953 100,000 27,411 27,411 100,000
17 27,132 8,608 8,608 100,000 16,060 16,060 100,000 30,809 30,809 100,000
18 29,539 8,806 8,806 100,000 17,177 17,177 100,000 34,540 34,540 100,000
19 32,066 8,950 8,950 100,000 18,299 18,299 100,000 38,639 38,639 100,000
20 34,719 9,032 9,032 100,000 19,422 19,422 100,000 43,146 43,146 100,000
- -----------------------------------------------------------------------------------------------------------------------
Age 65 69,761 4,832 4,832 100,000 29,447 29,447 100,000 123,683 123,683 150,893
Age 70 94,836 0 0 0 31,298 31,298 100,000 202,749 202,749 235,188
Age 75 126,840 0 0 0 26,525 26,525 100,000 328,574 328,574 351,574
Age 80 167,685 0 0 0 3,645 3,645 100,000 531,262 531,262 557,826
Age 85 219,815 0 0 0 0 0 0 845,412 845,412 887,683
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.
(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY FEDERAL KEMPER LIFE ASSURANCE COMPANY THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
45
<PAGE> 49
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $1,000 ANNUAL PREMIUM ISSUE AGE 35
$100,000 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ----------------------------- ---------------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE VALUE
- ------ --------- ------ --------- ------- ------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,050 750 690 100,000 801 741 100,000 853 793 100,000
2 2,153 1,490 1,370 100,000 1,640 1,520 100,000 1,796 1,676 100,000
3 3,310 2,220 2,040 100,000 2,518 2,338 100,000 2,841 2,661 100,000
4 4,526 2,940 2,700 100,000 3,437 3,197 100,000 3,998 3,758 100,000
5 5,802 3,651 3,351 100,000 4,399 4,099 100,000 5,278 4,978 100,000
6 7,142 4,353 4,053 100,000 5,407 5,107 100,000 6,695 6,395 100,000
7 8,549 5,045 4,765 100,000 6,461 6,181 100,000 8,264 7,984 100,000
8 10,027 5,728 5,488 100,000 7,565 7,325 100,000 10,000 9,760 100,000
9 11,578 6,402 6,222 100,000 8,721 8,541 100,000 11,922 11,742 100,000
10 13,207 7,067 7,067 100,000 9,931 9,931 100,000 14,050 14,050 100,000
11 14,917 7,724 7,724 100,000 11,198 11,198 100,000 16,406 16,406 100,000
12 16,713 8,372 8,372 100,000 12,524 12,524 100,000 19,013 19,013 100,000
13 18,599 9,011 9,011 100,000 13,912 13,912 100,000 21,899 21,899 100,000
14 20,579 9,642 9,642 100,000 15,365 15,365 100,000 25,094 25,094 100,000
15 22,657 10,264 10,264 100,000 16,887 16,887 100,000 28,631 28,631 100,000
16 24,840 10,879 10,879 100,000 18,479 18,479 100,000 32,546 32,546 100,000
17 27,132 11,485 11,485 100,000 20,147 20,147 100,000 36,879 36,879 100,000
18 29,539 12,083 12,083 100,000 21,893 21,893 100,000 41,677 41,677 100,000
19 32,066 12,673 12,673 100,000 23,720 23,720 100,000 46,987 46,987 100,000
20 34,719 13,256 13,256 100,000 25,633 25,633 100,000 52,865 52,865 100,000
- -----------------------------------------------------------------------------------------------------------------------------
Age 65 69,761 15,379 15,379 100,000 47,334 47,334 100,000 157,463 157,463 192,105
Age 70 94,836 14,093 14,093 100,000 61,504 61,504 100,000 263,555 263,555 305,724
Age 75 126,840 9,675 9,675 100,000 78,985 78,985 100,000 437,084 437,084 467,679
Age 80 167,685 0 0 0 102,042 102,042 107,144 722,374 722,374 758,493
Age 85 219,815 0 0 0 131,041 131,041 137,593 1,184,732 1,184,732 1,243,968
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.
(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY FEDERAL KEMPER LIFE ASSURANCE COMPANY THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
46
<PAGE> 50
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $3,000 ANNUAL PREMIUM ISSUE AGE 55
$100,000 INITIAL DEATH BENEFIT:
VALUES--GUARANTEED COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ---------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------ --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,015 1,835 100,000 2,162 1,982 100,000 2,309 2,129 100,000
2 6,457 3,932 3,572 100,000 4,353 3,993 100,000 4,793 4,433 100,000
3 9,930 5,751 5,211 100,000 6,575 6,035 100,000 7,471 6,931 100,000
4 13,577 7,470 6,750 100,000 8,825 8,105 100,000 10,362 9,642 100,000
5 17,406 9,080 8,180 100,000 11,099 10,199 100,000 13,485 12,585 100,000
6 21,426 10,577 9,677 100,000 13,392 12,492 100,000 16,863 15,963 100,000
7 25,647 11,951 11,111 100,000 15,699 14,859 100,000 20,524 19,684 100,000
8 30,080 13,192 12,472 100,000 18,011 17,291 100,000 24,495 23,775 100,000
9 34,734 14,284 13,744 100,000 20,319 19,779 100,000 28,810 28,270 100,000
10 39,620 15,213 15,213 100,000 22,612 22,612 100,000 33,511 33,511 100,000
11 44,751 15,966 15,966 100,000 24,883 24,883 100,000 38,650 38,650 100,000
12 50,139 16,529 16,529 100,000 27,127 27,127 100,000 44,297 44,297 100,000
13 55,796 16,889 16,889 100,000 29,338 29,338 100,000 50,533 50,533 100,000
14 61,736 17,031 17,031 100,000 31,514 31,514 100,000 57,460 57,460 100,000
15 67,972 16,930 16,930 100,000 33,644 33,644 100,000 65,203 65,203 100,000
16 74,521 16,551 16,551 100,000 35,714 35,714 100,000 73,909 73,909 100,000
17 81,397 15,797 15,797 100,000 37,663 37,663 100,000 83,756 83,756 100,000
18 88,617 14,706 14,706 100,000 39,538 39,538 100,000 94,954 94,954 105,399
19 96,198 13,149 13,149 100,000 41,269 41,269 100,000 107,330 107,330 116,990
20 104,158 11,036 11,036 100,000 42,822 42,822 100,000 120,985 120,985 129,454
- ------------------------------------------------------------------------------------------------------------------------
Age 65 39,620 15,213 15,213 100,000 22,612 22,612 100,000 33,511 33,511 100,000
Age 70 67,972 16,930 16,930 100,000 33,644 33,644 100,000 65,203 65,203 100,000
Age 75 104,158 11,036 11,036 100,000 42,822 42,822 100,000 120,985 120,985 129,454
Age 80 150,340 0 0 0 46,854 46,854 100,000 212,290 212,290 222,904
Age 85 209,282 0 0 0 37,114 37,114 100,000 354,177 354,177 371,886
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.
(2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY FEDERAL KEMPER LIFE ASSURANCE COMPANY THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
47
<PAGE> 51
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
MALE PREFERRED NON-SMOKER $3,000 ANNUAL PREMIUM ISSUE AGE 55
$100,000 INITIAL DEATH BENEFIT:
VALUES--CURRENT COST OF INSURANCE
<TABLE>
<CAPTION>
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL
PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
PAID PLUS ---------------------------- ----------------------------- -----------------------------
POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ --------- ------ --------- ------- ------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 2,202 2,022 100,000 2,355 2,175 100,000 2,508 2,328 100,000
2 6,457 4,384 4,024 100,000 4,831 4,471 100,000 5,297 4,937 100,000
3 9,930 6,548 6,008 100,000 7,436 6,896 100,000 8,399 7,859 100,000
4 13,577 8,694 7,974 100,000 10,176 9,456 100,000 11,849 11,129 100,000
5 17,406 10,821 9,921 100,000 13,057 12,157 100,000 15,686 14,786 100,000
6 21,426 12,930 12,030 100,000 16,088 15,188 100,000 19,953 19,053 100,000
7 25,647 15,021 14,181 100,000 19,276 18,436 100,000 24,698 23,858 100,000
8 30,080 17,094 16,374 100,000 22,629 21,909 100,000 29,976 29,256 100,000
9 34,734 19,149 18,609 100,000 26,155 25,615 100,000 35,846 35,306 100,000
10 39,620 21,186 21,186 100,000 29,864 29,864 100,000 42,374 42,374 100,000
11 44,751 23,207 23,207 100,000 33,765 33,765 100,000 49,634 49,634 100,000
12 50,139 25,209 25,209 100,000 37,869 37,869 100,000 57,708 57,708 100,000
13 55,796 27,195 27,195 100,000 42,185 42,185 100,000 66,688 66,688 100,000
14 61,736 29,163 29,163 100,000 46,724 46,724 100,000 76,675 76,675 100,000
15 67,972 31,115 31,115 100,000 51,498 51,498 100,000 87,782 87,782 101,827
16 74,521 33,050 33,050 100,000 56,520 56,520 100,000 100,077 100,077 115,088
17 81,397 34,968 34,968 100,000 61,802 61,802 100,000 113,670 113,670 128,448
18 88,617 36,870 36,870 100,000 67,357 67,357 100,000 128,702 128,702 142,859
19 96,198 38,756 38,756 100,000 73,200 73,200 100,000 145,326 145,326 158,405
20 104,158 40,626 40,626 100,000 79,346 79,346 100,000 163,713 163,713 175,173
- -------------------------------------------------------------------------------------------------------------------------
Age 65 39,620 21,186 21,186 100,000 29,864 29,864 100,000 42,374 42,374 100,000
Age 70 67,972 31,115 31,115 100,000 51,498 51,498 100,000 87,782 87,782 101,827
Age 75 104,158 40,626 40,626 100,000 79,346 79,346 100,000 163,713 163,713 175,173
Age 80 150,340 43,101 43,101 100,000 113,925 113,925 119,622 287,479 287,479 301,853
Age 85 209,282 40,685 40,685 100,000 156,675 156,675 164,508 488,197 488,197 512,607
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMPTIONS:
(1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES NO POLICY LOANS HAVE BEEN
MADE.
(2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES.
(3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT
RETURN LESS ALL CHARGES AND DEDUCTIONS.
(4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS.
(5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM
PAYMENT.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN
THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION
OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT,
CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN
IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT
ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO
REPRESENTATIONS CAN BE MADE BY FEDERAL KEMPER LIFE ASSURANCE COMPANY THAT THESE
HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER
ANY PERIOD OF TIME.
48
<PAGE> 52
APPENDIX B
TABLE OF DEATH BENEFIT FACTORS
<TABLE>
<CAPTION>
ATTAINED ATTAINED ATTAINED ATTAINED
AGE* PERCENT AGE* PERCENT AGE* PERCENT AGE* PERCENT
- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250 50 185 60 130 70 115
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 101
95+ 100
</TABLE>
* ATTAINED AGE AS OF THE BEGINNING OF THE POLICY YEAR
49
<PAGE> 53
UNDERTAKING PURSUANT TO RULE 484(B)(1)
UNDER THE SECURITIES ACT OF 1933
Pursuant to the Distribution Agreement filed as Exhibit 1-A(3)(a) to this
Registration Statement, Federal Kemper Life Assurance Company (FKLA) and the
Separate Account have agreed to indemnify Investors Brokerage Services, Inc.
(IBS) against any claims, liabilities and expenses which IBS may incur under the
Securities Act of 1933 (the Act), common law or otherwise, arising out of or
based upon any alleged untrue statements of material fact contained in any
registration statement or prospectus of the Separate Account, or any omission to
state a material fact therein, the omission of which makes any statement
contained therein misleading. IBS has agreed to indemnify FKLA and the Separate
Account against any and all claims, demands, liabilities and expenses which FKLA
or the Separate Account may incur, arising out of or based upon any act or deed
of IBS or of any registered representative of an NASD member investment dealer
which has an agreement with IBS and is acting in accordance with FKLA's
instructions.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of FKLA
or the Separate Account (by virtue of the fact that they may also be agents,
employees or controlling persons of IBS) pursuant to the foregoing provisions,
or otherwise, FKLA and the Separate Account have been advised that in the
opinion of the Securities and Exchange Commission such indemnification may be
against public policy as expressed in the Act and may be, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by FKLA or the Separate Account of expenses
incurred or paid by a director, officer or controlling person of FKLA or the
Separate Account 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, FKLA and the Separate Account 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 Act and will
be governed by the final adjudication of such issue.
REPRESENTATION REGARDING FEES AND CHARGES PURSUANT TO
SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940
Federal Kemper Life Assurance Company ("FKLA") represents that the fees and
charges deducted under the Policy, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the risks
assumed by FKLA.
II-1
<PAGE> 54
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The Facing sheet.
** Reconciliation and tie between items in N-8B-2 and Prospectus.
The prospectus consisting of 49 pages.
** The undertaking to file reports.
Undertaking pursuant to Rule 484(b)(1) under the Securities Act
of 1933.
Representation Regarding Fees and Charges Pursuant to Section
26 of the Investment Company Act of 1940.
The signatures.
Written consents of the following persons:
** A. Frank J. Julian, Esq. (Included in Opinion filed as Exhibit
3(a)).
C. KPMG Peat Marwick LLP, independent auditors (Filed as
Exhibit 6(a)).
D. Christopher J. Nickele, FSA (Included in Opinion filed as
Exhibit 3(b)).
The following exhibits:
<TABLE>
<S> <C>
****1-A(1) FKLA Resolution establishing the Separate Account
**1-A(3)(a) Distribution Agreement between FKLA and Investors Brokerage
Services, Inc.
*1-A(3)(b)(i) FKLA General Agent Agreement
***1-A(3)(b)(ii) Specimen Selling Group Agreement of Investors Brokerage
Services, Inc.
**1-A(3)(c) Schedules of commissions
**1-A(5) Specimen Policy
****1-A(6)(a) FKLA Articles of Incorporation
****1-A(6)(b) By-Laws of FKLA
1-A(8)(a) Janus Aspen Series Fund Participation Agreement
1-A(8)(b) Participation Agreement among Variable Insurance Products Fund,
Fidelity Distributors Corporation and Federal Kemper Life
Assurance Company
1-A(8)(c) Participation Agreement among Variable Insurance Products Fund
II, Fidelity Distributors Corporation and Federal Kemper Life
Assurance Company
1-A(8)(d) Form of Participation Agreement by and among Federal Kemper Life
Assurance Company and Warburg, Pincus Trust and Warburg, Pincus
Counsellors, Inc. and Counsellors Securities Inc.
1-A(8)(e) Participation Agreement among Kemper Investors Fund, Zurich
Kemper Investments, Inc., Kemper Distributors, Inc. and Federal
Kemper Life Assurance Company
**1-A(10) Application for Policy
**3(a) Opinion and consent of legal officer of FKLA as to legality of
policies being registered
3(b) Opinion and consent of actuarial officer of FKLA regarding
prospectus illustrations and actuarial matters
6(a) Consent of independent auditors
8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(iii)
****11 Representations, description and undertakings regarding
mortality and expense risk charge, pursuant to Rule
6e-3(T)(b)(13)(iii)(F)
13 Representation of Counsel (Rule 485(b))
</TABLE>
- -------------------------
* Filed with the Registration Statement of the Registrant on Form S-6 filed
on June 3, 1994.
** Filed with the Pre-Effective Amendment No. 1 of the Registrant on Form S-6
filed on March 24, 1995.
*** Filed with the Registration Statement on Form S-6 for KILICO Variable
Separate Account filed on or about December 26, 1995 (File No. 33-65399).
**** Filed with the Post-Effective Amendment No. 2 to the Registration
Statement on Form S-6 for FKLA Variable Separate Account filed on or
about May 30, 1996.
II-2
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
FKLA Variable Separate Account, certifies that it meets the requirements for
effectiveness of this Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Long Grove and State of Illinois on
the 23rd day of December, 1996.
FKLA VARIABLE SEPARATE ACCOUNT
(Registrant)
By: Federal Kemper Life Assurance Company
(Depositor)
By: /s/ JOHN B. SCOTT
---------------------------------------
John B. Scott, Chief Executive
Officer and President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following directors
and principal officers of Federal Kemper Life Assurance Company in the
capacities indicated on the 23rd day of December, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<S> <C>
/s/ JOHN B. SCOTT Chief Executive Officer, President and
- --------------------------------------------- Director (Principal Executive Officer)
John B. Scott
/s/ W. H. BOLINDER Chairman of the Board and Director
- ---------------------------------------------
William H. Bolinder
/s/ FREDERICK L. BLACKMON Senior Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Financial Officer and
Frederick L. Blackmon Principal Accounting Officer)
/s/ DANIEL L. DOCTOROFF Director
- ---------------------------------------------
Daniel L. Doctoroff
/s/ LOREN J. ALTER Director
- ---------------------------------------------
Loren J. Alter
/s/ STEVEN M. GLUCKSTERN Director
- ---------------------------------------------
Steven M. Gluckstern
/s/ PAUL H. WARREN Director
- ---------------------------------------------
Paul H. Warren
/s/ MICHAEL P. STRAMAGLIA Director
- ---------------------------------------------
Michael P. Stramaglia
</TABLE>
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER TITLE PAGES
- ------------- -------------------------------------------------------------- ----------
<S> <C> <C>
99.1-A(8)(a) Janus Aspen Series Fund Participation Agreement
99.1-A(8)(b) Participation Agreement among Variable Insurance Products
Fund, Fidelity Distributors Corporation and Federal Kemper
Life Assurance Company
99.1-A(8)(c) Participation Agreement among Variable Insurance Products Fund
II, Fidelity Distributors Corporation and Federal Kemper Life
Assurance Company
99.1-A(8)(d) Form of Participation Agreement by and among Federal Kemper
Life Assurance Company and Warburg, Pincus Trust and Warburg
Pincus, Counsellors, Inc. and Counsellors Securities Inc.
99.1-A(8)(e) Participation Agreement among Kemper Investors Fund, Zurich
Kemper Investments, Inc., Kemper Distributors, Inc. and
Federal Kemper Life Assurance Company
99.3(b) Opinion and consent of actuarial officer of FKLA regarding
prospectus illustrations and actuarial matters
99.6(a) Consent of independent auditors
99.8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(iii)
99.13 Representation of Counsel (Rule 485(b))
</TABLE>
<PAGE> 1
EXHIBIT 99.1A(8)(a)
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 16th day of September, 1996, between JANUS
ASPEN SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), JANUS CAPITAL CORPORATION, a Colorado corporation
(the "Adviser"), and FEDERAL KEMPER LIFE ASSURANCE COMPANY, a life insurance
company organized under the laws of the State of Illinois (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 with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Trust has
registered its shares 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 Trust issues shares of beneficial interest, 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 received an order from the SEC granting
Participating Insurance Companies and their 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 Trust to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies and certain qualified pension and retirement plans
(the "Exemptive Order"); and
<PAGE> 2
WHEREAS, the Company desires to utilize shares of one or more Portfolios
as an investment vehicle for variable life insurance and/or variable annuity
contracts ("Contracts") funded by the Accounts; and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, the Adviser serves as investment adviser to the Trust;
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 in the best interests 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.
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 i) such orders are received by the Company in good order prior to
the time the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 11:00 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
- 2 -
<PAGE> 3
trading and on which the Trust calculates its net asset value pursuant to the
rules of the SEC.
1.4. Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for by the Company no later than 12:00 noon New York
time on the same Business Day that the Trust receives notice of the order. The
Trust shall pay and transmit the proceeds of redemption orders that are
transmitted to the Trust in accordance with Section 1.3 no later than 12:00
noon New York time on the same Business Day that the Trust receives notice of
the redemption, except that the Trust reserves the right to postpone payment
upon redemption consistent with Section 22(e) of the 1940 Act and any rules
thereunder. Payments for such purchase orders will be made net of any
redemptions received on the same day as the purchase. Payments shall be made in
federal funds transmitted by wire.
1.5. Issuance and transfer of the Trust's shares will be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Shares ordered from the Trust will be recorded in the appropriate title for
each Account or the appropriate subaccount of each Account.
1.6. The Trust shall furnish prompt notice to the Company of any income
dividends or capital gain distributions payable on the Trust's shares. 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.
1.7. 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 6 p.m. New York time. Any
material error in the calculation or reporting of net asset value per share
shall be reported immediately upon discovery to the Company. In such event the
Company shall be entitled to an adjustment to the number of shares purchased or
redeemed to reflect the correct net asset value per share and the Trust or the
Adviser shall bear the cost of correcting such errors. Any error of a lesser
amount shall be corrected in the next Business Day's net asset value per share.
1.8. 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 Exemptive Order. No
shares of any Portfolio will be sold directly to the general public. The
Company agrees that Trust shares will be used
- 3 -
<PAGE> 4
only for the purposes of funding the Contracts and Accounts listed in Schedule
A, as amended from time to time.
1.9. 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 2.8 and
Article IV of this Agreement.
ARTICLE II.
OBLIGATIONS OF THE PARTIES
2.1. The Trust shall prepare and be responsible for filing with the SEC
and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional information
of the Trust. The Trust shall bear the costs of registration and qualification
of its shares, preparation and filing of the documents listed in this Section
2.1. and all taxes to which an issuer is subject on the issuance and transfer
of its shares.
2.2. At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments or supplements to any of the
foregoing, as the Company shall reasonably request; or (b) provide the Company
with a camera ready copy of such documents in a form suitable for printing. The
Trust shall provide the Company with a copy of its statement of additional
information in a form suitable for duplication by the Company. The prospectus
and statement of additional information provided by the Trust shall relate
either to all Portfolios of the Trust or only selected Portfolios of the Trust,
as the Company shall reasonably request. The Trust (at its expense) shall
provide the Company with copies of any Trust-sponsored proxy materials in such
quantity as the Company shall reasonably require for distribution to Contract
owners.
2.3. The Company shall bear the costs of printing and distributing the
Trust's prospectus, statement of additional information, shareholder reports
and other shareholder communications to owners of and applicants for policies
for which the Trust is serving or is to serve as an investment vehicle. The
Company shall bear the costs of distributing proxy materials (or similar
materials such as voting solicitation instructions) to Contract owners. The
Company assumes sole responsibility for ensuring that such materials are
delivered to Contract owners in accordance with applicable federal and state
securities laws.
2.4. The Company agrees and acknowledges that the Adviser is the sole
owner of the name and mark "Janus" and that all use of any designation
comprised in whole
- 4 -
<PAGE> 5
or part of Janus (a "Janus Mark") under this Agreement shall inure to the
benefit of the Adviser. Except as provided in Section 2.5, the Company shall
not use any Janus 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 the Adviser. Upon termination of this Agreement for any reason, the
Company shall cease all use of any Janus Mark(s) as soon as reasonably
practicable.
2.5. The Company shall furnish, or cause to be furnished, to the Trust (or
its designee), a copy of the initial Contract prospectus and statement of
additional information in which the Trust or the Adviser is first named prior
to the filing of such document with the SEC. The Company shall furnish, or
shall cause to be furnished, to the Trust (or its designee) a copy of each
subsequent Contract prospectus and statement of additional information in which
the Trust or the Adviser is named concurrently with the filing of such document
with the SEC provided that there are no material changes in disclosure related
to the Trust or the Adviser. The Trust may, in its reasonable discretion,
request that the Company modify any references to the Trust or the Adviser in
subsequent filings. 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 or the Adviser is named, at least five
Business Days prior to its use or concurrently with the filing of such document
with the National Association of Securities Dealers, Inc. ("NASD"), whichever
is greater. No such material shall be used if the Trust (or its designee)
reasonably objects to such use within five Business Days after receipt of such
material.
2.6 The Trust shall furnish, or cause to be furnished, to the Company (or
its designee), a copy of any initial Trust prospectus and statement of
additional information in which the Company is first named prior to the filing
of such document with the SEC. The Trust shall furnish, or shall cause to be
furnished, to the Company (or its designee) a copy of each subsequent Trust
prospectus and statement of additional information in which the Company is
named concurrently with the filing of such document with the SEC provided that
there are no material changes in disclosure related to the Company. The Company
may, in its reasonable discretion, request that the Trust modify any references
to the Company in subsequent filings. 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 is named, at least five
Business Days prior to its use or concurrently with the filing of such document
with the NASD, whichever is greater. No such material shall be used if the
Company (or its designee) reasonably objects to such use within five Business
Days after receipt of such material.
2.7. The Company shall not give any information or make any
representations or statements on behalf of the Trust or the Adviser or
concerning the Trust or the Adviser
- 5 -
<PAGE> 6
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), reports of
the Trust, Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee or the Adviser,
except as required by legal process or regulatory authorities or with the
written permission of the Trust or its designee or the Adviser.
2.8. Neither the Trust nor the Adviser shall 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 or prospectus for the Contracts (as such registration statement and
prospectus 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.
2.9. The Trust or the Adviser will provide the Company with as much
advance notice as is reasonably practicable of any material change affecting
the Portfolios (including, but not limited to, any material change in its
registration statement or prospectus affecting the Portfolios and any proxy
solicitation sponsored by the Trust or the Adviser affecting the Portfolios)
and consult with the Company in order to implement any such change in an
orderly manner, recognizing the expenses of changes and attempting to minimize
such expenses by implementing them in conjunction with regular annual updates
of the prospectus for the Contracts.
2.10. The Trust and the Adviser agree to maintain a blanket fidelity bond
or similar coverage for the benefit of the Trust in an amount not less than the
minimal coverage required by Section 17g-(1) of the 1940 Act or related
provisions as may be promulgated from time to time under the 1940 Act.
2.11. So long as, and to the extent that the SEC interprets the 1940 Act
to require pass-through voting privileges for variable policyowners, 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. 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 calculate 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
policyowners 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
- 6 -
<PAGE> 7
owners without the prior written consent of the Trust, which consent may be
withheld in the Trust's sole discretion, except in the event that the Company
determines, in reliance on an opinion of counsel, that a proxy proposal would
result in a violation of applicable insurance laws.
2.12. The Trust and Adviser shall use their best efforts to maintain
qualification of each Portfolio as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code of 1986, as amended ("Code") and
shall notify the Company 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. The Trust and the Adviser acknowledge that compliance
with Subchapter M is an essential element of compliance with Section 817(h).
2.13. The Trust and Adviser shall use their best efforts to enable each
Portfolio to comply with the requirements 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 shall
notify the Company immediately upon having a reasonable basis for believing
that any Portfolio has ceased or might cease to comply.
2.14. The Trust shall provide the Company or its designee with reports
certifying compliance with the aforesaid Section 817(h) diversification and
Subchapter M qualification requirements on a quarterly basis.
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 Illinois and
that it has legally and validly established each Account as a segregated asset
account under such law on the date set forth in Schedule A.
3.2. The Company represents and warrants that each of the 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.
3.3. The Company represents and warrants that the Contracts or interests
in the Accounts (1) are or, prior to issuance, will be registered as securities
under the 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. The Company further represents
- 7 -
<PAGE> 8
and warrants that the Contracts will be issued and sold in compliance in all
material respects with all applicable federal and state laws; and the sale of
the Contracts shall 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 are registered under the 1933 Act and the Trust
is registered under the 1940 Act. 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 accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust.
3.6. The Trust and the Adviser represent and warrant that the investments
of each Portfolio will comply with the diversification requirements set forth
in Section 817(h) of the Code and the rules and regulations thereunder.
3.7. The Adviser represents and warrants that it is registered as an
investment adviser under the Investment Advisers Act of 1940, as amended, and
any applicable state securities laws.
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. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or
(f) a decision by an insurer to disregard the voting instructions of contract
owners. The Trustees shall promptly inform the Company if they determine that
an irreconcilable material conflict exists and the implications thereof.
- 8 -
<PAGE> 9
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 Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
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 irreconcilable material 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.
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 a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Trust and terminate this Agreement with
respect to such Account within six (6) months after the Trustees inform the
Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by
- 9 -
<PAGE> 10
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 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no
event will the Company be required to establish a new funding medium for the
Contracts if an offer to do so has been declined by vote of a majority of
Contract owners materially adversely affected by the irreconcilable material
conflict. In the event that the Trustees determine that any proposed action
does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw the Account's investment in the Trust and terminate this
Agreement within six (6) months after the Trustees inform the Company in
writing of the foregoing determination; provided, however, that such withdrawal
and termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
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 Exemptive
Order, and 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 or shared
funding (as defined in the Exemptive Order) on terms and conditions materially
different from those contained in the 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. Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Trust, the Adviser, and each of their Trustees or Directors,
officers, employees and agents and each person, if any, who controls the Trust
or the Adviser within the meaning of Section 15 of the 1933 Act (collectively,
the "Indemnified Parties" for purposes of this Article V) against any and all
losses, claims, damages, liabilities
- 10 -
<PAGE> 11
(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:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves
or in sales literature generated or approved by the Company on behalf of
the Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), 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 or the Adviser for
use in Company Documents or otherwise for use in connection with the sale
of the Contracts or Trust shares; or
(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 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 or the Adviser 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 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.
- 11 -
<PAGE> 12
5.2. Indemnification By the Trust and the Adviser. The Trust and Adviser
agree 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 Article V) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Adviser) 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:
(a) 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 Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents" for the purposes of this
Article V), 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
(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 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 from 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 or the
Adviser to provide the services or furnish the materials required under the
terms of this Agreement; or
- 12 -
<PAGE> 13
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust or Adviser in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Trust or Adviser.
5.3. None of the parties to this Agreement shall be liable under the
indemnification provisions of Sections 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 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. None of the parties to this Agreement shall be liable under the
indemnification provisions of Sections 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 parties in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim 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 or
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.
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.
ARTICLE VI.
TERMINATION
6.1 This Agreement shall terminate as to the sale and issuance of new
Contracts:
(a) at the option of any party, for any reason upon ninety (90) days
advance written notice to the other parties, unless a shorter time period
is agreed to in writing by the parties to this Agreement;
- 13 -
<PAGE> 14
(b) at the option of the Company, upon one week advance written
notice to the Trust, if the Trust shares are not reasonably available to
meet the requirements of the Contracts as determined by the Company;
(c) at the option of the Company, immediately upon institution of
formal proceedings against the Trust or Adviser by the NASD, SEC, or any
other regulatory body that are deemed by the Company to materially affect
the performance of the obligations under this Agreement;
(d) at the option of the Trust or the Adviser, immediately upon
institution of formal proceedings against the broker-dealer or
broker-dealers marketing the Contracts, the Account, or the Company by
the NASD, SEC, or any other regulatory body that are deemed by the Trust
or Adviser to materially affect the performance of the obligations under
this Agreement;
(e) upon the requisite vote of Contract owners having an interest in
the Trust, or SEC approval of an application pursuant to Section 26(b) of
the 1940 Act, to substitute for the Trust's shares the shares of another
investment company in accordance with the terms of the applicable
Contracts. The Company will give sixty (60) days written notice to the
Trust of any proposed application or vote to replace the Trust's shares.
The Trust and Adviser shall cooperate with the Company in connection with
such application;
(f) upon assignment (as defined in Section 2(a)(4) of the 1940 Act)
of the Agreement, unless made with the written consent of all other
parties hereto;
(g) if the Trust's shares are not registered, issued or sold in
conformance with Federal law or such law precludes the use of the Trust's
shares as an underlying investment medium for Contracts issued or to be
issued by the Company. Prompt notice shall be given by each party should
such situation occur;
(h) by any party to the Agreement upon a determination by a majority
of the Trustees of the Trust, or a majority of its disinterested
Trustees, that an irreconcilable material conflict exists;
(i) at the option of the Trust or Adviser if the Contracts cease to
qualify as annuity contracts or life insurance contracts, as applicable,
under the Code or if the Contracts are not registered, issued or sold in
accordance with applicable state and/or federal law; or
- 14 -
<PAGE> 15
(j) if the need for substitution of the shares of another investment
company, pursuant to Section 26(b) of the 1940 Act, arises out of the
Trust's failure to be registered, issued or sold in conformance with
federal law, including applicable tax law, the expenses of obtaining such
order shall be reimbursed by the Trust or Adviser. The Trust and Adviser
shall cooperate with the Company in connection with such application.
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
Section 2.3.
6.3. The provisions of Articles III and V shall survive the termination of
this Agreement, and the provisions of Article IV and Section 2.11 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.
- 15 -
<PAGE> 16
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:
100 Fillmore Street, Suite 300
Denver, Colorado 80206
Attention: David C. Tucker, Esq.
If to the Company:
1 Kemper Drive
Long Grove, Illinois 60049
Attention: General Counsel
If to the Adviser:
100 Fillmore Street, Suite 300
Denver, Colorado 80206
Attention: David C. Tucker, Esq.
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.
- 16 -
<PAGE> 17
8.4. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of State of Colorado.
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 SEC, the NASD and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
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.
8.9. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval 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 caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
FEDERAL KEMPER LIFE ASSURANCE COMPANY
By: /s/ Otis R. Heldman, Jr.
--------------------------
Name: Otis R. Heldman, Jr.
--------------------------
Title: Marketing Officer
--------------------------
- 17 -
<PAGE> 18
JANUS ASPEN SERIES
By: /s/ David C. Tucker
-----------------------------
Name: David C. Tucker
-----------------------------
Title: Vice President
-----------------------------
JANUS CAPITAL CORPORATION
By: /s/ Stephen L. Stieneker
--------------------------------
Name: Stephen L. Stieneker
------------------------------
Title: Vice President
-----------------------------
- 18 -
<PAGE> 19
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
Name of Separate Account and Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
FKLA Variable Separate Account Kemper Quick VUL
established May 27, 1994 Policy Form Series
S-4050-A
- 19 -
<PAGE> 1
EX-99.1A(8)(b)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
FEDERAL KEMPER LIFE ASSURANCE COMPANY
THIS AGREEMENT, made and entered into as of the 15th day of August, 1996
by and among FEDERAL KEMPER LIFE ASSURANCE COMPANY, (hereinafter the
"Company"), an Illinois corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto as may
be amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
the Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, 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 (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated October 15, 1985 (File No. 812-6102), granting Participating
Insurance Companies and variable annuity and variable life insurance separate
accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent
necessary to permit
1
<PAGE> 2
shares of the Fund to be sold to and held by variable annuity and variable life
insurance separate accounts of both affiliated and unaffiliated life insurance
companies (hereinafter the "Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act
of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable life
insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, and divided
into subaccounts, to set aside and invest assets attributable to the aforesaid
variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good
standing of the National Association of Securities Dealers, Inc. (hereinafter
"NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall
2
<PAGE> 3
constitute receipt by the Fund; provided that the Fund receives notice of such
order by 11:00 a.m. Boston time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange is open for
trading and on which the Fund calculates its net asset value pursuant to the
rules of the Securities and Exchange Commission.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value
pursuant to rules of the Securities and Exchange Commission and the Fund shall
use reasonable efforts to calculate such net asset value on each day which the
New York Stock Exchange is open for trading. Notwithstanding the foregoing,
the Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees 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. The Company agrees that all
net amounts available under the variable annuity contracts with the form
number(s) which are listed on Schedule A attached hereto and incorporated
herein by this reference, as such Schedule A may be amended from time to time
hereafter by mutual written agreement of all the parties hereto, (the
"Contracts") shall be invested in the Fund, in such other Funds advised by the
Adviser as may be mutually agreed to in writing by the parties hereto, or in
the Company's general account, provided that such amounts may also be invested
in an investment company other than the Fund if (a) such other investment
company, or series thereof, has
3
<PAGE> 4
investment objectives or policies that are substantially different
from the investment objectives and policies of all the Portfolios of the Fund
in which the subaccounts invest; or (b) the Company gives the Fund and the
Underwriter 45 days written notice of its intention to make such other
investment company available as a funding vehicle for the Contracts; or (c)
such other investment company was available as a funding vehicle for the
Contracts prior to the date of this Agreement and the Company so informs the
Fund and Underwriter prior to their signing this Agreement (a list of such
funds appearing on Schedule C to this Agreement); or (d) the Fund or
Underwriter consents to the use of such other investment company.
1.7. The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio.
The Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions. The Fund shall provide advance notice to Company of any date on
which the Fund reasonably expects to make a dividend distribution; normally
this notice will be given at least ten days in advance of the ex-dividend date.
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. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements.
4
<PAGE> 5
The Company further represents and warrants that it is an
insurance company duly organized and in good standing under applicable law and
that it has legally and validly established each Account prior to any issuance
or sale thereof as a segregated asset account under Section 245.21 of the
Illinois Insurance Code and has registered or, prior to any issuance or sale of
the Contracts, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Illinois and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or
the Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future. The Fund acknowledges that any failure to qualify as a Regulated
Investment Company will eliminate the ability of the subaccounts to avail
themselves of the "look through" provisions of section 817(h) of the Code, and
that as a result the Contracts will almost certainly fail to qualify as annuity
contracts under section 817(h) of the Code.
2.4. The Company represents that the Contracts are currently treated as
endowment or annuity insurance contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that
they might not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a majority of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
5
<PAGE> 6
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Illinois and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Illinois to the extent required to perform this
Agreement.
2.7. The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Illinois and all applicable state
and federal securities laws, including without limitation the 1933 Act, the
1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered under all applicable federal and state securities
laws and that the Adviser shall perform its obligations for the Fund in
compliance in all material respects with the laws of the State of Illinois and
any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
dealing with the money and/or securities of the Fund are covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund, and that said
bond is issued by a reputable bonding company, includes coverage for larceny
and embezzlement, and is in an amount not less than $5 million. The Company
agrees to make all reasonable efforts to see that this bond or another bond
containing these provisions is always in effect, and agrees to notify the Fund
and the Underwriter in the event that such coverage no longer applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
6
<PAGE> 7
3.1. The Underwriter shall provide the Company with as many printed
copies of the Fund's current prospectus and Statement of Additional Information
as the Company may reasonably request. If requested by the Company in lieu
thereof, the Fund shall provide camera-ready film containing the Fund's
prospectus and Statement of Additional Information, and such other assistance
as is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus and/or Statement of Additional Information for the
Fund is amended during the year) to have the prospectus for the Contracts and
the Fund's prospectus printed together in one document, and to have the
Statement of Additional Information for the Fund and the Statement of
Additional Information for the Contracts printed together in one document.
Alternatively, the Company may print the Fund's prospectus and/or its Statement
of Additional Information in combination with other fund companies'
prospectuses and statements of additional information. Except as provided in
the following three sentences, all expenses of printing and distributing Fund
prospectuses and Statements of Additional Information shall be the expense of
the Company. For prospectuses and Statements of Additional Information
provided by the Company to its existing owners of Contracts 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 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 A and
B where A is the number of such prospectuses distributed to owners of the
Contracts, and B is the Fund's per unit cost of typesetting and printing the
Fund's prospectus. The same procedures shall be followed with respect to the
Fund's Statement of Additional Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the
Fund's expenses do not include the cost of printing any prospectuses or
Statements of Additional Information other than those actually distributed to
existing owners of the Contracts.
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter or the Company (or
in the Fund's discretion, the Prospectus shall state that such Statement is
available from the Fund).
3.3. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and Statements of Additional Information, which are covered in
Section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.4. 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
7
<PAGE> 8
(iii) vote Fund shares for which no instructions
have been received in a particular separate account in the
same proportion as Fund shares of such portfolio for which
instructions have been received in that separate account,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set
forth on Schedule B attached hereto and incorporated herein by this reference,
which standards will also be provided to the other Participating Insurance
Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, the form of each piece of sales literature or other
promotional material in which the Fund or its investment adviser or the
Underwriter is named, at least eight Business Days prior to its use. The Fund
will review such material within five Business Days. No such material shall be
used if the Fund or its designee reasonably objects to such use within five
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in or accurately derived from the registration
statement or prospectus for the Fund shares, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports or
proxy statements for the Fund, or in sales literature or other promotional
material approved by the Fund or its designee or by the Underwriter, except
with the permission of the Fund or the Underwriter or the designee of either.
8
<PAGE> 9
4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or its separate
account(s), is named at least eight Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to
such use within five Business Days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in or accurately derived from a registration statement or prospectus
for the Contracts, as such registration statement and prospectus may be amended
or supplemented from time to time, or in published reports for each Account
which are in the public domain or approved by the Company for distribution to
Contract owners, or in sales literature or other promotional material approved
by the Company or its designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational
or training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
9
<PAGE> 10
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement (except for items covered in Article III),
except that if the Fund or any Portfolio adopts and implements a plan pursuant
to Rule 12b-1 to finance distribution expenses, then the Underwriter may make
payments to the Company or to the underwriter for the Contracts if and in
amounts agreed to by the Underwriter in writing and such payments will be made
out of existing fees otherwise payable to the Underwriter, past profits of the
Underwriter or other resources available to the Underwriter. No such payments
shall be made directly by the Fund. Currently, no such payments are
contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will at all times comply with Section 817(h)
of the Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all reasonable
steps (a) to notify Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance with the grace period afforded by Regulation
1.817-5.
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of
10
<PAGE> 11
reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or
(f) a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out
its responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a
vote of all affected Contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contract owners, life insurance
contract owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering to
the affected contract owners the option of making such a change; and (2),
establishing a new registered management investment company or managed separate
account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
Account's (or subaccount's) investment in the Fund and terminate this Agreement
with respect to such Account (or subaccount); provided, however that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Any such withdrawal and termination must
take place within six (6) months after the Fund gives written notice that this
provision is being implemented, and until the end of that six month period the
Underwriter and Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
11
<PAGE> 12
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company
in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. Until the end of the foregoing six month period, the
Underwriter and Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but
in no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive
Order, then (a) the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
12
<PAGE> 13
8.1(a). The Company agrees to indemnify and hold harmless the
Fund and each trustee of the Board and officers and each person, if any,
who controls the Fund within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement or prospectus for the Contracts or contained
in the Contracts or sales literature for the Contracts (or any
amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of the Fund for use in the
Registration Statement or prospectus for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained
in the Registration Statement, prospectus or sales literature of
the Fund not supplied by the Company, or persons under its control)
or wrongful conduct of the Company or persons under its control,
with respect to the sale or distribution of the Contracts or Fund
Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement,
prospectus, or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information
furnished to the Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or
13
<PAGE> 14
result from any other material breach of this Agreement by the
Company, as limited by and in accordance with the provisions of
Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against an
Indemnified Party as such may arise from such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or duties
under this Agreement or to the Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
the Company in writing within a reasonable time after the summons
or other first legal process giving information of the nature of
the claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such
service on any designated agent), but failure to notify the Company
of any such claim shall not relieve the Company from any liability
which it may have to the Indemnified Party against whom such action
is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company
also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from
the Company to such party of the Company's election to assume the
defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Company
will not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party independently
in connection with the defense thereof other than reasonable costs
of investigation.
8.1(d). The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the Fund
Shares or the Contracts or the operation of the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the
14
<PAGE> 15
Underwriter) or litigation (including legal and other expenses) to
which the Indemnified Parties may become subject under any statute, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the sale
or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact
contained in the Registration Statement or prospectus or
sales literature of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund by or on
behalf of the Company for use in the Registration
Statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise
for use in connection with the sale of the Contracts or
Fund shares; or
(ii) arise out of or as a result of statements
or representations (other than statements or
representations contained in the Registration Statement,
prospectus or sales literature for the Contracts not
supplied by the Underwriter or persons under its control)
or wrongful conduct of the Fund, Adviser or Underwriter or
persons under their control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or
alleged untrue statement of a material fact contained in a
Registration Statement, prospectus, or sales literature
covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was
made in reliance upon information furnished to the Company
by or on behalf of the Fund; or
(iv) arise as a result of any failure by the
Fund to provide the services and furnish the materials
under the terms of this Agreement (including a failure,
whether unintentional or in good faith or otherwise, to
comply with the diversification requirements specified in
Article VI of this Agreement); or
15
<PAGE> 16
(v) arise out of or result from any material
breach of any representation and/or warranty made by the
Underwriter in this Agreement or arise out of or result
from any other material breach of this Agreement by the
Underwriter; as limited by and in accordance with the
provisions of Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason
of such Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement or to each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Underwriter
of any such claim shall not relieve the Underwriter from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Underwriter will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements result
from the gross
16
<PAGE> 17
negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the
Fund to provide the services and furnish the materials
under the terms of this Agreement (including a failure to
comply with the diversification requirements specified in
Article VI of this Agreement);or
(ii) arise out of or result from any material
breach of any representation and/or warranty made by the
Fund in this Agreement or arise out of or result from any
other material breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is
applicable.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such
party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the Fund
of the commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
17
<PAGE> 18
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and
regulations as the Securities and Exchange Commission may grant (including, but
not limited to, the Shared Funding Exemptive Order) and the terms hereof shall
be interpreted and construed in accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by six
months' advance written notice delivered to the other parties;
or
(b) termination by the Company by written notice to the
Fund and the Underwriter with respect to any 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; or
(c) termination by the Company by written notice to the
Fund and the Underwriter with respect to any Portfolio in the
event any of the Portfolio's shares are not registered, issued
or sold in accordance with applicable state and/or federal law
or such law precludes the use of such shares as the underlying
investment media of the Contracts issued or to be issued by the
Company; or
(d) termination by the Company by written notice to the
Fund and the Underwriter with respect to any Portfolio in the
event that such Portfolio ceases to qualify as a Regulated
Investment Company under Subchapter M of the Code or 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 Fund may fail to so
qualify; or
18
<PAGE> 19
(e) termination by either the Fund or the Underwriter by
written notice to the Company, if either one or both of the Fund
or the Underwriter respectively, shall determine, in their sole
judgment exercised in good faith, that the Company and/or its
affiliated companies has suffered a material adverse change in
its business, operations, financial condition or prospects since
the date of this Agreement or is the subject of material adverse
publicity; or
(f) termination by the Company by written notice to the
Fund and the Underwriter, if the Company shall determine, in its
sole judgment exercised in good faith, that either the Fund or
the Underwriter has suffered a material adverse change in its
business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse
publicity; but no termination shall be effective under this
subsection (f) until the Company has been afforded a reasonable
opportunity to respond to a statement by the Fund or the
Underwriter concerning the reason for notice of termination
hereunder; or
(g) termination by the Fund or the Underwriter by written
notice to the Company, if the Company gives the Fund and the
Underwriter the written notice specified in Section 1.6(b)
hereof and at the time such notice was given there was no notice
of termination outstanding under any other provision of this
Agreement; provided, however any termination under this Section
10.1(h) shall be effective ninety (90) days after the notice
specified in Section 1.6(b) was given. Company may, at its
option, withdraw its notice of the addition of other mutual
funds, and such withdrawal shall operate to cancel any
termination under this subsection (g) by the Fund or the
Underwriter.
10.2. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of
this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated
or approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act.
Upon request, the Company will promptly
19
<PAGE> 20
furnish to the Fund and the Underwriter the opinion of counsel for the Company
(which counsel shall be reasonably satisfactory to the Fund and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, and as may be in the best interests of
Contract owners, as determined by the Company, the Company shall not prevent
Contract Owners from allocating payments to a Portfolio that was otherwise
available under the Contracts without first giving the Fund or the Underwriter
90 days notice of its intention to do so.
10.4 Notwithstanding any termination of this Agreement for any reason,
the terms and conditions of the following provisions of this Agreement shall
remain in effect with respect to any Existing Contract, for so long as such
Existing Contract has assets invested in the Fund: Sections 1.3 to 1.10 of
Article I (governing the pricing and redemption of shares); Article II
(Representations and Warranties); Sections 3.1 through 3.3 and 3.5 of Article
III (Prospectuses and Proxy Statements, and Voting); Articles IV through IX
(Sales Material and Information; Fees and Expenses, Diversification; Potential
Conflicts; Indemnification; and Applicable Law); Article XI (Notices); and
Sections 12.1, 12.2, and 12.5 through 12.8 of Article XII (Miscellaneous).
Further, notwithstanding any termination of this Agreement for any reason, the
terms and conditions of the following provisions of this Agreement shall remain
in effect with regard to Contracts previously invested in the Fund: Article II
(Representations and Warranties); and Article VIII (Indemnification).
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Federal Kemper Life Assurance Company
1 Kemper Drive
Long Grove, Illinois 60049
Attention: General Counsel
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
20
<PAGE> 21
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and addresses and other confidential information until such time as it
may come into the public domain without the express written consent of the
affected party.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Underwriter may assign this Agreement or
any rights or obligations hereunder to any affiliate of or company under common
control with the Underwriter (but
<PAGE> 22
in such event the Underwriter shall continue to be liable under Article VIII
of this Agreement for any indemnification due to the Company, and the assignee
shall also be liable), if such assignee is duly licensed and registered to
perform the obligations of the Underwriter under this Agreement.
12.9. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared
under statutory accounting principles) and annual report
(prepared under generally accepted accounting principles
("GAAP"), if any), as soon as practical and in any event
within 90 days after the end of each fiscal year;
(b) the Company's quarterly statements
(statutory) (and GAAP, if any), as soon as practical and in
any event within 45 days after the end of each quarterly
period:
(c) any material financial statement, proxy
statement, notice or report of the Company sent to
policyholders, as soon as practical after the delivery
thereof to stockholders;
(d) any registration statement (without
exhibits) and financial reports of the Company filed with
the Securities and Exchange Commission or any state
insurance regulator, as soon as practical after the filing
thereof;
(e) any other report submitted to the Company
by independent accountants in connection with any annual,
interim or special audit made by them of the books of the
Company, as soon as practical after the receipt thereof;
but nothing in this subsection shall require the Company to
disclose any information that is privileged, or which if
disclosed would put the Company at a competitive
disadvantage and is both (i) confidential and (ii) not
material to the Company's financial condition.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
FEDERAL KEMPER LIFE ASSURANCE COMPANY
By: \s\ Otis R. Heldman, Jr.
------------------------
22
<PAGE> 23
Name: Otis R. Heldman, Jr.
------------------------
Title: Marketing Officer
------------------------
VARIABLE INSURANCE PRODUCTS FUND
By: \s\ J. Gary Burkhead
---------------------
J. Gary Burkhead
Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: \s\ Kurt A. Lange
-----------------
Kurt A. Lange
President
23
<PAGE> 24
Schedule A
Separate Accounts and Associated Contracts
Name of Separate Account and Policy Form Numbers of Contracts
Funded
Date Established by Board of Directors By Separate Account
-------------------------------------- -------------------
FKLA Variable Separate Account S-4050-A
(May 27, 1994)
24
<PAGE> 25
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for
the handling of proxies relating to the Fund by the Underwriter, the Fund and
the Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the
steps delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter
as early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in
the number of Customers to Fidelity, as soon as possible, but no later
than two weeks after the Record Date.
3. The Fund's Annual Report no longer needs to be sent to each Customer by
the Company either before or together with the Customers' receipt of a
proxy statement. Underwriter will provide the last Annual Report to the
Company pursuant to the terms of Section 3.3 of the Agreement to which
this Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting Instruction Cards. The Legal
Department of the Underwriter or its affiliate ("Fidelity Legal") must
approve the Card before it is printed. Allow approximately 2-4 business
days for printing information on the Cards. Information commonly found on
the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and
verification of votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
25
<PAGE> 26
5. During this time, Fidelity Legal will develop, produce, and the
Fund will pay for the Notice of Proxy and the Proxy Statement (one
document). Printed and folded notices and statements will be sent
to Company for insertion into envelopes (envelopes and return
envelopes are provided and paid for by the Insurance Company).
Contents of envelope sent to Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one
document)
c. return envelope (postage pre-paid by
Company) addressed to the Company or its tabulation
agent
d. "urge buckslip" - optional, but
recommended. (This is a small, single sheet of paper
that requests Customers to vote as quickly as possible
and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by
Company and reviewed and approved in advance by Fidelity
Legal.
6. The above contents should be received by the Company approximately
3-5 business days before mail date. Individual in charge at Company
reviews and approves the contents of the mailing package to ensure
correctness and completeness. Copy of this approval sent to
Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time
to the Company as the shareowner. (A 5-week period is
recommended.) Solicitation time is calculated as calendar days
from (but not including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually
takes place in another department or another vendor depending on
process used. An often used procedure is to sort Cards on arrival
by proposal into vote categories of all yes, no, or mixed replies,
and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal
procedure and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account
registration which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed on
the Card and is the signature needed on the Card.
26
<PAGE> 27
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible
Card is disregarded and considered to be not received for purposes
of vote tabulation. Any Cards that have "kicked out" (e.g.
mutilated, illegible) of the procedure are "hand verified," i.e.,
examined as to why they did not complete the system. Any questions
on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper
tabulation of votes and accuracy of that tabulation. The most
prevalent is to sort the Cards as they first arrive into categories
depending upon their vote; an estimate of how the vote is
progressing may then be calculated. If the initial estimates and
the actual vote do not coincide, then an internal audit of that vote
should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then
converted to shares. (It is very important that the Fund receives
the tabulations stated in terms of a percentage and the number of
shares.) Fidelity Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to
Fidelity Legal on the morning of the meeting not later than 10:00
a.m. Boston time. Fidelity Legal may request an earlier deadline if
required to calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final
vote. Fidelity Legal will provide a standard form for each
Certification.
15. The Company will be required to box and archive the Cards received
from the Customers. In the event that any vote is challenged or if
otherwise necessary for legal, regulatory, or accounting purposes,
Fidelity Legal will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
27
<PAGE> 28
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Kemper Investors Fund
Money Market Portfolio
Janus Aspen Series
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Alger American Fund
Small Cap Portfolio
Growth Portfolio
Growth & Income Portfolio
Balanced Portfolio
28
<PAGE> 1
EXHIBIT 99.1-A(8)(c)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
FEDERAL KEMPER LIFE ASSURANCE COMPANY
THIS AGREEMENT, made and entered into as of the 15th day of August, 1996
by and among FEDERAL KEMPER LIFE ASSURANCE COMPANY, (hereinafter the
"Company"), an Illinois corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto as may
be amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND II, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
the Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, 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 (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 17, 1986 (File No. 812-6422), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
<PAGE> 2
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act
of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable life
insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, and divided
into subaccounts, to set aside and invest assets attributable to the aforesaid
variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good
standing of the National Association of Securities Dealers, Inc. (hereinafter
"NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such order by 11:00 a.m. Boston time
on the next following Business Day. "Business Day" shall mean any day on which
the New York Stock Exchange is open for trading and on which the Fund
calculates its net asset value pursuant to the rules of the Securities and
Exchange Commission.
<PAGE> 3
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value
pursuant to rules of the Securities and Exchange Commission and the Fund shall
use reasonable efforts to calculate such net asset value on each day which the
New York Stock Exchange is open for trading. Notwithstanding the foregoing,
the Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees 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. The Company agrees that all
net amounts available under the variable annuity contracts with the form
number(s) which are listed on Schedule A attached hereto and incorporated
herein by this reference, as such Schedule A may be amended from time to time
hereafter by mutual written agreement of all the parties hereto, (the
"Contracts") shall be invested in the Fund, in such other Funds advised by the
Adviser as may be mutually agreed to in writing by the parties hereto, or in
the Company's general account, provided that such amounts may also be invested
in an investment company other than the Fund if (a) such other investment
company, or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of all the
Portfolios of the Fund in which the subaccounts invest; or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company
so informs the Fund and Underwriter prior to their signing this Agreement (a
list of such funds appearing on Schedule C to
<PAGE> 4
this Agreement); or (d) the Fund or Underwriter consents to the use of such
other investment company.
1.7. The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio.
The Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions. The Fund shall provide advance notice to Company of any date on
which the Fund reasonably expects to make a dividend distribution; normally
this notice will be given at least ten days in advance of the ex-dividend date.
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. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under Section 245.21 of the Illinois Insurance Code and has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to
serve as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in
<PAGE> 5
compliance with the laws of the State of Illinois and all applicable federal
and state securities laws and that the Fund is and shall remain registered
under the 1940 Act. The Fund shall amend the Registration Statement for its
shares under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Fund shall register
and qualify the shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future. The Fund acknowledges that any failure to qualify as a Regulated
Investment Company will eliminate the ability of the subaccounts to avail
themselves of the "look through" provisions of section 817(h) of the Code, and
that as a result the Contracts will almost certainly fail to qualify as annuity
contracts under section 817(h) of the Code.
2.4. The Company represents that the Contracts are currently treated as
endowment or annuity insurance contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that
they might not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a majority of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Illinois and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Illinois to the extent required to perform this
Agreement.
2.7. The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Illinois and all applicable state
and federal securities laws, including without limitation the 1933 Act, the
1934 Act, and the 1940 Act.
<PAGE> 6
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered under all applicable federal and state securities
laws and that the Adviser shall perform its obligations for the Fund in
compliance in all material respects with the laws of the State of Illinois and
any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
dealing with the money and/or securities of the Fund are covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund, and that said
bond is issued by a reputable bonding company, includes coverage for larceny
and embezzlement, and is in an amount not less than $5 million. The Company
agrees to make all reasonable efforts to see that this bond or another bond
containing these provisions is always in effect, and agrees to notify the Fund
and the Underwriter in the event that such coverage no longer applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many printed
copies of the Fund's current prospectus and Statement of Additional Information
as the Company may reasonably request. If requested by the Company in lieu
thereof, the Fund shall provide camera-ready film containing the Fund's
prospectus and Statement of Additional Information, and such other assistance
as is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus and/or Statement of Additional Information for the
Fund is amended during the year) to have the prospectus for the Contracts and
the Fund's prospectus printed together in one document, and to have the
Statement of Additional Information for the Fund and the Statement of
Additional Information for the Contracts printed together in one document.
Alternatively, the Company may print the Fund's prospectus and/or its Statement
of Additional Information in combination with other fund companies'
prospectuses and statements of additional information. Except as provided in
the following three sentences, all expenses of printing and distributing Fund
prospectuses and Statements of Additional Information shall be the expense of
the Company. For prospectuses and Statements of Additional Information
provided by the Company to its existing owners of Contracts 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
<PAGE> 7
to receive camera-ready film 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 A and B where A is the number of such prospectuses distributed to
owners of the Contracts, and B is the Fund's per unit cost of typesetting and
printing the Fund's prospectus. The same procedures shall be followed with
respect to the Fund's Statement of Additional Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the
Fund's expenses do not include the cost of printing any prospectuses or
Statements of Additional Information other than those actually distributed to
existing owners of the Contracts.
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter or the Company (or
in the Fund's discretion, the Prospectus shall state that such Statement is
available from the Fund).
3.3. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and Statements of Additional Information, which are covered in
Section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.4. 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 a particular separate account in the same
proportion as Fund shares of such portfolio for which
instructions have been received in that separate account,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set
forth on Schedule B attached hereto and incorporated herein by this reference,
which standards will also be provided to the other Participating Insurance
Companies.
3.5. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the Securities and Exchange Commission's interpretation
of the requirements of Section 16(a) with respect to periodic elections of
trustees and with whatever rules the Commission may promulgate with respect
thereto.
<PAGE> 8
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, the form of each piece of sales literature or other
promotional material in which the Fund or its investment adviser or the
Underwriter is named, at least eight Business Days prior to its use. The Fund
will review such material within five Business Days. No such material shall be
used if the Fund or its designee reasonably objects to such use within five
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in or accurately derived from the registration
statement or prospectus for the Fund shares, as such registration statement and
prospectus may be amended or supplemented from time to time, or in reports or
proxy statements for the Fund, or in sales literature or other promotional
material approved by the Fund or its designee or by the Underwriter, except
with the permission of the Fund or the Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or its separate
account(s), is named at least eight Business Days prior to its use. No such
material shall be used if the Company or its designee reasonably objects to
such use within five Business Days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in or accurately derived from a registration statement or prospectus
for the Contracts, as such registration statement and prospectus may be amended
or supplemented from time to time, or in published reports for each Account
which are in the public domain or approved by the Company for distribution to
Contract owners, or in sales literature or other promotional material approved
by the Company or its designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations
<PAGE> 9
for voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no action letters, and all amendments
to any of the above, that relate to the Contracts or each Account,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational
or training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement (except for items covered in Article III),
except that if the Fund or any Portfolio adopts and implements a plan pursuant
to Rule 12b-1 to finance distribution expenses, then the Underwriter may make
payments to the Company or to the underwriter for the Contracts if and in
amounts agreed to by the Underwriter in writing and such payments will be made
out of existing fees otherwise payable to the Underwriter, past profits of the
Underwriter or other resources available to the Underwriter. No such payments
shall be made directly by the Fund. Currently, no such payments are
contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
ARTICLE VI. Diversification
<PAGE> 10
6.1. The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will at all times comply with Section 817(h)
of the Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. In the
event of a breach of this Article VI by the Fund, it will take all reasonable
steps (a) to notify Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance with the grace period afforded by Regulation
1.817-5.
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company
if it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out
its responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a
vote of all affected Contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contract owners, life insurance
contract owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such
<PAGE> 11
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 (or subaccount's) investment in the Fund and terminate this Agreement
with respect to such Account (or subaccount); provided, however that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Any such withdrawal and termination must
take place within six (6) months after the Fund gives written notice that this
provision is being implemented, and until the end of that six month period the
Underwriter and Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company
in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. Until the end of the foregoing six month period, the
Underwriter and Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but
in no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive
Order, then (a) the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended,
<PAGE> 12
and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b)
Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue
in effect only to the extent that terms and conditions substantially identical
to such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and each trustee of the Board and officers and each person, if any, who
controls the Fund within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement or prospectus for the Contracts or contained
in the Contracts or sales literature for the Contracts (or any
amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that this agreement
to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to the
Company by or on behalf of the Fund for use in the Registration
Statement or prospectus for the Contracts or in the Contracts or
sales literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained
in the Registration Statement, prospectus or sales literature of the
Fund not supplied by the Company, or persons under its control) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or distribution of the Contracts or Fund Shares;
or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement,
prospectus, or sales literature of the Fund or any amendment thereof
or supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading if such a statement or
omission was
<PAGE> 13
made in reliance upon information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Company, as limited by and in accordance with the
provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against an
Indemnified Party as such may arise from such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or duties
under this Agreement or to the Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
the Company in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify the Company of any such
claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In
case any such action is brought against the Indemnified Parties, the
Company shall be entitled to participate, at its own expense, in the
defense of such action. The Company also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of
the Company's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional
counsel retained by it, and the Company will not be liable to such
party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings against
them in connection with the issuance or sale of the Fund Shares or
the Contracts or the operation of the Fund.
8.2. Indemnification by the Underwriter
<PAGE> 14
8.2(a). The Underwriter agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and
other expenses) to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements are
related to the sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or sales literature
of the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Underwriter or
Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for
the Contracts not supplied by the Underwriter or persons
under its control) or wrongful conduct of the Fund, Adviser
or Underwriter or persons under their control, with respect
to the sale or distribution of the Contracts or Fund shares;
or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the
Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
<PAGE> 15
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter; as
limited by and in accordance with the provisions of Sections
8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement or to each Company or the Account, whichever is
applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure to
notify the Underwriter of any such claim shall not relieve the Underwriter from
any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, the
Underwriter will be entitled to participate, at its own expense, in the defense
thereof. The Underwriter also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action. After notice from
the Underwriter to such party of the Underwriter's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Underwriter will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements result
from the gross negligence, bad faith or willful misconduct of the Board or any
member thereof, are related to the operations of the Fund and:
<PAGE> 16
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of this
Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such may arise
from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and duties under
this Agreement or to the Company, the Fund, the Underwriter or each Account,
whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
<PAGE> 17
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to,
the Shared Funding Exemptive Order) and the terms hereof shall be interpreted
and construed in accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by six months' advance
written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any 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;
or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such law
precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company
under Subchapter M of the Code or 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 Fund may fail to so qualify; or
(e) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or the
Underwriter respectively, shall determine, in their sole judgment
exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity;
or
(f) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter
has suffered a material adverse change
<PAGE> 18
in its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material
adverse publicity; but no termination shall be effective under
this subsection (f) until the Company has been afforded a
reasonable opportunity to respond to a statement by the Fund or
the Underwriter concerning the reason for notice of termination
hereunder; or
(g) termination by the Fund or the Underwriter by written notice to
the Company, if the Company gives the Fund and the Underwriter
the written notice specified in Section 1.6(b) hereof and at the
time such notice was given there was no notice of termination
outstanding under any other provision of this Agreement;
provided, however any termination under this Section 10.1(h)
shall be effective ninety (90) days after the notice specified in
Section 1.6(b) was given. Company may, at its option, withdraw
its notice of the addition of other mutual funds, and such
withdrawal shall operate to cancel any termination under this
subsection (g) by the Fund or the Underwriter.
10.2. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of
this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated
or approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act.
Upon request, the Company will promptly furnish to the Fund and the Underwriter
the opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, and as may be
in the best interests of Contract owners, as determined by the Company, the
Company shall not prevent Contract Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts without first giving
the Fund or the Underwriter 90 days notice of its intention to do so.
10.4 Notwithstanding any termination of this Agreement for any reason,
the terms and conditions of the following provisions of this Agreement shall
remain in effect with respect to any Existing Contract, for so long as such
Existing Contract has assets invested in the Fund: Sections 1.3 to 1.10 of
Article I (governing the pricing and redemption of shares); Article II
(Representations and Warranties); Sections 3.1 through 3.3 and 3.5 of Article
III (Prospectuses and Proxy Statements, and Voting); Articles IV through IX
(Sales Material and Information; Fees and Expenses, Diversification;
<PAGE> 19
Potential Conflicts; Indemnification; and Applicable Law); Article XI
(Notices); and Sections 12.1, 12.2, and 12.5 through 12.8 of Article XII
(Miscellaneous). Further, notwithstanding any termination of this Agreement
for any reason, the terms and conditions of the following provisions of this
Agreement shall remain in effect with regard to Contracts previously invested
in the Fund: Article II (Representations and Warranties); and Article VIII
(Indemnification).
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Federal Kemper Life Assurance Company
1 Kemper Drive
Long Grove, Illinois 60049
Attention: General Counsel
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and addresses and other confidential information until such time as it
may come into the public domain without the express written consent of the
affected party.
<PAGE> 20
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Underwriter may assign this Agreement or
any rights or obligations hereunder to any affiliate of or company under common
control with the Underwriter (but in such event the Underwriter shall continue
to be liable under Article VIII of this Agreement for any indemnification due
to the Company, and the assignee shall also be liable), if such assignee is
duly licensed and registered to perform the obligations of the Underwriter
under this Agreement.
12.9. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if any),
as soon as practical and in any event within 90 days after
the end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and GAAP, if
any), as soon as practical and in any event within 45 days
after the end of each quarterly period:
<PAGE> 21
(c) any material financial statement, proxy statement, notice or
report of the Company sent to policyholders, as soon as
practical after the delivery thereof to stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and
Exchange Commission or any state insurance regulator, as
soon as practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or
special audit made by them of the books of the Company, as
soon as practical after the receipt thereof; but nothing in
this subsection shall require the Company to disclose any
information that is privileged, or which if disclosed would
put the Company at a competitive disadvantage and is both
(i) confidential and (ii) not material to the Company's
financial condition.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
FEDERAL KEMPER LIFE ASSURANCE COMPANY
By: \s\ Otis R. Heldman, Jr.
------------------------
Name: Otis R. Heldman, Jr.
------------------------
Title: Marketing Officer
------------------------
VARIABLE INSURANCE PRODUCTS FUND II
By: \s\ J. Gary Burkhead
----------------------------
J. Gary Burkhead
Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: \s\ Kurt A. Lange
---------------------------
Kurt A. Lange
President
<PAGE> 22
Schedule A
Separate Accounts and Associated Contracts
Name of Separate Account and Policy Form Numbers of Contracts Funded
Date Established by Board of Directors By Separate Account
- -------------------------------------- -------------------
FKLA Variable Separate Account S-4050-A
(May 27, 1994)
<PAGE> 23
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for
the handling of proxies relating to the Fund by the Underwriter, the Fund and
the Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the
steps delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter
as early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report no longer needs to be sent to each Customer by
the Company either before or together with the Customers' receipt of a
proxy statement. Underwriter will provide the last Annual Report to the
Company pursuant to the terms of Section 3.3 of the Agreement to which
this Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting Instruction Cards. The Legal
Department of the Underwriter or its affiliate ("Fidelity Legal") must
approve the Card before it is printed. Allow approximately 2-4 business
days for printing information on the Cards. Information commonly found on
the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and
verification of votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE> 24
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided and
paid for by the Insurance Company). Contents of envelope sent to
Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as
quickly as possible and that their vote is important. One copy
will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation
time is calculated as calendar days from (but not including) the
meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed on the
Card and is the signature needed on the Card.
<PAGE> 25
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelope. The mutilated or illegible Card is disregarded
and considered to be not received for purposes of vote tabulation. Any
Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure
are "hand verified," i.e., examined as to why they did not complete the
system. Any questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fidelity Legal
must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate
the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
<PAGE> 26
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Kemper Investors Fund
Money Market Portfolio
Janus Aspen Series
Aggressive Growth Portfolio
Growth Portfolio
Worldwide Growth Portfolio
Alger American Fund
Small Cap Portfolio
Growth Portfolio
Growth & Income Portfolio
Balanced Portfolio
<PAGE> 1
99.1A(8)(D) EXHIBIT 99.1-A(8)(d)
Federal Kemper Life Ins.
FORM OF PARTICIPATION AGREEMENT
BY AND AMONG
FEDERAL KEMPER LIFE INSURANCE COMPANY
AND
WARBURG, PINCUS TRUST
AND
WARBURG, PINCUS COUNSELLORS, INC.
AND
COUNSELLORS SECURITIES INC.
THIS AGREEMENT, made and entered into this day of _____________,
1996, by and among Federal Kemper Life Insurance Company, organized under the
laws of ________________ (the "Company"), on its own behalf and on behalf of
each separate account of the Company named in Schedule 1 to this Agreement as
may be amended from time to time (each account referred to as the "Account"),
Warburg, Pincus Trust, an open-end management investment company and business
trust organized under the laws of the Commonwealth of Massachusetts (the
"Fund"); Warburg, Pincus Counsellors, Inc. a corporation organized under the
laws of the State of Delaware (the "Adviser"); and Counsellors Securities Inc.,
a corporation organized under the laws of the State of New York ("CSI").
WHEREAS, the Fund engages in business as an open-end management investment
company and was established for the purpose of serving as the investment
vehicle for separate accounts established for variable life insurance contracts
and variable annuity contracts to be offered by insurance companies that have
entered into participation agreements similar to this Agreement (the
"Participating Insurance Companies"), and
WHEREAS, beneficial interests in the Fund are divided into several series
of shares, each representing the interest in a particular managed portfolio of
securities and other assets (the "Portfolios"); and
WHEREAS, the Fund has received an order from the Securities and Exchange
Commission (the "SEC") granting Participating Insurance Companies and variable
annuity separate accounts and variable life insurance separate accounts relief
from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment
Company Act of 1940, as amended (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 separate
<PAGE> 2
accounts and variable life insurance separate accounts of both affiliated and
unaffiliated Participating Insurance Companies and qualified pension and
retirement plans outside of the separate account context (the "Mixed and Shared
Funding Exemptive Order"). The parties to this Agreement agree that the
conditions or undertakings specified in the Mixed and Shared Funding Exemptive
Order and that may be imposed on the Company, the Fund, the Adviser and/or CSI
by virtue of the receipt of such order by the SEC will be incorporated herein
by reference, and such parties agree to comply with such conditions and
undertakings to the extent applicable to each such party; 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 (the "1933 Act"); and
WHEREAS, the Company has registered or will register certain variable
annuity contracts (the "Contracts") under the 1933 Act; and
WHEREAS, the Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company under the insurance laws of ______________, to set aside and invest
assets attributable to the Contracts; and
WHEREAS, the Company has registered the Account as a unit investment trust
under the 1940 Act; and
WHEREAS, CSI, the Fund's distributor, is registered as a broker-dealer
with the SEC under the Securities Exchange Act of 1934 (the "1934 Act") and is
a member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Portfolios named in
Schedule 2, as such schedule may be amended from time to time (the "Designated
Portfolios"), on behalf of the Account to fund the Contracts, and the Fund is
authorized to sell such shares to unit investment trusts such as the Account at
net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund, the Adviser and CSI agree as follows:
2
<PAGE> 3
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund agrees to sell to the Company those shares of the Designated
Portfolios that each Account orders, executing such orders on a daily basis at
the net asset value next computed after receipt and acceptance by the Fund or
its designee of the order for the shares of the Fund. For purposes of this
Section 1.1, the Company will be the designee of the Fund for receipt of such
orders from each Account and receipt by such designee will constitute receipt
by the Fund; provided that the Fund receives notice of such order by 10:00 a.m.
Eastern Time on the next following Business Day ("T+1"). "Business Day" will
mean any day on which the New York Stock Exchange, Inc. (the "NYSE") is open
for trading and on which the Fund calculates its net asset value pursuant to
the rules of the SEC.
1.2. The Company will pay for Fund shares on T+1 in each case that an order to
purchase Fund shares is made in accordance with Section 1.1 above. Payment
will be in federal funds transmitted by wire. This wire transfer will be
initiated by 12:00 p.m. Eastern Time.
1.3. The Fund agrees to make shares of the Designated Portfolios available
indefinitely for purchase at the applicable net asset value per share by
Participating Insurance Companies and their separate accounts on those days on
which the Fund calculates its Designated Portfolio net asset value pursuant to
rules of the SEC and the Fund shall use reasonable efforts to calculate such
net asset value on each day the NYSE is open for trading; provided, however,
that the Fund or CSI 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
its or their sole discretion acting in good faith, necessary in the best
interests of the shareholders of such Portfolio.
1.4. On each Business Day on which the Fund calculates its net asset value, the
Company will aggregate and calculate the net purchase or redemption orders for
each Account maintained by the Fund in which contract owner assets are
invested. Net orders will only reflect orders that the Company has received
prior to the close of regular trading on the NYSE currently 4:00 p.m., Eastern
Time) on that Business Day. Orders that the Company has received after the
close of regular trading on the NYSE will be treated as though received on the
next Business Day. Each communication of orders by the Company will constitute
a representation that such orders were received by it prior to the close of
regular trading on the NYSE on the Business Day on which the purchase or
redemption order is priced in accordance with Rule 22c-1 under the 1940 Act.
Other procedures relating to the handling of orders will be in accordance with
the prospectus and statement of information of
3
<PAGE> 4
the relevant Designated Portfolio or with instructions that CSI or the Fund
will forward to the Company from time to time, as practice may develop over the
course of performance of this Agreement.
1.5. The Fund agrees that shares of the Fund will be sold only to Participating
Insurance Companies and their separate accounts, qualified pension and
retirement plans or such other persons as are permitted under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and regulations promulgated thereunder, the sale to which will
not impair the tax treatment currently afforded the Contracts. No shares of
any Portfolio will be sold to the general public except as set forth in this
Section 1.5.
1.6. The Fund agrees to redeem for cash, upon 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 and
acceptance by the Fund or its designee of the request for redemption. For
purposes of this Section 1.6, the Company will be the designee of the Fund for
receipt of requests for redemption from each Account and receipt by such
designee will constitute receipt by the Fund, provided the Fund receives notice
of request for redemption by 10:00 a.m. Eastern Time on the next following
Business Day. Payment will be in federal funds transmitted by wire to the
Company's account as designated by the Company in writing from time to time, on
the same Business Day the Fund receives notice of the redemption order from the
Company. The Fund reserves the right to delay payment of redemption proceeds
in extraordinary circumstances, but in no event may such payment be delayed
longer than the period permitted by the 1940 Act. The Fund will not bear any
responsibility whatsoever for the proper disbursement or crediting of
redemption proceeds; the Company alone will be responsible for such action. If
notification of redemption is received after 10:00 a.m. Eastern Time, payment
for redeemed shares will be made on the next following Business Day.
1.7. The Company agrees to purchase and redeem the shares of the Designated
Portfolios offered by the then current prospectus of the Fund in accordance
with the provisions of such prospectus.
1.8. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Purchase
and redemption orders for Fund shares will be recorded in an appropriate title
for each Account or the appropriate subaccount of each Account.
1.9. The Fund will furnish same day notice (by telecopier, followed by written
confirmation) to the Company of the declaration of any income, dividends or
capital gain
4
<PAGE> 5
distributions payable on each Designated Portfolio's shares. The Company
hereby elects to receive all such dividends and distributions as are payable
on the Designated Portfolio shares in the form of additional shares of that
Designated Portfolio. The Fund will notify the Company of the number of shares
so issued as payment of such dividends and distributions. The Company reserves
the right to revoke this election upon reasonable prior notice to the Fund and
to receive all such dividends and distributions in cash.
1.10. The Fund will make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and will use its
best efforts to make such net asset value per share available by 6:00 p.m.,
Eastern Time, but in no event later than 7:00 p.m., Eastern Time, each Business
Day.
1.11. In the event adjustments are required to correct any error in the
computation of the net asset value of the Fund's shares, the Fund or CSI will
notify the Company as soon as practicable after discovering the need for those
adjustments that result in an aggregate reimbursement of $150 or more to any
one Account investing in a Designated Portfolio unless notified otherwise by
the Company (or, if lesser, results in an adjustment of $10 or more to each
contractowner's account). Any such notice will state for each day for which an
error occurred the incorrect price, the correct price and, to the extent
communicated to the Fund's shareholders, the reason for the price change. The
Company may send this notice or a derivation thereof (so long as such
derivation is approved in advance by CSI or the Adviser) to contractowners
whose accounts are affected by the price change.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act and that the Contracts will be issued and sold in
compliance with all applicable federal and state laws. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account as a separate account under applicable state law and
has registered the Account as a unit investment trust in accordance with the
provisions of the 1940 Act to serve as a segregated investment account for the
Contracts, and that it will maintain such registration for so long as any
Contracts are outstanding. The Company will amend the registration statement
under the 1933 Act for the Contracts and the registration statement under the
1940 Act for the Account from time to time as required in order to effect the
continuous offering of the Contracts or as may otherwise be required by
applicable law. The Company will register and qualify the Contracts for sale
in accordance with the securities laws of the various states only if and to the
extent deemed necessary by the Company.
5
<PAGE> 6
2.2. The Company represents that the Contracts are currently and at the time of
issuance will be treated as annuity or life insurance contracts under
applicable provisions of the Internal Revenue Code, and that it will make every
effort to maintain such treatment and that it will notify the Fund and the
Adviser immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
2.3. The Fund represents and warrants that Fund shares of the Designated
Portfolios sold pursuant to this Agreement will be registered under the 1933
Act and duly authorized for issuance in accordance with applicable law and that
the Fund is and will remain registered under the 1940 Act for as long as such
shares of the Designated Portfolios are outstanding. The Fund will 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 or as may otherwise be required by applicable law. The Fund will
register and qualify the shares of the Designated Portfolios for sale in
accordance with the laws of the various states only if and to the extent deemed
advisable by the Fund.
2.4. The Fund and the Adviser each represents that each Designated Portfolio is
currently qualified as a Regulated Investment Company under Subchapter M of the
Internal Revenue Code and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that a Designated Portfolio has ceased to so qualify or that it might
not so qualify in the future.
2.5. In performing the services described in this Agreement, the Fund, CSI and
the Adviser will comply with all applicable laws, rules and regulations
governing the issuance and sale of shares of the Fund. Neither the Fund, the
Adviser nor CSI makes any representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies, objectives and restrictions) complies with the insurance laws and
regulations of any state. The Adviser, the Fund and CSI each agree that upon
request they will use their best efforts to furnish the information required by
state insurance laws so that the Company can obtain the authority needed to
issue the Contracts in the various states.
2.6. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it
reserves the right to make such payments in the future. To the extent that it
decides to finance distribution expenses pursuant to Rule 12b-1 the Fund
undertakes to have its Fund Board formulate and approve any plan under Rule
12b-1 to finance distribution expenses in accordance with the 1940 Act.
6
<PAGE> 7
2.7. The Fund represents that it is lawfully organized and validly existing
under the laws of The Commonwealth of Massachusetts and that it does and will
comply in all material respects with applicable provisions of the 1940 Act.
2.8. CSI represents and warrants that it will distribute the Fund shares of the
Designated Portfolios in accordance with all applicable federal and state
securities laws including, without limitation, the 1933 Act, the 1934 Act and
the 1940 Act.
2.9. CSI represents and warrants that it is and will remain duly registered
under all applicable federal and state securities laws and that it will perform
its obligations for the Fund in accordance in all material respects with any
applicable state and federal securities laws.
2.10. The Fund represents and warrants that all of its trustees, officers,
employees, and other individuals/entities having access to the funds and/or
securities of the Fund are and continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund in an amount not
less than the minimal coverage as required currently by Rule 17g-(1) of the
1940 Act or related provisions as may be promulgated from time to time. The
aforesaid bond includes coverage for larceny and embezzlement and is issued by
a reputable bonding company. CSI and the Fund's investment advisers represent
and warrant that they are and continue to be at all times covered by policies
similar to the aforesaid bond.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING
3.1. The Fund or CSI will create and file a definitive prospectus with the SEC
under Rule 497 of the 1933 Act, and will provide the Company, at the Fund's or
its affiliate's expense, with as many copies of the current Fund prospectus for
the Designated Portfolios as the Company may reasonably request for
distribution, at the Company's expense, to prospective contractowners and
applicants. The Fund or CSI will provide, at the Fund's or its affiliate's
expense, as many copies of said prospectus as necessary for distribution, at
the Company's expense, to existing contractowners. The Fund or CSI will
provide the copies of said prospectus to the Company or to its mailing agent.
If requested by the Company, the Fund or CSI will provide such documentation,
including a computer diskette of the Company's specification or a final copy of
a current prospectus set in type at the Fund's or its affiliate's expense, and
such other assistance as is reasonably necessary in order for the Company at
least annually (or more frequently if the Fund prospectus is amended more
frequently) to have the Fund's prospectus, the prospectus for the Contracts and
the prospectuses of other mutual funds in which assets attributable to the
Contracts may be invested printed together in one document (the "Multifund
Prospectus"), in which case the Fund or its affiliate will bear its
7
<PAGE> 8
reasonable share of expenses as described above, allocated based on the
proportionate number of pages of the Fund's and other fund's respective
portions of the document.
3.2. The Fund or CSI will provide the Company, at the Fund's or its affiliate's
expense, with as many copies of the statement of additional information as the
Company may reasonably request for distribution, at the Company's expense, to
prospective contractowners and applicants. The Fund or CSI will provide, at
the Fund's or its affiliate's expense, as many copies of said statement of
additional information as necessary for distribution, at the Company's expense,
to any existing contractowner who requests such statement or whenever state or
federal law otherwise requires that such statement be provided. The Fund or
CSI will provide the copies of said statement of additional information to the
Company or to its mailing agent.
3.3. To the extent that the Fund or CSI changes (whether by revision or
supplement) any of the material information contained in any form of Designated
Portfolio prospectus or statement of additional information provided to the
Company for inclusion in a Multifund Prospectus, the Company agrees to make
such changes within a reasonable period of time after receipt of a request to
make such change from the Fund or CSI, subject to the following limitation. To
the extent that the Fund is legally required to make a change to a Designated
Portfolio prospectus or statement of additional information provided to the
Company for inclusion in a Multifund Prospectus, the Company agrees to make any
such change as soon as possible following receipt of the form of revised
prospectus and/or statement of additional information or supplement, as
applicable, but in no event later than five days following receipt. To the
extent that the Fund is required by law to cease selling shares of a Designated
Portfolio, the Company agrees to cease offering shares of the Designated
Portfolio until the Fund or CSI notifies the Company otherwise.
3.4. The Fund or CSI, at the Fund's or its affiliate's expense, will provide
the Company or its mailing agent with copies of its proxy material, if any,
reports to shareholders and other communications to shareholders in such
quantity as the Company will reasonably require. The Company will distribute
this proxy material, reports and other communications to existing contract
owners and tabulate the votes.
3.5. If and to the extent required by law the Company will:
(a) solicit voting instructions from contractowners;
(b) vote the shares of the Designated Portfolios held in the Account in
accordance with instructions received from contractowners; and
8
<PAGE> 9
(c) vote shares of the Designated Portfolios held in the
Account for which no timely instructions have been received, as well as
shares it owns, in the same proportion as shares of such Designated Portfolio
for which instructions have been received from the Company's contractowners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass-through voting privileges for variable contractowners.
Except as set forth above, 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 Company will be responsible for assuring that each of its separate
accounts participating in the Fund calculates voting privileges in a manner
consistent with all legal requirements, including the Mixed and Shared Funding
Exemptive Order.
3.6. The Fund will comply with all provisions of the 1940 Act requiring voting
by shareholders, and in particular, the Fund either will provide for annual
meetings (except insofar as the SEC may interpret Section 16 of the 1940 Act
not to require such meetings) or, as the Fund currently intends, will comply
with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts
described in Section 16(c) of that Act) as well as with Sections 16(a) and, if
and when applicable, 16(b). Further, the Fund will act in accordance with the
SEC's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees, with whatever rules the SEC may promulgate with
respect thereto and with the Mixed and Shared Funding Exemptive Order.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. CSI will provide the Company on a timely basis with investment performance
information for each Designated Portfolio in which an Account invests,
including total return for the preceding calendar month and calendar quarter,
the calendar year to date, and the prior one-year, five-year, and ten year (or
life of the Designated Portfolio) periods. The Company may, based on such
information supplied by CSI, prepare communications for contractowners
("Contractowner Materials"). The Company will provide copies of all
Contractowner Materials concurrently with their first use for CSI's internal
recordkeeping purposes. It is understood that neither CSI nor any Designated
Portfolio will be responsible for errors or omissions in, or the content of,
Contractowner Materials except to the extent that the error or omission
resulted from information provided by or on behalf of CSI or the Designated
Portfolio. Any printed information that is furnished to the Company pursuant
to this Agreement other than each Designated Portfolio's prospectus or
statement of additional information (or information supplemental thereto),
periodic reports and proxy solicitation
9
<PAGE> 10
materials is CSI's sole responsibility and not the responsibility of any
Designated Portfolio or the Fund. The Company agrees that the Portfolios, the
shareholders of the Portfolios and the officers and governing Board of the Fund
will have no liability or responsibility to the Company in these respects.
4.2. The Company will not give any information or make any representations or
statements on behalf of the Fund or concerning the Fund in connection with the
sale of the Contracts other than the information or representations contained
in the registration statement, prospectus or statement of additional
information for Fund shares, as such registration statement, prospectus and
statement of additional information may be amended or supplemented from time to
time, or in reports or proxy statements for the Fund, or in published reports
for the Fund which are in the public domain or approved by the Fund or CSI for
distribution, or in sales literature or other material provided by the Fund,
the Adviser or by CSI, except with permission of CSI. The Company will
furnish, or will cause to be furnished, to the Fund, the Adviser or CSI, each
piece of sales literature or other promotional material in which the Company or
its Account is named, at least ten (10) business days prior to its use. No
such sales literature or other promotional material which requires the
permission of CSI prior to use will be used if CSI reasonably objects to such
use within five (5) business days after receipt.
Nothing in this Section 4.2 will be construed as preventing the Company's
affiliates from giving advice on investment in the Fund.
4.3. The Fund, the Adviser and CSI will not give any information or make any
representations or statements on behalf of the Company or concerning the
Company, each Account, or the Contracts other than the information or
representations contained in a registration statement, prospectus or statement
of additional information for the Contracts, as such registration statement,
prospectus and statement of additional information may be amended or
supplemented from time to time, or in published reports for each Account or the
Contracts which are in the public domain or approved by the Company for
distribution to contractowners, or in sales literature or other material
provided by the Company, except with permission of the Company. The Company
agrees to respond to any request for approval on a prompt and timely basis.
The Fund, the Adviser or CSI will furnish, or will cause to be furnished, to
the Company or its designee, each piece of sales literature or other
promotional material in which the Company or its Account is named at least
eight (8) business days prior to its use. No such material will be used if the
Company reasonably objects to such use within five (5) business days after
receipt of such material.
10
<PAGE> 11
4.4. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additions information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the SEC, the NASD or other regulatory
authority.
4.5. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts
or each Account, contemporaneously with the filing of such document with the
SEC, the NASD or other regulatory authority.
4.6. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media (e.g., on-line
networks such as the Internet or other electronic messages)), 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
advertisements sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospectuses,
statements of additional information, shareholder reports, proxy materials and
any other material constituting sales literature or advertising under the NASD
rules, the 1933 Act or the 1940 Act.
4.7. The Fund and CSI hereby consent to the Company's use of the names Warburg,
Pincus Trust International Equity Portfolio, Warburg, Pincus Trust Small
Company Value Portfolio, Warburg, Pincus Trust Post-Venture Capital Portfolio
or other Designated Portfolio and Warburg, Pincus Counsellors, Inc. in
connection with the marketing of the Contracts, subject to the terms of
Sections 4.1 and 4.2 of this Agreement. Such consent will continue only as
long as any Contracts are invested in the relevant Designated Portfolio and
only as long as such use is consistent with the provision of historical
information on the Contracts.
ARTICLE V. FEES AND EXPENSES
11
<PAGE> 12
5.1. The Fund, the Adviser and CSI will pay no fee or other compensation to the
Company (other than as set forth in the administrative services letter
agreement between CSI and the Company) except if the Fund or any Designated
Portfolio adopts and implements a plan pursuant to Rule 12b-1 under the 1940
Act to finance distribution expenses, then, subject to obtaining any required
exemptive orders or other regulatory approvals, the Fund may make payments to
the Company or to the underwriter for the Contracts if and in such amounts
agreed to by the Fund in writing.
5.2. All expenses incident to performance by the Fund of this Agreement will be
paid by the Fund to the extent permitted by law. The Fund will bear the
expenses for the cost of registration and qualification of the Fund's shares;
preparation and filing of the Fund's prospectus, statement of additional
information and registration statement, proxy materials and reports; setting in
type and printing the Fund's prospectus; setting in type and printing proxy
materials and reports by it to contractowners (including the costs of printing
a Fund prospectus that contains an annual report); the preparation of all
statements and notices required by any federal or state law; all taxes on the
issuance or transfer of the Fund's shares; any expenses permitted to be paid or
assumed by the Fund pursuant to a plan, if any, under Rule 12b-1 under the 1940
Act; and all other expenses set forth in Article III of this Agreement.
ARTICLE VI. DIVERSIFICATION
6.1. The Adviser will ensure that the Fund will at all times invest money from
the Contracts in such a manner as to ensure that the Contracts will be treated
as variable annuity contracts under the Internal Revenue Code and the
regulations issued thereunder. Without limiting the scope of the foregoing,
the Fund will comply with Section 817(h) of the Internal Revenue Code and
Treasury Regulation 1.817-5, as amended from time to time, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulation. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps: (a) to notify the Company of such breach; and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Treasury Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board of Trustees of the Fund (the "Fund Board") will monitor the Fund
for the existence of any irreconcilable material conflict among the interests
of the contractowners of all separate accounts investing in the Fund. An
irreconcilable material conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority; (b) a
12
<PAGE> 13
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
Participating Insurance Companies or by variable annuity and variable life
insurance contractowners; or (f) a decision by an insurer to disregard the
voting instructions of contractowners. The Fund Board will promptly inform the
Company if it determines that an irreconcilable material conflict exists and
the implications thereof.
7.2. The Company will report any potential or existing conflicts of which it is
aware to the Fund Board. The Company agrees to assist the Fund Board in
carrying out its responsibilities, as delineated in the Mixed and Shared
Funding Exemptive Order, by providing the Fund Board with all information
reasonably necessary for the Fund Board to consider any issues raised. This
includes, but is not limited to, an obligation by the Company to inform the
Fund Board whenever contractowner voting instructions are to be disregarded.
The Company's responsibilities hereunder will be carried out with a view only
to the interest of contractowners.
7.3. If it is determined by a majority of the Fund Board, or a majority of its
disinterested trustees, that an irreconcilable material conflict exists, the
Company will, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested trustees), take whatever steps
are necessary to remedy or eliminate the irreconcilable material conflict, up
to and including: (a) withdrawing the assets allocable to some or all of the
Accounts from the Fund or any Designated 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 contractowners and, as
appropriate, segregating the assets of any appropriate group (i.e., variable
annuity contractowners or variable life insurance contractowners of one or more
Participating Insurance Companies) that votes in favor of such segregation, or
offering to the affected contractowners the option of making such a change; and
(b) 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 contractowner voting instructions, and the Company's
judgment represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
subaccount of the Account's investment in the Fund and terminate this Agreement
with respect to such subaccount; provided, however, that such withdrawal and
termination will be limited to the extent required by the foregoing
13
<PAGE> 14
irreconcilable material conflict as determined by a majority of the
disinterested trustees of the Fund Board. No charge or penalty will be imposed
as a result of such withdrawal.
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 insurance regulators, then the Company will withdraw
the affected subaccount of the Account's investment in the Fund and terminate
this Agreement with respect to such subaccount; provided, however, that such
withdrawal and termination will be limited to the extent required by the
foregoing irreconcilable material conflict as determined by a majority
of the disinterested directors of the Fund Board. No charge or penalty will be
imposed as a result of such withdrawal.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of
the disinterested members of the Fund Board will determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no
event will the Fund or the Adviser (or any other investment adviser to the
Fund) be required to establish a new funding medium for the Contracts. The
Company will not be required by Section 7.3 to establish a new funding medium
for the Contracts if an offer to do so has been declined by vote of a majority
of contractowners materially affected by the irreconcilable material conflict.
7.7. The Company will at least annually submit to the Fund Board such reports,
materials or data as the Fund Board may reasonably request so that the Fund
Board may fully carry out the duties imposed upon it as delineated in the Mixed
and Shared Funding Exemptive Order, and said reports, materials and data will
be submitted more frequently if deemed appropriate by the Fund Board.
7.8. 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 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 Fund and/or the Participating Insurance
Companies, as appropriate, will take such steps as may be necessary to comply
with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2, 7.3,
7.4, and 7.5 of this Agreement will 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.
14
<PAGE> 15
ARTICLE VIII. INDEMNIFICATION
8.1. Indemnification By The Company
(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, CSI, and each person, if any, who controls or is associated with the
Fund, the Adviser or CSI within the meaning of such terms under the federal
securities laws and any director, trustee, officer, partner, employee or agent
of the foregoing (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, expenses, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including reasonable legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements:
(1) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration statement,
prospectus or statement of additional information for the Contracts or contained
in the Contracts or sales literature or other promotional material for the
Contracts (or any amendment or supplement to any of the foregoing), including
any prospectuses or statements of additional information of the Fund to which
the Company has made any changes to the information provided to the Company or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated or necessary to make such
statements not misleading in light of the circumstances in which they were made;
provided that this agreement to indemnify will 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 written information furnished to
the Company by the Fund, the Adviser or CSI for use in the registration
statement, prospectus or statement of additional information for the Contracts
or in the Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund shares;
or
(2) arise out of or as a result of statements or representations by or
on behalf of the Company or wrongful conduct of the Company or persons under its
control, with respect to the sale or distribution of the Contracts or Fund
shares (other than statements or representations contained in the Fund
registration statement, Fund prospectus, Fund statement of additional
information, sales literature or other promotional material of the Fund not
supplied by the Company or persons under its control); or
(3) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Fund registration statement, prospectus,
statement of additional
15
<PAGE> 16
information or sales literature or other promotional material of the Fund (or
amendment or supplement) or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make such
statements not misleading in light of the circumstances in which they were
made, 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 persons under its control; or
(4) 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
(5) arise out of 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 by the Company of this Agreement, including, but not
limited to, a failure to comply with the provisions of Section 3.3;
except to the extent provided in Sections 8.1(b) and 8.3 hereof.
This indemnification will be in addition to any liability that the Company
otherwise may have.
(b) No party will be entitled to indemnification under Section 8.1(a) to
the extent such loss, claim, damage, liability or litigation is due to the
willful misfeasance, bad faith, or gross negligence in the performance of such
party's duties under this Agreement, or by reason of such party's reckless
disregard of its obligations or duties under this Agreement by the party
seeking indemnification.
(c) The Indemnified Parties promptly will notify the Company of the
commencement of any litigation, proceedings, complaints or actions by
regulatory authorities against them in connection with the issuance or sale of
the Fund shares or the Contracts or the operation of the Fund.
8.2. Indemnification By The Adviser, the Fund and CSI
(a) The Adviser, the Fund and CSI, in each case solely to the extent
relating to such party's responsibilities hereunder, agree to indemnify and
hold harmless the Company and each person, if any, who controls or is
associated with the Company within the meaning of such terms under the federal
securities laws and any director, trustee, officer, partner, employee or agent
of the foregoing (collectively, the "Indemnified Parties" for purposes of this
Section 8.2) against any and all losses, claims, expenses, damages, liabilities
(including amounts paid in settlement with the written consent of the Adviser)
or litigation (including reasonable legal and other expenses) to which the
Indemnified Parties may become subject
16
<PAGE> 17
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:
(1) 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 Fund or sales
literature or other promotional material 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 or necessary to make such statements not misleading in light of the
circumstances in which they were made (in each case substantially as
transmitted to you by the Fund or CSI), provided that this agreement to
indemnify will 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 Adviser, CSI or the Fund by or on
behalf of the Company for use in the registration statement, prospectus or
statement of additional information for the Fund or in sales literature of the
Fund (or any amendment or supplement thereto) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(2) arise out of or as a result of statements or representations or
wrongful conduct of the Adviser, the Fund or CSI or persons under the control
of the Adviser, the Fund or CSI respectively, with respect to the sale of the
Fund shares (other than statements or representations contained in a
registration statement, prospectus, statement of additional information, sales
literature or other promotional material covering the Contracts not supplied by
CSI or persons under its control); or
(3) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a registration statement, prospectus, statement of
additional information or sales literature or other promotional material
covering the Contracts (or any amendment or supplement thereto), or the
omission or alleged omission to state therein a material fact required to be
stated or necessary to make such statement or statements not misleading in
light of the circumstances in which they were made, if such statement or
omission was made in reliance upon and in conformity with written information
furnished to the Company by the Adviser, the Fund or CSI or persons under the
control of the Adviser, the Fund or CSI; or
(4) arise as a result of any failure by the Fund, the Adviser or CSI to
provide the services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good faith or
otherwise, to comply with the diversification requirements and procedures
related thereto specified in Article VI of this Agreement); or
17
<PAGE> 18
(5) arise out of or result from any material breach of any
representation and/or warranty made by the Adviser, the Fund or CSI in this
Agreement, or arise out of or result from any other material breach of this
Agreement by the Adviser the Fund or CSI;
except to the extent provided in Sections 8.2(b) and 8.3 hereof.
These indemnifications will be in addition to any liability that the Fund,
Adviser or CSI otherwise may have.
(b) No party will be entitled to indemnification under Section 8.2(a) to
the extent such loss, claim, damage, liability or litigation is due to the
willful misfeasance, bad faith, or gross negligence in the performance of such
party's duties under this Agreement, or by reason of such party's reckless
disregard of its obligations or duties under this Agreement by the party
seeking indemnification.
(c) The Indemnified Parties will promptly notify the Adviser, the Fund and
CSI of the commencement of any litigation, proceedings, complaints or actions
by regulatory authorities against them in connection with the issuance or sale
of the Contracts or the operation of the account.
8.3. Indemnification Procedure
Any person obligated to provide indemnification under this Article VIII
("Indemnifying Party" for the purpose of this Section 8.3) will not be liable
under the indemnification provisions of this Article VIII with respect to any
claim made against a party entitled to indemnification under this Article VIII
("Indemnified Party" for the purpose of this Section 8.3) unless such
Indemnified Party will have notified the Indemnifying Party in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim will have been served upon such
Indemnified Party (or after such party will have received notice of such
service on any designated agent), but failure to notify the Indemnifying Party
of any such claim will not relieve the Indemnifying Party from any liability
which it may have to the Indemnified Party against whom such action is brought
otherwise than on account of the indemnification provision of this Article
VIII, except to the extent that the failure to notify results in the failure of
actual notice to the Indemnifying Party and such Indemnifying Party is damaged
solely as a result of failure to give such notice. In case any such action is
brought against the Indemnified Party, the Indemnifying Party will be entitled
to participate, at its own expense, in the defense thereof. The Indemnifying
Party also will be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from the
Indemnifying Party to the Indemnified Party of the Indemnifying Party's
election to assume the defense thereof, the
18
<PAGE> 19
Indemnified Party will bear the fees and expenses of any additional counsel
retained by it, and the Indemnifying Party 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, unless: (a) the Indemnifying Party and
the Indemnified Party will have mutually agreed to the retention of such
counsel; or (b) 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 will not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there is a final judgment for the plaintiff, the Indemnifying Party agrees to
indemnify the Indemnified Party from and against any loss or liability by
reason of such settlement or judgment. A successor by law of the parties to
this Agreement will be entitled to the benefits of the indemnification
contained in this Article VIII. The indemnification provisions contained in
this Article VIII will survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement will be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York.
9.2. This Agreement will be subject to the provisions of the 1933 Act, the 1934
Act and the 1940 Act, 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 will be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement will terminate:
(a) at the option of any party, with or without cause, with respect to
some or all of the Designated Portfolios, upon ninety (90) days' advance
written notice to the other parties; or
(b) at the option of the Company, upon receipt of the Company's written
notice by the other parties, with respect to any Designated Portfolio if shares
of the Designated Portfolio are not reasonably available or appropriate to meet
the requirements of the Contracts as determined in good faith by the Company;
or
19
<PAGE> 20
(c) at the option of the Company, upon receipt of the Company's written
notice by the other parties, with respect to any Designated Portfolio in the
event any of the Designated Portfolio's shares are not registered, issued or
sold in accordance with applicable state and/or Federal law or such law
precludes the use of such shares as the underlying investment media of the
Contracts issued or to be issued by Company; or
(d) at the option of the Fund, upon receipt of the Fund's written notice
by the other parties, upon institution of formal proceedings against the
Company by the NASD, the SEC, the insurance commission of any state or any
other regulatory body regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the administration of the Contracts, the
operation of the Account, or the purchase of the Fund shares, provided that the
Fund determines in its sole judgment, exercised in good faith, that any such
proceeding would have a material adverse effect on the Company's ability to
perform its obligations under this Agreement; or
(e) at the option of the Company, upon receipt of the Company's written
notice by the other parties, upon institution of formal proceedings against the
Fund, Adviser or CSI by the NASD, the SEC, or any state securities or insurance
department or any other regulatory body, provided that the Company determines
in its sole judgment, exercised in good faith, that any such proceeding would
have a material adverse effect on the Fund's, Adviser's or CSI's ability to
perform its obligations under this Agreement; or
(f) at the option of the Company, upon receipt of the Company's written
notice by the other parties, with respect to any Designated Portfolio if the
Designated Portfolio ceases to qualify as a Regulated Investment Company under
Subchapter M of the Internal Revenue Code, or under any successor or similar
provision, or if the Company reasonably and in good faith believes that the
Designated Portfolio may fail to so qualify; or
(g) at the option of the Company, upon receipt of the Company's written
notice by the other parties, with respect to any Designated Portfolio if the
Designated Portfolio fails to meet the diversification requirements specified
in Article VI hereof or if the Company reasonably and in good faith believes
the Designated Portfolio may fail to meet such requirements; or
(h) at the option of any party to this Agreement, upon written notice to
the other parties, upon another party's material breach of any provision of
this Agreement which material breach is not cured within thirty (30) days of
said notice; or
20
<PAGE> 21
(i) at the option of the Company, if the Company determines in its sole
judgment exercised in good faith, that either the Fund, the Adviser or CSI has
suffered a material adverse change in its business, operations or financial
condition since the date of this Agreement or is the subject of material
adverse publicity which is likely to have a material adverse impact upon the
business and operations of the Company, such termination to be effective sixty
(60) days' after receipt by the other parties of written notice of the election
to terminate; or
(j) at the option of the Fund or CSI, if the Fund or CSI respectively,
determines in its sole judgment exercised in good faith, that the Company has
suffered a material adverse change in its business, operations or financial
condition since the date of this Agreement or is the subject of material
adverse publicity which is likely to have a material adverse impact upon the
business and operations of the Fund or the Adviser, such termination to be
effective sixty (60) days' after receipt by the other parties of written notice
of the election to terminate; or
(k) at the option of the Company or the Fund upon receipt of any necessary
regulatory approvals and/or the vote of the contractowners having an interest
in the Account (or any subaccount) to substitute the shares of another
investment company for the corresponding Designated Portfolio shares of the
Fund in accordance with the terms of the Contracts for which those Designated
Portfolio shares had been selected to serve as the underlying investment media.
The Company will give sixty (60) days' prior written notice to the Fund of the
date of any proposed vote, proposed regulatory approval request or other action
taken to replace the Fund's shares; or
(l) at the option of the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of the disinterested Fund Board
members, that an irreconcilable material conflict exists among the interests
of: (1) all contractowners of variable insurance products of all separate
accounts; or (2) the interests of the Participating Insurance Companies
investing in the Fund as set forth in Article VII of this Agreement; or
(m) at the option of the Fund in the event any of the Contracts are not
issued or sold in accordance with applicable federal and/or state law.
Termination will be effective immediately upon such occurrence without notice.
21
<PAGE> 22
10.2. Notice Requirement
Except as specified in Section 10.1(m), no termination of this Agreement
will be effective unless and until the party terminating this Agreement gives
prior written notice to all other parties of its intent to terminate, which
notice will set forth the basis for the termination.
10.3. Effect of Termination
In the event of any termination of this Agreement other than pursuant to
subsection (d), (j), (l) or (m) of Section 10.1, the Fund and CSI will, at the
option of the Company, continue to make available additional shares of the Fund
pursuant to the terms and conditions of this Agreement, for all Contracts in
effect on the effective date of termination of this Agreement (hereinafter
referred to as "Existing Contracts.") Specifically, without limitation, the
owners of the Existing Contracts will be permitted to reallocate investments in
the Designated Portfolios (as in effect on such date), redeem investments in
the Designated Portfolios and/or invest in the Designated Portfolios upon the
making of additional purchase payments under the Existing Contracts.
10.4. Surviving Provisions
Notwithstanding any termination of this Agreement, each party's
obligations under Article VIII to indemnify other parties will survive and not
be affected by any termination of this Agreement. In addition, each party's
obligations under Section 12.6 will survive and not be affected by any
termination of this Agreement. Finally, with respect to Existing Contracts,
all provisions of this Agreement also will survive and not be affected by any
termination of this Agreement.
10.5 Effectuation of Termination
The parties to this Agreement agree to cooperate in effectuating the
termination of this Agreement.
ARTICLE XI. NOTICES
11.1. Any notice will be deemed duly 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 parties.
22
<PAGE> 23
If to the Company: If to the Fund, the Adviser and/or CSI:
466 Lexington Avenue
10th Floor
New York, NY 10017
Attn: . Attn: Eugene P. Grace
Senior Vice President
ARTICLE XII. MISCELLANEOUS
12.1. The Fund, the Adviser and CSI acknowledge that the identities of the
customers of the Company or any of its affiliates (collectively the "Company
Protected Parties" for purposes of this Section 12.1), information maintained
regarding those customers, and all computer programs and procedures or other
information developed or used by the Company Protected Parties or any of their
employees or agents in connection with the Company's performance of its duties
under this Agreement are the valuable property of the Company Protected Parties.
The Fund, the Adviser and CSI agree that if they come into possession of any
list or compilation of the identities of or other information about the Company
Protected Parties' customers, or any other information or property of the
Company Protected Parties, other than such information as is publicly available
or as may be independently developed or compiled by the Fund, the Adviser or CSI
from information supplied to them by the Company Protected Parties' customers
who also maintain accounts directly with the Fund, the Adviser or CSI, the Fund,
the Adviser and CSI will hold such information or property in confidence and
refrain from using, disclosing or distributing any of such information or other
property except: (a) with the Company's prior written consent; or (b) as
required by law or judicial process. The Company acknowledges that the
identities of the customers of the Fund, the Adviser, CSI or any of their
affiliates (collectively the "Adviser Protected Parties" for purposes of this
Section 12.1), information maintained regarding those customers, and all
computer programs and procedures or other information developed or used by the
Adviser Protected Parties or any of their employees or agents in connection with
the Fund's, the Adviser's or CSI's performance of their respective duties under
this Agreement are the valuable property of the Adviser Protected Parties. The
Company agrees that if it comes into possession of any list or compilation of
the identities of or other information about the Adviser Protected Parties'
customers, or any other information or property of the Adviser Protected
Parties, other than such information as is publicly available or as may be
independently developed or compiled by the Company from information supplied to
them by the Adviser Protected Parties' customers who also maintain accounts
directly with the Company, the Company will hold such information or property in
confidence and refrain from using, disclosing or distributing any of such
information or other property except: (a) with the Fund's, the Adviser's or
CSI's prior written consent; or (b) as required by law or judicial process. Each
party acknowledges
23
<PAGE> 24
that any breach of the agreements in this Section 12.1 would result in
immediate and irreparable harm to the other parties for which there would be no
adequate remedy at law and agree that in the event of such a breach, the other
parties will be entitled to equitable relief by way of temporary and permanent
injunctions, as well as such other relief as any court of competent
jurisdiction deems appropriate.
12.2. 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.
12.3. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together will constitute one and the same
instrument.
12.4. If any provision of this Agreement will be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement will
not be affected thereby.
12.5. This Agreement will not be assigned by any party hereto without the prior
written consent of all the parties.
12.6. Each party to this Agreement will maintain all records required by law,
including records detailing the services it provides. Such records will be
preserved, maintained and made available to the extent required by law and in
accordance with the 1940 Act and the rules thereunder. Each party to this
Agreement will cooperate with each other party and all appropriate governmental
authorities (including without limitation the SEC, the NASD and state insurance
regulators) and will permit each other and 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. Upon
request by the Fund or CSI, the Company agrees to promptly make copies or, if
required, originals of all records pertaining to the performance of services
under this Agreement available to the Fund or CSI, as the case may be. The
Fund, the Adviser and CSI each agree that the Company will have the right to
inspect, audit and copy all records pertaining to the performance of services
under this Agreement pursuant to the requirements of any state insurance
department. Each party also agrees to promptly notify the other parties if it
experiences any difficulty in maintaining the records in an accurate and
complete manner. This provision will survive termination of this Agreement.
12.7. Each party represents that the execution and delivery of this Agreement
and the consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate or board action, as applicable, by such
party and when so executed and
24
<PAGE> 25
delivered this Agreement will be the valid and binding obligation of such party
enforceable in accordance with its terms.
12.8. The parties to this Agreement acknowledge and agree that all liabilities
of the Fund arising, directly or indirectly, under this agreement, will be
satisfied solely out of the assets of the Fund and that no trustee, officer,
agent or holder of shares of beneficial interest of the Fund will be personally
liable for any such liabilities. No Portfolio or series of the Fund will be
liable for the obligations or liabilities of any other Portfolio or series.
12.9. The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect changes in or relating to the Contracts, the
Accounts or the Designated Portfolios of the Fund or other applicable terms of
this Agreement.
12.10. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified below.
FEDERAL KEMPER LIFE INSURANCE COMPANY
SEAL By:_________________________________
ATTEST: By:_____________________________
SEAL WARBURG, PINCUS TRUST
By:_________________________________
Name:_______________________________
Title:______________________________
25
<PAGE> 26
SEAL WARBURG, PINCUS COUNSELLORS, INC.
By:______________________________
Name:____________________________
Title:___________________________
SEAL COUNSELLORS SECURITIES INC.
By:______________________________
Name:____________________________
Title:___________________________
ATTEST: By:_____________________________
26
<PAGE> 27
SCHEDULE 1
PARTICIPATION AGREEMENT
BY AND AMONG
FEDERAL KEMPER LIFE INSURANCE COMPANY
AND
WARBURG, PINCUS TRUST
AND
WARBURG, PINCUS COUNSELLORS, INC.
AND
COUNSELLORS SECURITIES INC.
The following separate accounts of Federal Kemper Life Insurance Company are
permitted in accordance with the provisions of this Agreement to invest in
Designated Portfolios of the Fund shown in Schedule 2:
_____________________________________-
established ___________
_______________, 1996
27
<PAGE> 28
SCHEDULE 2
PARTICIPATION AGREEMENT
BY AND AMONG
FEDERAL KEMPER LIFE INSURANCE COMPANY
AND
WARBURG, PINCUS TRUST
AND
WARBURG, PINCUS COUNSELLORS, INC.
AND
COUNSELLORS SECURITIES INC.
The Separate Account(s) shown on Schedule 1 may invest in the following
Designated Portfolios of the Warburg, Pincus Trust:
Warburg, Pincus Trust International Equity Portfolio
Warburg, Pincus Trust Small Company Value Portfolio
Warburg, Pincus Trust Post-Venture Capital Portfolio
December ___, 1996
28
<PAGE> 1
EXHIBIT 99.1-A(8)(e)
QUICK VUL
PARTICIPATION AGREEMENT
AMONG
KEMPER INVESTORS FUND
ZURICH KEMPER INVESTMENTS, INC.
KEMPER DISTRIBUTORS, INC.
AND
FEDERAL KEMPER LIFE ASSURANCE COMPANY
THIS AGREEMENT, made and entered into as of this 18th day of December, 1996 by
and among Federal Kemper Life Assurance Company (hereinafter, the "Company"),
an Illinois insurance company, 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 account hereinafter referred to as an "Account"), Kemper
Investors Fund, a business trust organized under the laws of the Commonwealth
of Massachusetts (hereinafter the "Fund"), Zurich Kemper Investments, Inc.
(hereinafter the "Adviser"), a Delaware corporation, and Kemper Distributors,
Inc. (hereinafter the "Underwriter"), a Delaware corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance and variable annuity contracts
(hereinafter the "Variable Insurance Products") offered by insurance companies
that have entered into participation agreements with the Fund (hereinafter
"Participating Insurance Companies");
WHEREAS, the beneficial interest in the Fund is divided into several series of
shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets;
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance separate accounts exemptions from the
provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company
Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, if and to the extent necessary to permit shares of
the Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
(SEC Release No. IC-17164; File No. 812-7345; hereinafter the "Shared Funding
Exemption Order");
<PAGE> 2
WHEREAS, the Fund is registered as an open-end management investment company
under the 1940 Act and shares of the Portfolios are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act");
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;
WHEREAS, the Company has registered or will register certain variable life
insurance and variable annuity contracts supported wholly or partially by the
Accounts (the "Contracts") under the 1933 Act, and said Contracts are listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement;
WHEREAS, each Account is duly established and maintained as a separate account,
established by resolution of the Board of Directors of the Company, on the date
shown for such Account on Schedule A hereto, to set aside and invest assets
attributable to the aforesaid Contracts;
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act;
WHEREAS, the Underwriter 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");
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company intends to purchase shares of the Portfolios listed in Schedule A
hereto, as it may be amended from time to time by mutual written agreement
("Designated Portfolios"), on behalf of the Accounts to fund the aforesaid
Contracts, and the Underwriter is authorized to sell such shares to unit
investment trusts such as the Accounts at net asset value; and
WHEREAS, to the extent permitted by applicable insurance laws and regulations,
the Company also intends to purchase shares in other open-end investment
companies or series thereof not affiliated with the Fund ("Unaffiliated Funds")
on behalf of the Accounts to fund the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund, the Adviser and the Underwriter agree as follows:
ARTICLE I
Sale of Fund Shares
1.1 The Underwriter agrees to sell to the Company those shares of the Designated
Portfolios that the Accounts order, executing such orders on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
the order for the shares of the Designated Portfolios.
2
<PAGE> 3
1.2 The Fund agrees to make shares of each Designated Portfolio available for
purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which the Fund calculates such Designated Portfolio's
net asset value pursuant to rules of the SEC, and the Fund shall use reasonable
efforts to calculate such net asset value on each day when the New York Stock
Exchange is open for trading. Notwithstanding the foregoing, the Board of
Trustees of the Fund ("Board") may refuse to sell shares of any Designated
Portfolio to any person, or suspend or terminate the offering of shares of any
Designated Portfolio if such action is required by law or by regulatory
authorities having jurisdiction, or is, in the sole discretion of the Board
acting in good faith and in light of its fiduciary duties under federal and any
applicable state laws, necessary in the best interest of the shareholders of
such Designated Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be sold only
to Participating Insurance Companies or their separate accounts. No shares of
any Designated Portfolios will be sold to the general public. The Fund and the
Underwriter will not sell shares of any Designated Portfolio to any insurance
company or separate account unless an agreement containing provisions
substantially the same as Sections 2.1, 3.4, 3.5 and 3.6 and Article VII of
this Agreement is in effect to govern such sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or fractional
shares of the Designated Portfolios held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption, except that the Fund
reserves the right to suspend the right of redemption or postpone the date of
payment or satisfaction upon redemption consistent with Section 22(e) of the
1940 Act and any rules thereunder, and in accordance with the procedures and
policies of the Fund as described in the Fund's then current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the designee of
the Fund for receipt of purchase and redemption orders from the Accounts, and
receipt by such designee shall constitute receipt by the Fund; provided that
the Company receives the order prior to the determination of net asset value as
set forth in the Fund's then current prospectus and the Fund receives notice of
such order 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 Fund calculates its net asset value pursuant to
the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each Designated
Portfolio offered by the Fund's then current prospectus in accordance with the
provisions of such prospectus.
1.7 The Company shall pay for shares of a Designated Portfolio on the next
Business Day after receipt of an order to purchase shares of such Designated
Portfolio. Payment shall be in federal funds transmitted by wire by 11:00 a.m.
New York time. If payment in federal funds for any purchase is not received or
is received by the Fund after 11:00 a.m. New York time on such Business Day,
the Company shall promptly, upon the Fund's request, reimburse the Fund
3
<PAGE> 4
for any charges, costs, fees, interest or other expenses incurred by
the Fund in connection with any advances to, or borrowing or overdrafts by, the
Fund, or any similar expenses incurred by the Fund, as a result of portfolio
transactions effected by the Fund based upon such purchase request. For
purposes of Section 2.8 and 2.9 hereof, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
1.8 Issuance and transfer of the shares of a Designated Portfolio will be by
book entry only. Stock certificates will not be issued to the Company or any
Account. Shares of a Designated Portfolio ordered from the Fund will be
recorded in an appropriate title for each Account or the appropriate subaccount
of each Account.
1.9 The Fund shall furnish same-day notice (by wire or telephone, followed by
written confirmation) to the Company of any income, dividends or capital gain
distributions payable on shares of the Designated Portfolios. The Company
hereby elects to receive all such income, dividends, and capital gain
distributions as are payable on shares of a Designated Portfolio in additional
shares of that Designated Portfolio. The Company reserves the right to revoke
this election and to receive all such income dividends and capital gain
distributions in cash. The Fund shall notify the Company of the number of
shares so issued as payment of such dividends and distributions. The Fund
shall use its best efforts to furnish advance notice of the day such dividends
and distributions are expected to be paid.
1.10 The Fund shall make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. New York time) and shall use its best efforts to make such net asset value
per share available by 7:00 p.m. New York time.
1.11 The Parties hereto acknowledge that the arrangement contemplated by this
Agreement is not exclusive; the shares of the Designated Portfolios (and other
Portfolios of the Fund) may be sold to other insurance companies (subject to
Section 1.3 and Article VII hereof) and the cash value of the Contracts may be
invested in other investment companies, provided, however, that (a) such other
investment company, or series thereof, has investment objectives or policies
that are substantially different from the investment objectives and policies
of any Designated Portfolio; or (b) the Company gives the Fund, the Adviser and
the Underwriter 45 days' written notice of its intention to make such other
investment company available as a funding vehicle for the Contracts; or (c) the
Fund, the Adviser or Underwriter consents to the use of such other investment
company, such consent not to be unreasonably withheld.
ARTICLE II
Representations and Warranties
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act; that the Contracts will be continually issued,
offered for sale and sold in compliance in all material respects with all
applicable federal and state laws and that the sale of
4
<PAGE> 5
the Contracts shall comply in all material respects with state
insurance suitability requirements. The Company further represents and warrants
that it is an insurance company duly organized and in good standing under
applicable law and that it has legally and validly established each Account
prior to any issuance or sale thereof as a separate account under the Illinois
insurance laws and has registered or, prior to any issuance or sale of the
Contracts, will register each Account as a unit investment trust in accordance
with the provisions of the 1940 Act to serve as a separate account for the
Contracts.
2.2 The Fund represents and warrants that shares of the Designated Portfolios
sold pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with all applicable federal
securities laws and that the Fund is and shall remain registered under the 1940
Act. The Fund shall amend the Registration Statement for its shares under the
1933 Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Fund shall register and qualify the
shares of the Designated Portfolios for sale in accordance with the laws of the
various states only if and to the extent deemed advisable by the Fund after
taking into consideration any state insurance law requirements that the Company
advises the Fund may be applicable.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it
may make such payments in the future subject to applicable law.
2.4 The Fund makes no representations as to whether any aspect of its operation,
including but not limited to, investments policies, fees and expenses, complies
with the insurance and other applicable laws of the various states, except that
the Fund represents that the investment policies, fees and expenses of the
Designated Portfolios are and shall at all times remain in compliance with the
insurance laws of the State of Illinois to the extent required to perform this
Agreement. The Company will advise the Fund in writing as to any requirements
of Illinois insurance law that affect the Designated Portfolios, and the Fund
will be deemed to be in compliance with this Section 2.4 so long as the Fund
complies with such advice of the Company.
2.5 The Fund represents that it is lawfully organized and validly existing as a
business trust under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act.
2.6 The Underwriter represents and warrants that it is a member in good standing
of the NASD and is registered as a broker-dealer with the SEC. The Underwriter
further represents that it will sell and distribute the shares of the
Designated Portfolios in accordance with any applicable state and federal
securities laws.
2.7 The Adviser represents and warrants that it is and shall remain duly
registered as an investment adviser under all applicable federal and state
securities laws and that the Adviser shall perform its obligations for the Fund
in compliance in all material respects with any applicable state and federal
securities laws.
5
<PAGE> 6
2.8 The Fund, the Adviser and the Underwriter represent and warrant that all
their directors, officers, employees, investment advisers, and other
individuals or entities dealing with the money and/or securities of the Fund
are and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimum coverage required currently by Rule 17g-1 of the 1940 Act or such
related provisions as may be promulgated from time to time. The aforesaid bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.9 The Company represents and warrants that all its directors, officers,
employees, investment advisers, and other individuals or entities employed or
controlled by the Company dealing with the money and/or securities of the Fund
are covered by a blanket fidelity bond or similar coverage in an amount not
less than $20 million. The aforesaid bond includes coverage for larceny and
embezzlement and is issued by a reputable bonding company. The Company agrees
that this bond or another bond containing these provisions will always be in
effect, and agrees to notify the Fund, the Adviser and the Underwriter in the
event that such coverage no longer applies.
2.10 The Company represents and warrants that all shares of the Designated
Portfolios purchased by the Company will be purchased on behalf of one or more
unmanaged separate accounts that offer interests therein that are registered
under the 1933 Act and upon which a registration fee has been or will be paid;
and the Company acknowledges that the Fund intends to rely upon this
representation and warranty for purposes of calculating SEC registration fees
payable with respect to such shares of the Designated Portfolios pursuant to
Instruction B.5 to Form 24F-2 or any similar form or SEC registration fee
calculation procedure that allows the Fund to exclude shares so sold for
purposes of calculating its SEC registration fee. The Company agrees to
cooperate with the Fund on no less than an annual basis to certify as to its
continuing compliance with this representation and warranty.
ARTICLE III
Prospectuses, Statements of Additional
Information, and Proxy Statements; Voting
3.1 The Fund shall provide the Company with as many copies of the Fund's current
prospectus for the Designated Portfolios as the Company may reasonably request.
If requested by the Company in lieu thereof, the Fund shall provide such
documentation (including a final copy of the new prospectus) and other
assistance as is reasonably necessary in order for the Company once each year
(or more frequently if the prospectus for a Designated Portfolio is amended) to
have the prospectus for the Contracts and the prospectus for the Designated
Portfolios printed together in one document. Expenses with respect to the
foregoing shall be borne as provided under Article V.
3.2 The Fund's prospectus shall disclose that (a) the Fund is intended to be a
funding vehicle for all types of variable annuity and variable life insurance
contracts offered by Participating Insurance Companies, (b) material
irreconcilable conflicts of interest may arise, and (c) the
6
<PAGE> 7
Fund's Board will monitor events in order to identify the existence of
any material irreconcilable conflicts and determine what action, if any, should
be taken in response to such conflicts. The Fund hereby notifies the Company
that disclosure in the prospectus for the Contracts regarding the potential
risks of mixed and shared funding may be appropriate. Further, the Fund's
prospectus shall state that the current Statement of Additional Information
("SAI") for the Fund is available from the Company (or, in the Fund's
discretion, from the Fund), and the Fund shall provide a copy of such SAI to
any owner of a Contract who requests such SAI and to the Company in such
quantities as the Company may reasonably request. Expenses with respect to the
foregoing shall be borne as provided under Article V.
3.3 The Fund shall provide the Company with copies of its proxy material,
reports to shareholders, and other communications to shareholders for the
Designated Portfolios in such quantity as the Company shall reasonably require
for distributing to Contract owners. Expenses with respect to the foregoing
shall be borne as provided under Article V.
3.4 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the shares of each Designated Portfolio in
accordance with instructions received from Contract owners;
and
(iii) vote shares of each Designated Portfolio for
which no instructions have been received in the same
proportion as shares of such Designated Portfolio for which
instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act
to require pass-through voting privileges for variable contract owners or to
the extent otherwise required by law. The Company reserves the right to vote
shares of each Designated Portfolio held in any separate account in its own
right, to the extent permitted by law.
3.5 The Company shall be responsible for assuring that each of its separate
accounts participating in a Designated Portfolio calculates voting privileges
as required by the Shared Funding Exemption Order and consistent with any
reasonable standards that the Fund has adopted or may adopt.
3.6 The Fund will comply with all provisions of the 1940 Act requiring voting by
shareholders, and in particular the Fund will either provide for annual
meetings or comply with Section 16(c) of the 1940 Act (although the Fund is not
one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, Section 16(b). Further, the Fund
will act in accordance with the SEC's interpretation of the requirements of
Section 16(a) with respect to periodic elections of directors or trustees and
with whatever rules the SEC may promulgate from time to time with respect
thereto. The Fund reserves the right, upon prior written notice to the Company
(given at the earliest practicable
7
<PAGE> 8
time), to take all actions, including but not limited to, the
dissolution, termination, merger and sale of all assets of the Fund or any
Designated Portfolio upon the sole authorization of the Board, to the extent
permitted by the laws of the Commonwealth of Massachusetts and the 1940 Act.
3.7 It is understood and agreed that, except with respect to information
regarding the Fund, the Underwriter, the Adviser or Designated Portfolios
provided in writing by the Fund, the Underwriter or the Adviser, none of the
Fund, the Underwriter or the Adviser is responsible for the content of the
prospectus or statement of additional information for the Contracts.
ARTICLE IV
Sales Material and Information
4.1 The Company shall furnish, or shall cause to be furnished, to the Fund or
the Underwriter, each piece of sales literature or other promotional material
("sales literature") that the Company develops or uses and in which the Fund
(or a Designated Portfolio thereof) or the Adviser or the Underwriter is named,
at least eight business days prior to its use. No such material shall be used
if the Fund or its designee reasonably objects to such use within eight
business days after receipt of such material. The Fund or its designee
reserves the right to reasonably object to the continued use of such material,
and no such material shall be used if the Fund or its designee so object.
4.2 The Company shall not give any information or make any representation or
statement on behalf of the Fund or concerning the Fund in connection with the
sale of the Contracts other than the information or representations contained
in the registration statement, prospectus or SAI for the shares of the
Designated Portfolios, as such registration statement, prospectus or SAI may be
amended or supplemented from time to time, or in reports or proxy statements
for the Fund, or in sales literature approved by the Fund or its designee or by
the Underwriter, except with the permission of the Fund or the Underwriter or
the designee of either.
4.3 The Fund or the Underwriter shall furnish, or shall cause to be furnished,
to the Company, each piece of sales literature that the Fund or Underwriter
develops or uses in which the Company and/or its Account is named, at least
eight business days prior to its use. No such material shall be used if the
Company reasonably objects to such use within eight business days after receipt
of such material. The Company reserves the right to reasonably object to the
continued use of such material and no such material shall be used if the
Company so objects.
4.4 The Fund and the Underwriter shall not give any information or make any
representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or statement of additional
information for the Contracts, as such registration statement, prospectus or
statement of additional information may be amended or supplemented from time to
time, or in published reports for the Accounts which are the public domain or
approved by the Company
8
<PAGE> 9
for distribution to Contract owners, or in sales literature approved by
the Company or its designee, except with the permission of the Company.
4.5 The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, SAIs, reports, proxy statements, sales
literature, applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the Designated Portfolios,
contemporaneously with the filing of such document(s) with the SEC or other
regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
shareholder reports, solicitations for voting instructions, sales literature,
applications for exemptions, request for no-action letters, and all amendments
to any of the above, that relate to the Contracts or the Accounts,
contemporaneously with the filing of such document(s) with the SEC or other
regulatory authorities.
4.7 For purposes of this Agreement, the phrase "sales literature" includes, but
is not limited to, any of the following: advertisements (such as material
published, or designed for use in, a newspaper, magazine, or other periodical,
radio, television, electronic media, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article) and educational or
training materials or other communications distributed or made generally
available to some or all agents or employees.
4.8 At the request of any party to this Agreement, any other party will make
available to the requesting party's independent auditors all records, data and
access to operating procedures that may reasonably be requested in connection
with compliance and regulatory requirements related to this Agreement or any
party's obligations under this Agreement.
ARTICLE V
Fees and Expenses
5.1 All expenses incident to performance by the Fund under this Agreement shall
be paid by the Fund, except and as further provided in Schedule B. The Fund
shall see to it that all shares of the Designated Portfolios are registered,
duly authorized for issuance and sold in compliance with applicable federal
securities laws and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state securities laws prior to their sale.
5.2 The parties hereto shall bear the expenses of typesetting, printing and
distributing the Fund's prospectus, SAI, proxy materials and reports as
provided in Schedule B.
9
<PAGE> 10
5.3 Administrative services to variable Contract owners shall be the
responsibility of the Company and shall not be the responsibility of the Fund,
Underwriter or Adviser. The Fund recognizes the Company as the sole
shareholder of shares of the Designated Portfolios issued under the Agreement.
5.4 The Fund shall not pay and neither the Adviser nor the Underwriter shall pay
any fee or other compensation to the Company under this Agreement, although the
parties will bear certain expenses in accordance with Schedule B and other
provisions of this Agreement.
ARTICLE VI
Diversification and Qualification
6.1 The Fund will invest the assets of each Designated Portfolio in such a
manner as to ensure that the Contracts will be treated as annuity or life
insurance contracts, whichever is appropriate, under the Internal Revenue Code
of 1986, as amended ("Code") and the regulations issued thereunder (or any
successor provisions). Without limiting the scope of the foregoing, the Fund
will, with respect to each Designated Portfolio, comply with Section 817(h) of
the Code and Treasury Regulation Section 1.817-5, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts, and any amendments or
other modifications or successor provisions to such Section or Regulations. In
the event of a breach of this Article VI, the Fund will take all reasonable
steps (a) to notify the Company of such breach and (b) to adequately diversify
the affected Designated Portfolio so as to achieve compliance within the grace
period afforded by Treasury Regulation Section 1.817-5.
6.2 The Fund represents that each Designated Portfolio is currently qualified
(and for new Designated Portfolios, intends to qualify) as a Regulated
Investment Company under Subchapter M of the Code, and that it will make every
effort to maintain such qualification (under Subchapter M or any successor or
similar provisions) and that it will notify the Company immediately upon having
a reasonable basis for believing that a Designated Portfolio has ceased to so
qualify or that a Designated Portfolio might not so qualify in the future.
6.3 The Company represents that the Contracts are currently, and at the time of
issuance shall be, treated as life insurance or annuity insurance contracts,
under applicable provisions of the Code, and that it will make every effort to
maintain such treatment, and that it will notify the Fund, the Adviser and the
Underwriter immediately upon having a reasonable basis for believing the
Contracts have ceased to be so treated or that they might not be so treated in
the future. The Company agrees that any prospectus offering a contract that is
a "modified endowment contract" as that term is defined in Section 7702A of the
Code (or any successor or similar provision), shall identify such contract as a
modified endowment contract.
10
<PAGE> 11
ARTICLE VII
Potential Conflicts
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Designated 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 a Participating Insurance
Company to disregard the voting instructions of contract owners. The Board
shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2 The Company and the Adviser will report any potential or existing conflicts
of which each is aware to the Board. The Company will assist the Board in
carrying out its responsibilities under the Shared Funding Exemption Order, by
providing the Board with all information reasonably necessary for the Board to
consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever Contract owner voting
instructions are disregarded. At least annually, and more frequently if deemed
appropriate by the Board, the Company shall submit to the Adviser, and the
Adviser shall at least annually submit to the Board, such reports, materials
and data as the Board may reasonably request so that the Board may fully carry
out the obligations imposed upon it by the conditions contained in the Shared
Funding Exemption Order; and said reports, materials and data shall be
submitted more frequently if deemed appropriate by the Board. The
responsibility to report such information and conflicts to the Board will be
carried out with a view only to the interests of the contract owners.
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 any other Participating Insurance Companies shall, at their expense
and to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (a),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Designated Portfolio and reinvesting such assets in a different
investment medium, which may include another Designated Portfolio of the Fund,
or submitting to a vote of all affected contract owners the question whether
such segregation should be implemented 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.
11
<PAGE> 12
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 any Designated Portfolio and terminate this Agreement with
respect to such Account provided, however, that such withdrawal and termination
shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. The Company will bear the cost of any remedial action,
including such withdrawal and termination. No penalty will be imposed by the
Fund upon the affected Account for withdrawing assets from the Fund in the
event of a material irreconcilable conflict. Any such withdrawal and
termination must take place within six (6) months after the Fund gives written
notice that this provision is being implemented, and until the effective date
of such termination the Fund shall continue to accept and implement orders by
the Company for the purchase (and redemption) of shares of such Designated
Portfolio.
7.5 If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state regulators, then the Company will withdraw the affected
Account's investment in the affected Designated Portfolio and terminate this
Agreement with respect to such Account within six months after the Board
informs the Company in writing that it has determined that such decision has
created an irreconcilable material conflict; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Until the effective date of such
termination the Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of such Designated
Portfolios.
7.6 For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of
the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict; but in no
event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contract if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw an Account's investment in any
Designated Portfolio and terminate this Agreement within six (6) months after
the Board informs the Company in writing of the foregoing determination;
provided, however, that such withdrawal and termination shall be limited to the
extent required by any such material irreconcilable conflict as determined by a
majority of the disinterested members of the Board.
7.7 If and to the extent the Shared Funding Exemption Order contains terms and
conditions different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4 and 7.5 of
this Agreement, then the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with the
Shared Funding Exemption Order, and Sections 3.4, 3.5, 3.6,
12
<PAGE> 13
7.1, 7.2, 7.3, 7.4 and 7.5 of the Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to such
Sections are contained in the Shared Funding Exemption Order or any amendment
thereto. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemption Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemption Order, then (a) the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to comply
with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 3.4, 3.5, 3.6, 7.1, 7.2,
7.3, 7.4 and 7.5 of this Agreement shall continue in effect only to the extent
that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII
Indemnification
8.1 Indemnification by the Company.
(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, the Underwriter and each of their officers, trustees and directors and
each person, if any, who controls the Fund, the Adviser or the Underwriter
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the shares of the
Designated Portfolios or the Contracts and;
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement, prospectus, or statement of additional information for the
Contracts or contained in the Contracts or sales literature for the
Contracts (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided that this
agreement to indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished in writing to
the Company by or on behalf of the Fund for use in the Registration
Statement, prospectus or statement of additional information for the
Contracts or in the Contracts or sales literature for the Contracts (for
any amendment or supplement) or otherwise for use in connection with the
sale of the Contracts or shares of the Designated Portfolios; or
13
<PAGE> 14
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus, SAI or sales literature of the Fund not supplied
by the Company or persons under its control) or wrongful conduct of the
Company or persons under its authorization or control, with respect to
the sale or distribution of the Contracts or shares of the Designated
Portfolios; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, prospectus,
SAI or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or omission was
made in reliance upon information furnished to the Fund by or on behalf
of the Company; or
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good faith or
otherwise, to comply with the qualification requirements specified in
Article VI of this Agreement); or
(v) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in any Registration
Statement, prospectus, statement of additional information or sales
literature for any Unaffiliated Fund, or arise out of or are based upon
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, or otherwise pertain to or arise in connection with the
availability of any Unaffiliated Fund as an underlying funding vehicle in
respect of the Contracts; or
(vi) 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).
(b) The Company shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation to which
an Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of its obligations or duties under this Agreement.
(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
14
<PAGE> 15
agent), but failure to notify the Company of any such claim shall not
relieve the Company from any liability that it may have to the Indemnified
Party against whom such action is brought otherwise than on account of this
indemnification provision, except to the extent that the Company has been
prejudiced by such failure to give notice. In case any such action is brought
against an Indemnified Party, the Company shall be entitled to participate, at
its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense provided,
however, that no such settlement shall, without the Indemnified Parties'
written consent, include any factual stipulation referring to the Indemnified
Parties or their conduct. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
(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 shares of the Designated Portfolios or the
Contracts or the operation of the Fund.
8.2 Indemnification by the Underwriter
(a) The Underwriter agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.2) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Underwriter) or litigation (including legal and
other expenses) to which the Indemnified Parties may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of shares of the Designated
Portfolios or the Contracts; and
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement, prospectus or SAI of the Fund or sales literature of the Fund
developed by the Underwriter (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Underwriter or Fund by or on behalf of the Company for
use in the Registration Statement or prospectus for the Fund or its sales
literature (or any amendment or supplement thereto) or otherwise for use
in connection with the sale of the Contracts or shares of the Designated
Portfolios; or
15
<PAGE> 16
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus or sales literature for the Contracts not supplied
by the Underwriter or persons under its control) or wrongful conduct of
the Fund or Underwriter or person under their control with respect to the
sale or distribution of the Contracts or shares of the Designated
Portfolios; 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 for the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to the Company
by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or
otherwise, to comply with the diversification and other qualification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
(b) The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason
of such Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance or such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement or to the Company or the Accounts, whichever is applicable.
(c) The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Underwriter
of any such claim shall not relieve the Underwriter from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision, except to the extent that
the Underwriter has been prejudiced by such failure to give notice. In case
any such action is brought against the Indemnified Party, the Underwriter will
be entitled to participate, at its own expense, in the defense thereof. The
Underwriter also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action and to settle the claim
16
<PAGE> 17
at is own expense; provided, however, that no such settlement shall,
without the Indemnified Parties' written consent, include any factual
stipulation referring to the Indemnified Parties or their conduct. After
notice from the Underwriter to such party of the Underwriter's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Underwriter will not
be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
(d) The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3 Indemnification By the Fund
(a) The Fund agrees to indemnify and hold harmless the Company and each of
its directors and officers and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, expenses, damages, liabilities (including amounts paid in
settlement with the written consent of the Fund); or litigation (including
legal and other expenses) to which the Indemnified Parties may be required to
pay or may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, expenses, damages, liabilities or
expenses (or actions in respect thereof) or settlements, are related to the
operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or otherwise,
to comply with the diversification and qualification requirements
specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
(b) The Fund shall not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation to which an
Indemnified Party would otherwise be subject by reason of such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company, the Fund, the Underwriter, the Adviser or the Accounts, whichever is
applicable.
(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
17
<PAGE> 18
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
that it may have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision, except to the
extent that the Fund has been prejudiced by such failure to give notice. 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 and to settle the claim at its
own expense; provided, however, that no such settlement shall, without the
Indemnified Parties' written consent, include any factual stipulation referring
to the Indemnified Parties or their conduct. After notice from the Fund to such
party of the Fund's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Fund will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Company, the Adviser and the Underwriter agree to notify the Fund
promptly of the commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of any Account, or the sale or
acquisition of shares of the Designated Portfolios.
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 the statutes, rules and regulations as the SEC may grant
(including, but not limited to, the Shared Funding Exemption Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X
Termination
10.1 This Agreement shall continue in full force and effect until the first to
occur of:
(a) termination by any party, for any reason with respect to any
Designated Portfolio, by twelve (12) months' advance written notice delivered
to the other parties; or
18
<PAGE> 19
(b) termination by the Company by written notice to the Fund, the Adviser
and the Underwriter with respect to any Designated Portfolio based upon the
Company's reasonable and good faith determination that shares of such
Designated Portfolio are not reasonably available to meet the requirements of
the Contracts; or
(c) termination by the Company by written notice to the Fund, the Adviser
and the Underwriter with respect to any Designated Portfolio if the shares of
such Designated Portfolio are not registered, issued or sold in accordance with
applicable state and/or federal securities laws or such law precludes the use
of such shares to fund the Contracts issued or to be issued by the Company; or
(d) termination by the Fund, the Adviser or Underwriter in the event that
formal administrative proceedings are instituted against the Company or any
affiliate by the NASD, the SEC, or the Insurance Commissioner or like official
of any state or any other regulatory body regarding the Company's duties under
this Agreement or related to the sale of the Contracts, the operation of any
Account, or the purchase of the shares of a Designated Portfolio or the shares
of any Unaffiliated Fund, provided, however, that the Fund, the Adviser or
Underwriter 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
(e) termination by the Company in the event that formal administrative
proceedings are instituted against the Fund, the Adviser or Underwriter by the
NASD, the SEC, or any state securities or insurance department or any other
regulatory body, provided, however, that the Company determines in its sole
judgment exercised in good faith, that any such administrative proceedings will
have a material adverse effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(f) termination by the Company by written notice to the Fund, the Adviser
and the Underwriter with respect to any Designated Portfolio in the event that
such Designated Portfolio ceases to qualify as a Regulated Investment Company
under Subchapter M or fails to comply with the Section 817(h) diversification
requirements specified in Article VI hereof, or if the Company reasonably
believes that such Designated Portfolio may fail to so qualify or comply; or
(g) termination by the Fund, the Adviser or Underwriter by written notice
to the Company in the event that the Contracts fail to meet the qualifications
specified in Article VI hereof; or
(h) termination by any of the Fund, the Adviser or the Underwriter by
written notice to the Company, if any of the Fund, the Adviser or the
Underwriter, respectively, shall determine, in their sole judgement exercised
in good faith, that the Company has suffered a material adverse change in its
business, operations, financial condition, insurance company rating or
prospects since the date of this Agreement or is the subject of material
adverse publicity; or
19
<PAGE> 20
(i) termination by the Company by written notice to the Fund, the Adviser
and the Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that the Fund, the Adviser or the Underwriter has
suffered a material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the subject of
material adverse publicity and that material adverse change or publicity will
have a material adverse effect on the Fund's or the Underwriter's ability to
perform its obligations under this Agreement; or
(j) at the option of Company, as one party, or the Fund, the Adviser and
the Underwriter, as one party, upon the other party's material breach of any
provision of this Agreement upon 30 days' notice and opportunity to cure.
10.2 Effect of Termination. Notwithstanding any termination of this Agreement,
the Fund and the Underwriter shall, at the option of the Company, continue to
make available additional shares of a Designated Portfolio pursuant to the
terms and conditions of this Agreement, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, the owners of the Existing Contracts may
in such event be permitted to reallocate investments in the Designated
Portfolios, redeem investments in the Designated Portfolios and/or invest in
the Designated Portfolios upon the making of additional purchase payments under
the Existing Contracts. The parties agree that this Section 10.2 shall not
apply to any termination under Article VII and the effect of such Article VII
termination shall be governed by Article VII of this Agreement. The parties
further agree that this Section 10.2 shall not apply to any termination under
Section 10.1(g) of this Agreement.
10.3 Notwithstanding any termination of this Agreement, each party's obligation
under Article VIII to indemnify the other parties shall survive.
ARTICLE XI
Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Kemper Investors Fund
222 South Riverside Plaza
Chicago, Illinois 60606
Attention: Secretary
20
<PAGE> 21
If to the Company:
Federal Kemper Life Assurance Company
1 Kemper Drive
Long Grove, Illinois 60049
Attention: General Counsel
If to the Adviser:
Zurich Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
Attention: Secretary
If to the Underwriter:
Kemper Distributors, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
Attention: Secretary
ARTICLE XII
Miscellaneous
-----------------
12.1 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.
12.2 This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together shall constitute one and the same instrument.
12.3 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.
12.4 Each party hereto shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the SEC, the NASD, and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Delaware Insurance Commissioner with any information or
reports in connection with services provided under this Agreement that such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with the
Delaware variable annuity laws and regulations and any other applicable law or
regulations.
21
<PAGE> 22
12.5 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.
12.6 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.
12.7 All persons are expressly put on notice of the Fund's Agreement and
Declaration of Trust and all amendments thereto, all of which on file with the
Secretary of the Commonwealth of Massachusetts, and the limitation of
shareholder and trustee liability contained therein. This Agreement has been
executed by and on behalf of the Fund by its representatives as such
representatives and not individually, and the obligations of the Fund with
respect to a Designated Portfolio hereunder are not binding upon any of the
trustees, officers or shareholders of the Fund individually, but are binding
upon only the assets and property of such Designated Portfolio. All parties
dealing with the Fund with respect to a Designated Portfolio shall look solely
to the assets of such Designated Portfolio for the enforcement of any claims
against the Fund hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in its name and on behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified below.
COMPANY: Federal Kemper Life Assurance Company
By: /s/ John B. Scott
-------------------------------------
Title: President and Chief Executive Officer
---------------------------------------
Date: 12/20/96
-------------------------------------
FUND: Kemper Investors Fund
By: /s/ John E. Neal
-------------------------------------
Title: Vice President
-------------------------------------
Date: 12/19/96
-------------------------------------
22
<PAGE> 23
ADVISER Zurich Kemper Investments, Inc.
By: /s/ John E. Neal
-------------------------------------
Title: President Kemper Funds Group
-------------------------------------
Date: 12/19/96
-------------------------------------
UNDERWRITER Kemper Distributors, Inc.
By: /s/ James L. Greenawalt
-------------------------------------
Title: President
-------------------------------------
Date: 12/19/96
-------------------------------------
23
<PAGE> 24
SCHEDULE A
NAME OF SEPARATE ACCOUNT AND DATE
ESTABLISHED BY BOARD OF DIRECTORS
FKLA Variable Separate Account
CONTRACTS FUNDED
BY SEPARATE ACCOUNT
Quick VUL
DESIGNATED PORTFOLIOS
Money Market Portfolio
Total Return Portfolio
High Yield Portfolio
Growth Portfolio
Government Securities Portfolio
International Portfolio
Small Cap Growth Portfolio
A-1
<PAGE> 25
SCHEDULE B
EXPENSES
1. In the event the prospectus, SAI, annual report or other
communication of the Fund is combined with a document of another party,
the Fund will pay the costs based upon the relative number of pages
attributable to the Fund.
================================================================================
ITEM FUNCTION RESPONSIBLE PARTY
================================================================================
PROSPECTUS
- --------------------------------------------------------------------------------
Update Typesetting Fund (1)
- --------------------------------------------------------------------------------
New Sales: Printing Company
Distribution Company
- --------------------------------------------------------------------------------
Existing Printing Fund (1)
Owners: Distribution Fund (1)
- --------------------------------------------------------------------------------
STATEMENTS OF ADDITIONAL
INFORMATION Same as Prospectus Same
- --------------------------------------------------------------------------------
PROXY MATERIALS OF THE FUND Typesetting Fund
Printing Fund
Distribution Fund
- --------------------------------------------------------------------------------
ANNUAL REPORTS & OTHER
COMMUNICATIONS
WITH SHAREHOLDERS
OF THE FUND
- --------------------------------------------------------------------------------
All Typesetting Fund (1)
- --------------------------------------------------------------------------------
Marketing: Printing Company
Distribution Company
- --------------------------------------------------------------------------------
Existing Owners: Printing Fund (1)
Distribution Fund (1)
- --------------------------------------------------------------------------------
B-1
<PAGE> 26
OPERATIONS OF FUND All operations and related Fund
expenses, including 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, the preparation
of all statements and
notices required by any
federal or state law and all
taxes on the issuance of the
Fund's shares, and all costs
of management of the
business affairs of the Fund
B-2
<PAGE> 1
EXHIBIT 99.3(b)
ACTUARIAL OPINION
This opinion is supplied with the filing of a Registration Statement on Form
S-6, File No. 33-79808, by the FKLA Variable Separate Account and Federal
Kemper Life Assurance Company (FKLA) covering an indefinite number of units of
interest in the Separate Account. Premiums received under FKLA's Flexible
Premium Variable Life Insurance Policies may be allocated by FKLA to the
Separate Account as described in the Prospectus included in the Registration
Statement.
I am familiar with the Policy provisions and the description in the Prospectus
and it is my opinion that the illustrations of death benefits, cash values,
surrender values, and accumulated premiums included in Appendix A of the
Prospectus, based on the assumptions and illustrations, are consistent with the
Policy provisions. The policy rate structure has not been designed to make the
relationship between planned premiums and benefits, as shown in the
illustrations, appear more favorable to prospective male preferred nonsmokers
ages 35 and 55, than to male preferred nonsmokers at other ages. The nonsmoker
rate class generally has a more favorable rate structure than other rate
classes. Female rate classes generally have a more favorable rate structure
than male rate classes.
The current and guaranteed monthly mortality rates used in the illustrations
have not been designed so as to make the relationship between current and
guaranteed rates more favorable for the ages and sexes illustrated than for a
male preferred nonsmoker at other ages. The nonsmoker rate classes generally
have lower monthly mortality rates than the other rate classes. The female
rate classes generally have lower monthly mortality rates than the male rate
classes.
I consent to the use of this opinion as an Exhibit to the Registration
Statement and the reference to me under the heading "Experts" in the
Prospectus.
Christopher J. Nickele, FSA, MAAA
---------------------------------
/s/ Christopher J. Nickele
Actuarial Officer - Agency
<PAGE> 1
EXHIBIT 99.6(A)
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
FEDERAL KEMPER LIFE ASSURANCE COMPANY:
We consent to the use of our report included herein on Federal Kemper Life
Assurance Company and to the reference to our firm under the heading "Experts"
in the prospectus.
Our report dated March 15, 1996 includes a paragraph that states that in
our opinion, because of the effects of the differences between generally
accepted accounting principles and the accounting practices prescribed or
permitted by the Department of Insurance of the State of Illinois, the statutory
financial statements do not present fairly, in conformity with generally
accepted accounting principles, the financial position of Federal Kemper Life
Assurance Company as of December 31, 1995 and 1994, and its net income and its
cash flows for each of the years in the three-year period ended December 31,
1995. In our opinion, however after consideration of the adjustments included in
Note 1, the adjusted capital and surplus and net income present fairly, in all
material respects, capital stock and surplus as of December 31, 1995 and 1994,
and net income for each of the years in the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
December 20, 1996
<PAGE> 1
EXHIBIT 99.8
Description of Federal Kemper Life Assurance Company's
Issuance, Transfer and Redemption Procedures for Policies
Pursuant to Rule 6e-3(T)(b)(12)(iii)
under the Investment Company Act of 1940
I. INTRODUCTION
Set forth below is the information called for under Rule 6e-3(T)(b)(12)(iii)
under the Investment Company Act of 1940 ("1940 Act"). That rule provides an
exemption for separate accounts, their investment advisers, principal
underwriters and sponsoring insurance company from Sections 22(d), 22(e), and
27(c)(1) of the 1940 Act, and Rule 22c-1 promulgated thereunder, for issuance,
transfer and redemption procedures under flexible premium variable life
insurance policies to the extent necessary to comply with Rule 6e-3(T), state
administrative law or established administrative procedures of the life
insurance company. In order to qualify for the exemption, procedures must be
reasonable, fair and not discriminatory and they must be disclosed in the
registration statement filed by the separate account.
The FKLA Variable Separate Account (the "Separate Account") is registered under
the 1940 Act. Within the Separate Account are Subaccounts, which are as of the
date of this filing, the KINF Money Market, KINF Total Return, KINF High
Yield, KINF Growth, KINF Government Securities, KINF International, KINF Small
Cap Growth, Janus Growth, Janus Aggressive Growth, Janus Worldwide Growth,
Warburg Pincus Small Company Growth, Warburg Pincus Post-Venture Capital,
Warburg Pincus International Equity, Fidelity Equity-Income, Fidelity Growth,
Fidelity Asset Manager: Growth, and Fidelity Investment Grade Bond
Subaccounts. (the "Subaccounts). Procedures apply equally to each Subaccount
and for purposes of this description are defined in terms of the Separate
Account, except where a discussion of both the Separate Account and its
Subaccounts is necessary. Each Subaccount invests in shares of a corresponding
portfolio of the Kemper Investors Fund, the Janus Aspen Series, the Warburg
Pincus Trust, the Fidelity Variable Insurance Products Fund or the Fidelity
Variable Insurance Products Fund II (the "Funds"), mutual funds registered
under the 1940 Act. The investment experience of the Subaccounts of the
Account depends on the market performance of the corresponding fund portfolios.
FKLA believes its procedures meet the requirements of Rule 6e-3(T)(b)(12)(iii)
and states the following:
A. Because of the insurance nature of FKLA's flexible premium
variable life insurance policies ("policies") and due to the
requirements of state insurance laws,
1
<PAGE> 2
the procedures necessarily differ in significant respects from
procedures for mutual funds and contractual plans for which the 1940
Act was designed.
B. Many of the procedures used by FKLA have been adopted from
established procedures for Zurich Kemper Life's flexible premium
universal life insurance policies.
C. In structuring its procedures to comply with Rule 6e-3(T),
state insurance laws and its established administrative procedures,
FKLA has attempted to comply with the intent of the 1940 Act, to
the extent deemed feasible.
D. In general, state insurance laws require that FKLA's
procedures be reasonable, fair and not discriminatory.
E. Because of the nature of the insurance product, it is often
difficult to determine precisely when FKLA's procedures deviate from
those required under Section 22(d), 22(e) or 27(c)(1) of the 1940
Act or Rule 22c-1 thereunder. Accordingly, set out below is a
summary of the principal policy provisions and procedures which may
be deemed to constitute, either directly or indirectly, such a
deviation. The summary, while comprehensive, does not attempt to
address each and every procedure of variation which might occur and
does include certain procedural steps which might be deemed as
deviations from the above-cited sections rules.
II. ISSUANCE
This section outlines those provisions and administrative procedures which
might be deemed to constitute, either directly or indirectly, a "purchase"
transaction. Because of the insurance nature of the policy, the procedures
involved necessarily differ in certain significant respects from the purchase
procedures for mutual funds and contractual plans. The chief differences
revolve around the structure of the cost of insurance and the insurance
underwriting (i.e., evaluation of risk) process. There are also certain policy
provisions, such as reinstatement, which do not result in the issuance of a
policy but which require certain payments by the Policyowner and involve a
transfer of assets supporting the policy reserve into the Account.
A. Insurance Charges and Underwriting Standards
Cost of insurance charges for FKLA's policies will not be the same for all
policyholders. The chief reason is that the principle of pooling and
distribution of mortality risks is based on the assumption that each
Policyowner pays a cost of insurance charge commensurate with the insured
person's mortality risk. This mortality risk is actuarially determined based
upon factors
2
<PAGE> 3
such as age, smoking status, sex, health, and occupation. Each insured is
charged a monthly deduction based on applying a cost of insurance rate
commensurate with his/her mortality risk to the Net Amount at Risk. The
policies will be offered and sold pursuant to the cost of insurance schedules
and underwriting standards and in accordance with state insurance laws. Such
laws prohibit discrimination among insureds, but recognize that premiums must
be based on factors such as age, sex, health and occupation. A table showing
the maximum cost of insurance rates will be delivered as part of the policy.
B. Application and Initial Premium Processing
1. DEATH BENEFIT
The Death Benefit for the policies is based on the death
benefit option and specified amount selected and the table of death
benefit percentages applicable at the time of death. A policy will be
issued if the following conditions are met:
a. A premium payment of at least $50 is paid.
b. A completed application is submitted.
c. Required underwriting information, satisfactory to FKLA, is
provided.
2. POLICY ISSUE
Before FKLA will issue a policy, it must receive a completed
application and a full initial premium at its Home Office. A policy
ordinarily will be issued only for Insureds Age 0 through 85 who
supply satisfactory evidence of insurability to FKLA. Acceptance of
an application is subject to underwriting by FKLA. FKLA reserves the
right to decline an application for any reason.
After underwriting is complete and the policy is delivered to
the owner, insurance coverage under the policy will be deemed to
have begun as of the day following the date of receipt of a completed
application and the full initial premium. This date is the
Policy Date.
3. PREMIUMS
Premiums are to be paid to FKLA at its Home Office. Checks ordinarily
must be made payable to FKLA.
3
<PAGE> 4
Initial Premium - The minimum initial premium that FKLA will accept under
a policy is $50.00. FKLA reserves the right to increase or decrease this
amount for a class of policies issued after some future date.
On the day following the date of receipt, the net initial premium will be
allocated to the Money Market Subaccount. This premium will remain in
the Money Market Subaccount until the Trade Date. On the Trade Date,
Separate Account Value in the Money Market Subaccount will be allocated
to the Subaccounts and the Fixed Account in accordance with elections by
the Owner in the application for the policy. The Trade Date is the date
30 days after the issue date.
The Policy Date is the date used to determine Policy Years and Monthly
Processing Dates. The Policy Date generally will be the date following
receipt of the application, except that if such date is the 29th, 30th,
or 31st of a month, the Policy Date will be the first of the following
month. Acceptance is subject to FKLA's underwriting rules, and FKLA
reserves the right to reject an application for any reason.
The Policy Date is the date when FKLA accepts the risk of providing
insurance coverage to the Insured. Monthly deductions begin as of the
Policy Date.
The cost of insurance for the full amount of coverage applied for is
applied as of the Policy Date. This is consistent with established
administrative procedures of FKLA and is permitted and consistent with
common insurance company administrative practice and insurance laws.
Additional Premiums - Subject to the premium guidelines established under
Federal tax law, additional premiums may be contributed while this policy
is in force, including when necessary to prevent lapse. Upon request,
FKLA will tell the Owner whether an additional premium payment can be
made and what its maximum amount is. Except to prevent lapse, such an
additional premium payment must be at least $50.00. FKLA reserves the
right to limit the ability to make more than one additional premium
payment in each Policy Year. Evidence of insurability may be required if
an additional premium payment would result in an increase in the Death
Benefit.
4. ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE
Allocation of Premiums - The Owner allocates premiums to Subaccounts of
the Separate Account. The Owner must indicate the initial allocation in
the policy application. On the Trade Date, the policy's Separate Account
Value in the Money Market Subaccount will be allocated to the Subaccounts
of the Separate Account and the Fixed Account in accordance with the
Owner's allocation instructions in the application. Additional premiums
received will continue to be allocated in accordance with the Owner's
instructions in the application unless contrary written instructions are
received. Once a
4
<PAGE> 5
change in allocation is made, all future premiums will be allocated in
accordance with the new allocation, unless contrary written instructions
are received.
C. Delivery Period - Policies Issued - Other Than As Applied For
1. FKLA will take steps to protect itself against anti-selection
by the prospective Owner resulting from a deterioration in the
health of the proposed Insured including requiring policies to be
delivered promptly. Generally, the period will not exceed 60 days
from the date the policy is issued.
2. Failure to Complete Delivery - FKLA will review the file to
verify that delivery requirements were not satisfied.
a. If FKLA determines that delivery was satisfied,
the policy will be placed in force as of the Policy Date.
b. If delivery was not satisfied, the policy will be
terminated as of the Policy Date and any premium refunded to
the Owner, subject to the refund rules mentioned herein.
Notification will be sent to the Owner advising him or her
that delivery was never completed and that no insurance has
been in effect.
D. Delivery Requirements
1. An agent/agency must submit all outstanding delivery
requirements to the FKLA Home Office prior to the end of the
delivery period.
2. The FKLA Home Office cannot accept partial requirements;
however, if an agency does inadvertently submit only part of the
requirements necessary to complete delivery, FKLA will record any
documents as received, and return the policy to the agency with a
memo advising them of the remaining requirements.
3. Any money submitted with incomplete delivery requirements
will be returned to proposed owner with correspondence specifying
the remaining requirements.
4. If a policy is reported as delivered after the delivery
period has expired, the policy will be placed in force, subject to
underwriting approval.
5. If a policy is returned to the agency due to incomplete
requirements, a delivery extension may be obtained on the agency's
behalf.
5
<PAGE> 6
E. Policy Lapse
Lapse will occur when the Surrender Value of a policy is insufficient to cover
the monthly deductions and a grace period expires without a sufficient payment
being made.
The duration of coverage depends upon the Surrender Value being sufficient to
cover the monthly deductions.
A grace period of 61 days will be given to the Owner. It begins when notice is
sent that the Surrender Value of the policy is insufficient to cover the
monthly deductions. Failure to make a premium payment or loan repayment during
the grace period sufficient to keep the policy in force for three months will
cause the policy to lapse and terminate without value.
If payment is received within the grace period, the premium or loan repayment
will be allocated to the Subaccounts and the Fixed Account in accordance with
the most current allocation instructions, unless otherwise requested. Amounts
over and above the amounts necessary to prevent lapse may be paid as additional
premiums, however, to the extent otherwise permitted.
FKLA will not accept any payment that would cause the total premium payment to
exceed the maximum payment permitted by the Code. However, the Owner may
voluntarily repay a portion of Debt to avoid lapse.
If premium payments have not exceeded the maximum payment permitted by the
Code, the Owner may choose to make a larger payment than the minimum required
payment to avoid the recurrence of the potential lapse of coverage. The Owner
may also combine premium payments
with Debt repayments.
The death benefit payable during the grace period will be the Death Benefit in
effect immediately prior to the grace period, less any Debt and any unpaid
monthly deductions.
F. Reinstatement
If a policy lapses because of insufficient Surrender Value to cover the monthly
deductions, and it has not been surrendered for its Surrender Value, it may be
reinstated at any time within three years after the date of lapse.
Reinstatement is subject to:
1. receipt of evidence of insurability satisfactory to FKLA;
2. payment of a minimum premium sufficient to cover monthly
deductions for the grace period and to keep the policy in force
three months; and
3. payment or reinstatement of any Debt against the policy which
existed at the date of termination of coverage.
6
<PAGE> 7
The effective date of reinstatement of a Policy will be the Monthly Processing
Date that coincides with or next follows the date the application for
reinstatement is approved by FKLA. Suicide and incontestability provisions
will a apply from the effective date of reinstatement.
G. Contestability
1. This policy is contestable for two years during the lifetime
of the Insured, measured from the Issue Date, for material
misrepresentations made in the initial application for the policy.
Policy changes and reinstatements may be contested for two years
after the effective date of change or reinstatement. No statement
will be used to contest a policy unless it is contained in an
application. The two year limitation does not apply in the event of
fraud.
III. TRANSFER PROCEDURES
A. Separate Account Value may be transferred among the
Subaccounts of the Separate Account and the Fixed Account. One
transfer of all or a part of the Separate Account Value may be made
within a fifteen day period. All transfers made during a business
day will be treated as one request. Fixed Account Value may be
transferred to one or more Subaccounts. One transfer of part of the
Fixed Account Value may be made once each Policy Year in the thirty
day period following the end of a Policy Year.
1. Transfer requests must be in writing in a form
acceptable to FKLA, or by telephone authorization under forms
authorized by FKLA.
2. The minimum partial transfer amount is $500. No
partial transfer may be made if the value of the Owner's
remaining interest in a Subaccount or the fixed account, from
which amounts are to be transferred, would be less than $500
after such transfer.
3. Transfers will be based on the Accumulation Unit
Values next determined following receipt of valid complete
transfer instructions by FKLA.
4. The transfer provision may be suspended, modified
or terminated at any time by FKLA.
5. Written acknowledgment of transfers between
Subaccounts will be provided at two points in time:
a. A confirmation notice will be sent to
the Owner within seven days of receipt of the request.
b. The annual statement will also
reflect transfers.
7
<PAGE> 8
B. Policy Loans
1. After the first policy year the Owner may by written request
to FKLA borrow all or part of the maximum loan amount of the policy.
The maximum loan amount is 95% of the policy's Cash value minus
applicable surrender charges. The amount of any new loan may not
exceed the maximum loan amount less Debt on the date a loan is
granted. The minimum amount of a loan is $500. Any amount due an
Owner under a Policy Loan ordinarily will be paid within 7 days
after FKLA receives a loan request at its Home Office, although
payments may be postponed under certain circumstances.
2. On the date a loan is made, an amount equal to the loan
amount will be transferred from the Separate Account and Fixed
Account to the loan account in the General Account. Unless the
Owner directs otherwise, the loaned amount will be deducted from the
Subaccounts and Fixed Account in proportion to the values that each
bears to the Separate Account Value of the policy in all of the
Subaccounts plus the Fixed Account Value at the end of the Valuation
Period during which the request is received.
3. If the Net Surrender Value on the day immediately preceding a
Deduction Day is less than the monthly deduction for the next month,
FKLA will notify the Owner and any assignee of record.
4. A policy loan will have an effect on the Cash Value of a
policy. The collateral for the loan (in the Loan Account) does not
participate in the experience of the Subaccounts or the current
interest rate of the Fixed Account while the loan is outstanding.
If the amount credited to the Loan Account is more than the amount
that would have been earned in the Subaccounts of the Fixed
Accounts, the Cash Value will, and the Death Benefit may, be higher
as a result of the loan. Conversely, if the amount credited to the
Loan Account is less than would have been earned in the Subaccounts
or the Fixed Accounts, the Cash Value, as well as the Death Benefit,
may be less.
C. Loan Interest
1. The loan interest will be assessed at an effective annual
rate of 5.00%. Interest not paid will be added to the loan amount
due and bear interest at the same rate.
2. Cash Value in the loan account will earn 3.00% annual
interest for the first nine Policy Years and 5.00% annual interest
thereafter. Such earnings will be allocated to the Loan Account.
8
<PAGE> 9
D. Loan Repayment
1. While the policy is in force, policy loans may be repaid at
any time, in whole or in part. At the time of repayment, Cash Value
in the loan account equal to the amount of the repayment which
exceeds the difference between interest due and interest earned will
be allocated to the Subaccounts and the Fixed Account, according to
the Owner's current allocation instructions, unless otherwise
requested by the Owner. Transfers from the Loan Account to the
Separate Account or the Fixed Account as a result of the repayment
of Debt will be allocated at the end of the Valuation Period during
which the repayment is received. Such transfers will not be counted
in determining the transfers made within a 15 day period.
2. FKLA will provide written confirmation of loan repayments,
including the effective date of the payment, and the effect on
specific Subaccounts and the General Account, within seven days of
the receipt of payment.
E. Policy Date and Deduction Day Deductions
1. The Cost of Insurance (COI) is calculated on the net amount
at risk using current rates. After calculating COI, substandard
ratings are applied. Increases in specified amount can be rated
separately from the original rating.
2. The calculated monthly deductions are distributed among the
Funds and the Fixed Account according to the selected allocation
percentages specified by the policyholder.
IV. REDEMPTION PROCEDURES
The following outlines are administrative procedures attendant to transactions
which involve redemption of a policy's values.
A. Free Look Period
1. The Owner may, until the end of the period of time specified
in the policy, examine the policy and return it for a refund. The
applicable period of time will depend on the state in which the
policy is issued; however, it will be at least 10 days from the date
the policy is received by the Owner. The amount of the refund will
be at least equal to the premium paid. A refund will be at least
equal to the premium paid. An Owner seeking a refund should return
the policy to FKLA at its Home Office or to the agent who sold the
policy.
9
<PAGE> 10
2. The Policyowner will receive a refund equal to the Cash Value
of the policy plus any monthly deductions and any deductions made
against premiums.
3. Refunds will be made within seven working days of receipt of
the request, providing the original payment has had sufficient time
from the date of our deposit to clear the payor's bank account.
Normally, this is 30 days for payments made by personal check,
money order or cashier's check. Any refund or portion thereof is
subject to being held in FKLA's office until this time requirement
is met. If only a portion of the refund is needed to meet the time
requirements, the undisputed portion will be released within the
seven day time frame. The disputed portion will be held until the
time requirement is met and then refunded by separate check. Any
refund that needs to be held to meet the time requirement from FKLA
date of deposit can be expedited if the payor submits proof that the
item has been honored by the bank.
B. Surrender Privilege and Charges
1. While the Insured is living and the policy is in force, the
Owner may surrender the policy for its Net Surrender Value. To
surrender the policy, the Owner must make written request to FKLA at
its Home Office and return the policy to FKLA. The Net Surrender
Value is equal to the Cash Value less any applicable Surrender
Charge and any Debt. After the first Policy Year , a Policy Owner
may make withdrawals of amounts less than the Net Surrender Value.
The minimum amount of each withdrawal is $500. Surrender charges
will apply to the extent aggregate withdrawals exceed Cash Value
less total premiums paid. Amounts in excess of total premiums paid
will be considered to be withdrawn first. A $25.00 withdrawal
charge will be imposed for processing each withdrawal. A withdrawal
will decrease the Cash Value by the amount of the withdrawal and any
applicable surrender charge. If Death Benefit Option A is in
effect, it will reduce the Specified Amount by the amount of the
withdrawal and any applicable surrender charge.
2. A 2.5% charge is deducted from each premium to reimburse FKLA
for the payment of state premium taxes. In addition, a charge for
federal taxes equal to 1% of each premium payment will be deducted
to compensate FKLA for a higher corporate income tax liability
resulting from changes made to the Internal Revenue Code by the
Omnibus Budget Reconciliation Act of 1990.
3. A contingent deferred sales charge ("Surrender Charge") will
be used to cover expenses relating to the distribution of the policy
including commissions paid to sales personnel, and other promotion
and acquisition expenses. If this policy is surrendered or if the
Cash Value is applied under a Settlement Option, the amount
10
<PAGE> 11
payable may reflect a deduction for applicable Surrender Charges. In
addition, the Surrender Charge may apply against a partial
withdrawal.
4. A Surrender Charge will not be assessed against Cash Values
applied under a settlement option if the policy has been in force
for five or more years and the settlement option elected provides
for benefit payments of at least five years.
5. The amount of the Surrender Charge will be calculated as a
percentage of the total premiums paid. The charge decreases from 6%
to 0% depending on the length of time between the Policy Date and
the date of surrender or application under a settlement option.
6. During the period from the Policy Date to the fifth Policy
Anniversary, the rate is 6%; on the fifth Policy Anniversary, the
rate decreases to 5%, and on each of the next three Policy
Anniversaries it will decrease an additional 1%. Thus, there will
be no Surrender Charge beginning on the ninth Policy Anniversary.
7. The applicable Surrender Charge will be determined based upon
the date of receipt of the written request for surrender.
8. No minimum amount of Net Surrender Value is guaranteed.
9. FKLA will make the payment of the Net Surrender Value out of
its General Account and at the same time, transfer assets from the
Separate Account to the General Account in an amount equal to the
policy reserves in the Separate Account.
C. Death Claims
1. FKLA will ordinarily pay a death benefit to the beneficiary
within seven calendar days after receipt, at its Home Office, of the
policy, due proof of death of the insured and all other requirements
necessary* to make payment. FKLA will send the check to the
beneficiary within seven days after FKLA receives all required
documents.
2. FKLA will make payment of the death benefit out of its
General Account, and will transfer assets from the Separate Account
to the General Account in an amount equal to the reserve in the
Separate Account. The excess, if any, of the death benefit over the
amount transferred will be paid out of the General Account reserve
maintained for that purpose.
11
<PAGE> 12
*State insurance laws impose various requirements, such as receipt of a tax
waiver, before payment of the death benefit may be made. In addition, payment
of the death benefit is subject to the provisions of the policies regarding
suicide and incontestability.
D. Premium Refunds
FKLA will not normally refund premium payments unless one of the following
situations occurs:
1. The Insured is rated substandard during the underwriting
process and the Owner does not accept the rating.
2. The proposed Insured is determined to be uninsurable by
FKLA's standards.
3. The premium paid is in permanent suspense because
underwriting requirements were never completed.
4. The delivery period has expired and delivery has not been
completed.
5. The Owner exercises the Free Look Privilege.
6. The premium payment would disqualify the policy as life
insurance coverage; (see Guideline Premium Test) however, in this
instance, the payment will first be applied as a repayment of any
outstanding loans.
7. In the event an application is declined by FKLA, the initial
premium will be refunded, together with the earnings credited based
on the investment experience of the FKLA Money Market Subaccount.
E. Guideline Premium Test - Tax Qualification
The Guideline Premium Test is a two part test applied to determine if a policy
qualifies as life insurance as defined in the IRS Code, Section 7702.
1. Part I - Guideline Premium Limitation. The sum of the actual
premiums paid into the contract cannot exceed the greater of:
a. the guideline single premium, or
b. the sum of the guideline level premiums at that time.
2. The guideline single premium is the premium needed at issue
for the future benefits under contract, computed on the basis of:
12
<PAGE> 13
a. the guaranteed mortality charges specified in the
contract.
b. other guaranteed charges specified in the contract, and
c. an interest rate which is the greater of an
annual effective rate of six percent or the rate or rates
guaranteed at issue.
3. For this plan the guideline single premium is based on:
a. the guaranteed maximum mortality rates, for all
durations, and
b. six percent interest.
4. Guideline level premiums are the annual premium version of
the guideline single premium based on the above assumptions and a
premium payment period extending to age 95. The interest rate used
will be four percent. At the point where a policy is recognized as
being out of compliance, the Death Benefit must be increased or
premiums refunded as necessary for qualification as life insurance.
5. Part II - Cash Value Corridor Requirement. The Cash Value
test regulates the ratio of the policy Cash Value to the death
benefit regardless of the effect of the guideline premium limit.
The death benefit payable under the contract must always be greater
than or equal to the policy Cash Value times the death benefit
factor. Death benefit factors vary only by attained age and range
from 1.00 to 2.50 for the FKLA VUL.
A check for compliance will be made at the time premiums are
applied and at least annually thereafter. If a violation is
detected, the agent will be notified and monies refunded.
F. Misstatement of Age or Sex
If the age and/or sex of the insured was misstated, the death benefit will be
adjusted based on what the cost of insurance charged for the most recent
Monthly Processing Date, prior to the insured's death, would have purchased
using the correct age and/or sex.
G. Postponement of Payments
Payment of any amount due upon: (a) policy termination at the maturity date,
(b) surrender of the policy, (c) payment of any policy loan, or (d) death of
the Insured, may be postponed whenever:
13
<PAGE> 14
1. The New York Stock Exchange is closed other than customary
weekend and holiday closing, or trading on the New York Stock
Exchange is restricted as determined by the SEC;
2. The SEC by order permits postponement for the protection of
Owners; or
3. An emergency exists, as determined by the SEC, as a result of
which disposal of securities of the Fund is not reasonably
practicable or it is not reasonably practicable to determine the
value of the net assets of the Separate Account.
Transfers may also be postponed under these circumstances.
H. Payment Not Honored by Bank
The portion of any payment due under the policy which is derived from any
amount paid to FKLA by check or draft may be postponed until such time as FKLA
determines that such instrument has been honored by the bank upon which it was
drawn.
I. Suicide
Suicide by the Insured, while sane or insane, within two years from the Policy
Date of the policy is a risk not assumed under the policy. FKLA's liability
for such suicide is limited to the premiums paid less any withdrawals and debt.
When the laws of the state in which a policy is delivered require less than a
two year period, the period will be as stated in such laws.
V. RECORDS AND REPORTS
FKLA will maintain all records relating to the Separate Account. FKLA will
send Owners, at their last known address of record, an annual report stating
the Death Benefit, the Accumulation Unit Value, the Cash Value and Net
Surrender Value under the policy, and indicating any additional premium
payments, transfers, policy loans and repayments and charges made during the
Policy Year. Owners will also be sent annual and semi-annual reports for the
Funds to the extent required by the 1940 Act.
14
<PAGE> 1
EXHIBIT 99.13
[LETTERHEAD]
December 20, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: FKLA Variable Separate Account
File No. 33-79808
Commissioners:
I am an attorney at law admitted to the Bar of the state of Illinois. I am
Associate General Counsel of Federal Kemper Life Assurance Company. I provide
legal counsel for the FKLA Variable Separate Account. In such capacity, I have
reviewed the FKLA Variable Separate Account's Post-Effective Amendment No. 3 to
Form S-6 filed pursuant to Rule 485(b) under the Securities Act of 1933 and
represent that such Amendment does not contain disclosure which would render it
ineligible to become effective pursuant to Rule 485(b).
Yours truly,
/s/ Frank J. Julian
Frank J. Julian
Associate General Counsel
