<PAGE>
Registration No. 33-82658
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
Post-Effective Amendment No. 13
GROUP VEL ACCOUNT
OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester MA 01653
(Address of Principal Executive Office)
Mary Eldridge, Secretary
440 Lincoln Street
Worcester MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
_X_ on May 1, 2000 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)
___ (1) on (date) pursuant to paragraph (a) (1)
___ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
FLEXIBLE PREMIUM VARIABLE LIFE
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act"). The Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1999 was filed on or
before March 30, 2000.
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS A
- ------------- -----------------------
<S> <C>
1...................................Cover Page
2...................................Cover Page
3...................................Not Applicable
4...................................Distribution
5...................................The Company, The Group VEL Account
6...................................The Group VEL Account
7...................................Not Applicable
8...................................Not Applicable
9...................................Legal Proceedings
10..................................Summary; Description of the Company, The Group VEL Account and the Underlying
Funds; The Certificate; Certificate Termination and Reinstatement; Other
Certificate Provisions
11..................................Summary; The Trust, Investment Objectives and Policies
12..................................Summary; The Trust
13..................................Summary; The Trust; Fidelity VIP; Fidelity VIP II; T. Rowe Price; DGPF; and
Morgan Stanley; Charges and Deductions
14..................................Summary; Enrollment Form for a Certificate
15..................................Summary; Enrollment Form for a Certificate; Premium Payments; Allocation of
Net Premiums
16 The Group VEL Account; The Trust; Fidelity VIP; Fidelity VIP II; T. Rowe
Price; DGPF; and Morgan Stanley; Premium Payments; Allocation of Net Premiums
17..................................Summary; Surrender; Partial Withdrawal; Charges and Deductions;
Certificate Termination and Reinstatement
18..................................The Group VEL Account; The Trust; Fidelity VIP; Fidelity VIP II; T. Rowe
Price; DGPF; and Morgan Stanley; Premium Payments
19..................................Reports; Voting Rights
20..................................Not Applicable
21..................................Summary; Certificate Loans; Other Certificate Provisions
22..................................Other Certificate Provisions
23..................................Not Required
24..................................Other Certificate Provisions
25..................................The Company
26..................................Not Applicable
27..................................The Company
28..................................Directors and Principal Officers of the Company
29..................................The Company
30..................................Not Applicable
31..................................Not Applicable
<PAGE>
32..................................Not Applicable
33..................................Not Applicable
34..................................Not Applicable
35..................................Distribution
36..................................Not Applicable
37..................................Not Applicable
38..................................Summary; Distribution
39..................................Summary; Distribution
40..................................Not Applicable
41..................................The Company, Distribution
42..................................Not Applicable
43..................................Not Applicable
44..................................Premium Payments; Certificate Value and Surrender Value
45..................................Not Applicable
46..................................Certificate Value and Surrender Value; Federal Tax Considerations
47..................................The Company
48..................................Not Applicable
49..................................Not Applicable
50..................................The Group VEL Account
51..................................Cover Page; Summary; Charges and Deductions; The Certificate;
Certificate Termination and Reinstatement; Other Certificate Provisions
52..................................Addition, Deletion or Substitution of Investments
53..................................Federal Tax Considerations
54..................................Not Applicable
55..................................Not Applicable
56..................................Not Applicable
57..................................Not Applicable
58..................................Not Applicable
59..................................Not Applicable
</TABLE>
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
<TABLE>
<CAPTION>
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS B
- ------------- -----------------------
<S> <C>
1...................................Cover Page
2...................................Cover Page
3...................................Not Applicable
4...................................Distribution
5...................................The Company, The Group VEL Account
6...................................The Group VEL Account
7...................................Not Applicable
8...................................Not Applicable
9...................................Legal Proceedings
10..................................Summary; Description of the Company, The Group VEL Account and the Underlying
Funds; The Certificate; Certificate Termination and Reinstatement; Other
Certificate Provisions
11..................................Summary; The Underlying Funds; Investment Objectives and Policies
12..................................Summary; The Underlying Funds
13..................................Summary; The Underlying Funds; Charges and Deductions
14..................................Summary; Enrollment Form for a Certificate
15..................................Summary; Enrollment Form for a Certificate; Premium Payments; Allocation of
Net Premiums
16 The Group VEL Account; The Underlying Funds; Premium Payments; Allocation of
Net Premiums
17..................................Summary; Surrender; Partial Withdrawal; Charges and Deductions;
Certificate Termination and Reinstatement
18..................................The Group VEL Account; The Underlying Funds; Premium Payments
19..................................Reports; Voting Rights
20..................................Not Applicable
21..................................Summary; Certificate Loans; Other Certificate Provisions
22..................................Other Certificate Provisions
23..................................Not Required
24..................................Other Certificate Provisions
25..................................The Company
26..................................Not Applicable
27..................................The Company
28..................................Directors and Principal Officers of the Company
29..................................The Company
30..................................Not Applicable
31..................................Not Applicable
32..................................Not Applicable
33..................................Not Applicable
34..................................Not Applicable
<PAGE>
35..................................Distribution
36..................................Not Applicable
37..................................Not Applicable
38..................................Summary; Distribution
39..................................Summary; Distribution
40..................................Not Applicable
41..................................The Company, Distribution
42..................................Not Applicable
43..................................Not Applicable
44..................................Premium Payments; Certificate Value and Surrender Value
45..................................Not Applicable
46..................................Certificate Value and Surrender Value; Federal Tax Considerations
47..................................The Company
48..................................Not Applicable
49..................................Not Applicable
50..................................The Group VEL Account
51..................................Cover Page; Summary; Charges and Deductions; The Certificate;
Certificate Termination and Reinstatement; Other Certificate Provisions
52..................................Addition, Deletion or Substitution of Investments
53..................................Federal Tax Considerations
54..................................Not Applicable
55..................................Not Applicable
56..................................Not Applicable
57..................................Not Applicable
58..................................Not Applicable
59..................................Not Applicable
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CONTRACTS
GROUP VARI-EXCEPTIONAL LIFE PLUS
This Prospectus provides important information about Group Vari-Exceptional Life
Plus, a group flexible premium variable life insurance contract offered by
Allmerica Financial Life Insurance and Annuity Company. Certificates under the
Contract are available to eligible applicants who are members of a non-qualified
benefit plan having a minimum of five or more members, depending on the group,
and who are Age 80 years old and under. PLEASE READ THIS PROSPECTUS CAREFULLY
BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE.
The Certificates are funded through the Group VEL Account, a separate investment
account of the Company that is referred to as the Separate Account. The Separate
Account is subdivided into Sub-Accounts. Each Sub-Account invests exclusively in
shares of one of the following Funds of Allmerica Investment Trust, Fidelity
Variable Insurance Products Fund, Fidelity Variable Insurance Products Fund II,
T. Rowe Price International Series, Inc., Delaware Group Premium Fund, and
Morgan Stanley Dean Witter Universal Funds, Inc.
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Select Aggressive Growth Fund Fidelity VIP Overseas Portfolio
Select Capital Appreciation Fund Fidelity VIP Equity-Income Portfolio
Select Value Opportunity Fund Fidelity VIP Growth Portfolio
Select Emerging Markets Fund Fidelity VIP High Income Portfolio
Select International Equity Fund
Select Growth Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Select Strategic Growth Fund Fidelity VIP II Asset Manager Portfolio
Core Equity Fund Fidelity VIP II Contrafund Portfolio
Equity Index Fund Fidelity VIP II Index 500 Portfolio
Select Growth and Income Fund
Select Investment Grade Income Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Government Bond Fund T. Rowe Price International Stock Portfolio
Money Market Fund MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.**
DELAWARE GROUP PREMIUM FUND MSDW Fixed Income Portfolio
DGPF International Equity Series MSDW Technology Portfolio
</TABLE>
**The MSDW Fixed Income Portfolio of Morgan Stanley is available only to
employees of Duke Energy Corporation and its affiliates.
THE PURPOSE OF THE POLICIES IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. NO CLAIM IS MADE THAT THE CERTIFICATE IS IN ANY WAY SIMILAR OR
COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE CERTIFICATE,
TOGETHER WITH ITS ATTACHED APPLICATION, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
YOU AND THE COMPANY.
THE CERTIFICATES ARE NOT SUITABLE FOR SHORT-TERM INVESTMENT. VARIABLE LIFE
POLICIES INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. IT MAY NOT BE
ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH THE CERTIFICATE. THIS LIFE
CERTIFICATE IS NOT: A BANK DEPOSIT OR OBLIGATION; OR FEDERALLY INSURED; OR
ENDORSED BY ANY BANK OR GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
<TABLE>
<S> <C>
CORRESPONDENCE MAY BE MAILED TO: DATED MAY 1, 2000
ALLMERICA LIFE 440 LINCOLN STREET
P.O. BOX 8179 WORCESTER, MASSACHUSETTS 01653
BOSTON, MA 02266-8179 (508) 855-1000
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND CHARGES................................. 7
SUMMARY OF CERTIFICATE FEATURES............................. 12
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE
UNDERLYING FUNDS........................................... 18
INVESTMENT OBJECTIVES AND POLICIES.......................... 21
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 23
VOTING RIGHTS............................................... 24
THE CERTIFICATE............................................. 25
Enrollment Form for a Certificate......................... 25
Free-Look Period.......................................... 25
Conversion Privileges..................................... 26
Premium Payments.......................................... 26
Allocation of Net Premiums................................ 27
Transfer Privilege........................................ 27
Election of Death Benefit Options......................... 28
Guideline Premium Test and Cash Value Accumulation Test... 29
Death Proceeds............................................ 29
Change in Death Benefit Option............................ 31
Change in Face Amount..................................... 32
Certificate Value and Surrender Value..................... 33
Payment Options........................................... 35
Optional Insurance Benefits............................... 35
Surrender................................................. 35
Paid-Up Insurance Option.................................. 35
Partial Withdrawal........................................ 36
CHARGES AND DEDUCTIONS...................................... 36
Premium Expense Charge.................................... 37
Monthly Deduction from Certificate Value.................. 37
Charges Reflected in the Assets of the Separate Account... 40
Surrender Charge.......................................... 40
Charges on Partial Withdrawal............................. 42
Transfer Charges.......................................... 43
Charge for Change in Face Amount.......................... 43
Other Administrative Charges.............................. 43
CERTIFICATE LOANS........................................... 44
CERTIFICATE TERMINATION AND REINSTATEMENT................... 45
OTHER CERTIFICATE PROVISIONS................................ 47
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY............. 48
DISTRIBUTION................................................ 49
REPORTS..................................................... 50
LEGAL PROCEEDINGS........................................... 50
FURTHER INFORMATION......................................... 50
INDEPENDENT ACCOUNTANTS..................................... 50
FEDERAL TAX CONSIDERATIONS.................................. 51
The Company and the Separate Account...................... 51
Taxation of the Certificates.............................. 51
Certificate Loans......................................... 52
Modified Endowment Contracts.............................. 52
MORE INFORMATION ABOUT THE GENERAL ACCOUNT.................. 53
FINANCIAL STATEMENTS........................................ 54
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
APPENDIX A -- OPTIONAL BENEFITS............................. A-1
APPENDIX B -- PAYMENT OPTIONS............................... B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, CERTIFICATE
VALUES AND ACCUMULATED PREMIUMS............................ C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES...... D-1
APPENDIX E -- PERFORMANCE INFORMATION....................... E-1
FINANCIAL STATEMENTS........................................ FIN-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
AGE: The Insured's age as of the nearest birthday measured from a Certificate
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Certificate to receive
the insurance proceeds upon the death of the Insured.
CERTIFICATE CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Death Benefit Option.
CERTIFICATE OWNER: The persons or entity entitled to exercise the rights and
privileges under the certificate.
CERTIFICATE VALUE: The total amount available for investment under a Certificate
at any time. It is equal to the sum of (a) the value of the Units credited to a
Certificate in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Certificate.
COMPANY: Allmerica Financial Life Insurance and Annuity Company. "We," "our,"
"us," and "the Company" refer to Allmerica Financial Life Insurance and Annuity
Company in this Prospectus.
DATE OF ISSUE: The date set forth in the Certificate used to determine the
Monthly Processing Date, Certificate months, Certificate years, and Certificate
anniversaries.
DEATH BENEFIT: The amount payable upon the death of the Insured, before the
Final Premium Payment Date, prior to deductions for Debt outstanding at the time
of the Insured's death, partial withdrawals and partial withdrawal charges, if
any, and any due and unpaid Monthly Deductions. The amount of the Death Benefit
will depend on the Death Benefit Option chosen, but will always be at least
equal to the Face Amount.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Death Benefit Option, less Debt
outstanding at the time of the Insured's death, partial withdrawals, if any,
partial withdrawal charges, and any due and unpaid Monthly Deductions. After the
Final Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate.
DEBT: All unpaid Certificate loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Certificate Owner and
returned to the Principal Office, that the Certificate Owner has received the
Certificate and the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, satisfactory to the Company, that is used
to determine the Insured's Underwriting Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Certificate is set forth in the specifications pages of the Certificate.
FINAL PREMIUM PAYMENT DATE: The Certificate anniversary nearest the Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Certificate. The Net Death Benefit may be different
before and after the Final Payment Date. See DEATH PROCEEDS.
GENERAL ACCOUNT: All the assets of the Company other than those held in a
Separate Account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date for the specified Death Benefit, if
premiums were fixed by the Company as to both timing and amount, and monthly
cost of insurance charges were based on the 1980 Commissioners Standard
4
<PAGE>
Ordinary Mortality Tables, Smoker or Non-Smoker (Mortality Table B for unisex
Certificates), net investment earnings at an annual effective rate of 5%, and
fees and charges as set forth in the Certificate and any Certificate riders. The
Death Benefit Option 1 Guideline Annual Premium is used when calculating the
maximum surrender charge.
GUIDELINE MINIMUM DEATH BENEFIT: The Guideline Minimum Death Benefit required to
qualify the Certificate as "life insurance" under federal tax laws. The
Guideline Minimum Death Benefit varies by Age. It is calculated by multiplying
the Certificate Value by a percentage determined by the Insured's Age.
The percentage factor is a percentage that, when multiplied by the Certificate
Value, determines the Guideline Minimum Death Benefit required under federal tax
laws. If Option 3 is in effect, the percentage factor is based on the Insured's
attained age, sex, risk classification, as set forth in the Certificate. For
both the Option 1 and the Option 2, the percentage factor is based on the
Insured's attained age, as set forth in GUIDELINE MINIMUM DEATH BENEFIT TABLE in
DEATH PROCEEDS -- "GUIDELINE MINIMUM DEATH BENEFIT UNDER OPTION 1 AND
OPTION 2."
INSURANCE AMOUNT AT RISK: The Death Benefit less the Certificate Value.
ISSUANCE AND ACCEPTANCE: The date the Company mails the Certificate if the
enrollment form is approved with no changes requiring your consent; otherwise,
the date the Company receives your written consent to any changes.
LOAN VALUE: The maximum amount that may be borrowed under the Certificate.
MONTHLY DEDUCTION: Charges deducted monthly from the Certificate Value prior to
the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by rider, the monthly
Certificate administrative charge, the monthly Separate Account administrative
charge and the monthly mortality and expense risk charge.
MONTHLY DEDUCTION SUB-ACCOUNT: A Sub-Account of the Separate Account to which
the payor that you name under the Payor Option may allocate Net Premiums to pay
all or a portion of the insurance charges and administrative charges. The
Monthly Deduction Sub-Account is currently the Sub-Account which invests in the
Money Market Fund of Allmerica Investment Trust.
MONTHLY PROCESSING DATE: The date on which the Monthly Deduction is deducted
from Certificate Value.
NET PREMIUM: An amount equal to the premium less any premium expense charge.
PAID-UP INSURANCE: Life insurance coverage for the life of the Insured, with no
further premiums due.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Certificate
Value will be allocated. If you do not, the Company will allocate the deduction
or Certificate Value among the General Account and the Sub-Accounts, excluding
the Monthly Deduction Sub-Account, in the same proportion that the Certificate
Value in the General Account and the Certificate Value in each Sub-Account bear
to the total Certificate Value on the date of deduction or allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets of the Company.
The assets of a separate account which are equal to the reserves and other
contract liabilities are not chargeable with liabilities arising out of any
other business which the Company may conduct.
5
<PAGE>
SUB-ACCOUNT: A subdivision of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Fund of the Allmerica Investment
Trust, a corresponding Portfolio of the Fidelity Variable Insurance Products
Fund or the Fidelity Variable Insurance Products Fund II, the T. Rowe Price
International Stock Portfoio of T. Rowe Price International Series, Inc., the
International Equity Series of the Delaware Group Premium Fund, or the MSDW
Technology Portfolio of the Morgan Stanley Dean Witter Universal Funds, Inc.
("MSDW Universal Funds or MSDW"), or the MSDW Fixed Income Portfolio of MSDW
which is available only to employees of Duke Energy Corporation and its
affiliates.
SURRENDER VALUE: The amount payable upon a full surrender of the Certificate. It
is the Certificate Value, less any Debt and any surrender charges.
UNDERLYING FUNDS ("FUNDS"): The Funds of the Allmerica Investment Trust
("Trust"), the Portfolios of the Fidelity Variable Insurance Products Fund
("Fidelity VIP") and Fidelity Variable Insurance Products Fund II ("Fidelity VIP
II"), the Portfolio of T. Rowe Price International Series, Inc. ("T. Rowe
Price"), the Series of the Delaware Group Premium Fund ("DGPF"), and the
Portfolio of Morgan Stanley Dean Witter Universal Funds, Inc. ("MSDW Universal
Funds or MSDW"), which are available under the Certificates.
UNDERWRITING CLASS: The risk classification that the Company assigns the Insured
based on the information in the enrollment form and any other Evidence of
Insurability considered by the Company. The Insured's Underwriting Class will
affect the cost of insurance charge and the amount of premium required to keep
the Certificate in force.
UNIT: A measure of your interest in a Sub-Account.
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, partial withdrawal, or surrender of a Certificate is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
WRITTEN REQUEST: A request by the Certificate Owner, in writing, satisfactory to
the Company.
YOU OR YOUR: The Certificate Owner, as shown in the enrollment form or the
latest change filed with the Company.
6
<PAGE>
SUMMARY OF FEES AND CHARGES
SURRENDER CHARGES
At any time that a Certificate is in effect, a Certificate Owner may elect to
surrender the Certificate and receive its Surrender Value. A surrender charge
may be calculated upon issuance of the Certificate and upon each increase in the
Face Amount. The surrender charge may be imposed, depending on the group to
which the Policy is issued, for up to 15 years from the Date of Issue or any
increase in the Face Amount and you request a full surrender or a decrease in
the Face Amount.
SURRENDER CHARGES FOR THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Certificate is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge
of up to $8.50 per thousand dollars of the initial Face Amount, and (b) is a
deferred sales charge of up to 50% (less any premium expense charge not
associated with state and local premium taxes) of premiums received up to the
Guideline Annual Premium, depending on the group to which the Policy is issued.
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per thousand
dollars of initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES. The maximum surrender charge remains level for up to
24 Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. If you surrender the
Certificate during the first two years following the Date of Issue before making
premium payments associated with the initial Face Amount which are at least
equal to one Guideline Annual Premium, the actual surrender charge imposed may
be less than the maximum. See THE CERTIFICATE -- "Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES FOR AN INCREASE IN FACE AMOUNT
A separate surrender charge may apply to and be calculated for each increase in
Face Amount. The maximum surrender charge for the increase is equal to the sum
of (a) plus (b), where (a) is a deferred administrative charge of up to $8.50
per thousand dollars of increase, and (b) is a deferred sales charge of up to
50% (less any premium expense charge not associated with state and local premium
taxes) of premiums associated with the increase, up to the Guideline Annual
Premium for the increase. In accordance with limitations under state insurance
regulations, the amount of the surrender charge will not exceed a specified
amount per thousand dollars of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
This maximum surrender charge with respect to an increase remains level for up
to 24 Certificate months following the increase, reduces uniformly each month
for the balance of the surrender charge period, and is zero thereafter. During
the first two Certificate years following an increase in Face Amount, before
making premium payments associated with the increase in Face Amount which are at
least equal to one Guideline Annual Premium, the actual surrender charge with
respect to the increase may be less than the maximum. See THE CERTIFICATE --
"Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
In the event of a decrease in the Face Amount, any surrender charge imposed is a
fraction of the charge that would apply to a full surrender of the Certificate.
See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender
Charge" and APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGE.
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes, and for sales expenses related to
the Certificates. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The DAC tax
deduction may range from
7
<PAGE>
zero to 1% of premiums, depending on the group to which the Policy is issued.
The charge for distribution expenses may range from zero to 10%. See CHARGES AND
DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTIONS FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider, and a charge for administrative expenses that may be up to $10, depending
on the group to which the Policy is issued. The Monthly Deduction may also
include a charge for Separate Account administrative expenses and a charge for
mortality and expense risks. The Separate Account administrative charge may
continue for up to 10 Certificate years and may be up to 0.25% of Certificate
Value in each Sub-Account, depending on the group to which the Policy was
issued. The mortality and expense risk charge may be up to 0.90% of Certificate
Value in each Sub-Account.
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses, the mortality and expense risk charge,
and the charge for the cost of additional benefits provided by rider will be
deducted. If the Payor Provision is in force, all cost of insurance charges and
administrative charges will be deducted from the Monthly Deduction Sub-Account.
If no allocation is specified, the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the unpaid balance will be totaled and the
Company will make a Pro-Rata Allocation.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly
Deductions from Certificate Value."
TRANSACTION CHARGES
Each of the charges listed below is designed to reimburse the Company for
administrative costs incurred in the applicable transaction.
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge, which is up to the smaller of 2% of the amount withdrawn,
or $25, is assessed at the time of each partial withdrawal to reimburse the
Company for the cost of processing the withdrawal. In addition to the
transaction charge, a partial withdrawal charge may also be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
The transaction fee applies to all partial withdrawals, including a Withdrawal
without a surrender charge.
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount, a charge of $2.50 per $1,000
of increase or decrease up to $40, may be deducted from the Certificate Value.
This charge is designed to reimburse the Company for underwriting and
administrative costs associated with the change. See THE CERTIFICATE -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Change in Face
Amount."
8
<PAGE>
TRANSFER CHARGE
The first twelve transfers of Certificate Value in a Certificate year will be
free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. See THE CERTIFICATE -- "Transfer Privilege" and
CHARGES AND DEDUCTIONS -- "Transfer Charges."
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. See CHARGES AND DEDUCTIONS -- "Other Administrative
Charges."
CHARGES OF THE UNDERLYING INVESTMENT FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Investment Funds. See CHARGES AND
DEDUCTIONS -- "Charges Reflected in the Assets of the Separate Account." The
levels of fees and expenses vary among the Underlying Investment Funds.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment under a
Certificate at any time. It is the sum of the value of all Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account of the Company credited to the Certificate. The Certificate Value
reflects the amount and frequency of Net Premiums paid, charges and deductions
imposed under the Certificate, interest credited to accumulations in the General
Account, investment performance of the Sub-Accounts to which Certificate Value
has been allocated, and partial withdrawals. The Certificate Value may be
relevant to the computation of the Death Proceeds. You bear the entire
investment risk for amounts allocated to the Separate Account. The Company does
not guarantee a minimum Certificate Value.
The Surrender Value will be the Certificate Value, less any Debt and surrender
charges. The Surrender Value is relevant, for example, in the computation of the
amounts available upon partial withdrawals, Certificate loans or surrender.
9
<PAGE>
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1999.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER EXPENSES TOTAL FUND EXPENSES
(AFTER VOLUNTARY (AFTER APPLICABLE (AFTER WAIVERS/
UNDERLYING FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- --------------- ---------------- ----------------- -------------------
<S> <C> <C> <C>
Select Aggressive Growth Fund............... 0.81%* 0.06% 0.87%(1)(2)*
Select Capital Appreciation Fund............ 0.90%* 0.07% 0.97%(1)*
Select Value Opportunity Fund............... 0.90% 0.07% 0.97%(1)(2)
Select Emerging Markets Fund................ 1.35% 0.57% 1.92%(1)(2)
Select International Equity Fund 0.89% 0.13% 1.02%(1)(2)
DGPF International Equity Series............ 0.83%(4) 0.12% 0.95%(4)
Fidelity VIP Overseas Portfolio............. 0.73% 0.18% 0.91(3)
T. Rowe Price International Stock
Portfolio.................................. 1.05% 0.00% 1.05%
Select Growth Fund.......................... 0.78% 0.05% 0.83%(1)(2)
Select Strategic Growth Fund................ 0.85% 0.35% 1.20%(1)(2)
Core Equity Fund............................ 0.43% 0.05% 0.48%(1)(2)
Fidelity VIP Growth Portfolio............... 0.58% 0.08% 0.66%(3)
Fidelity VIP II Index 500 Portfolio......... 0.24% 0.10% 0.34%(3)
Equity Index Fund........................... 0.28% 0.07% 0.35%(1)
Fidelity VIP Equity-Income Portfolio........ 0.48% 0.09% 0.57%(3)
Select Growth and Income Fund............... 0.67% 0.07% 0.74%(1)(2)
Fidelity VIP II Asset Manager Portfolio..... 0.53% 0.10% 0.63%(3)
Fidelity VIP High Income Portfolio.......... 0.58% 0.11% 0.69%
Select Investment Grade Income Fund......... 0.43% 0.07% 0.50%(1)
Fidelity VIP II Contrafund Portfolio........ 0.58% 0.09% 0.67%(3)
Government Bond Fund........................ 0.50% 0.12% 0.62%(1)
Money Market Fund........................... 0.24% 0.05% 0.29%(1)
MSDW Fixed Income Portfolio................. 0.06% 0.64% 0.70%(+)
MSDW Technology Portfolio................... 0.80% 0.35% 1.15%(+)
</TABLE>
* Effective September 1, 1999, the management fee rates for the Select
Aggressive Growth Fund and Select Capital Appreciation Fund were revised. The
Management Fee and Total Fund Expense ratios shown in the table above have been
adjusted to assume that the revised rates took effect January 1, 1999.
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of 1.50% of
average net assets for Select International Equity Fund, 1.35% for Select
Aggressive Growth Fund and Select Capital Appreciation Fund, 1.25% for Select
Value Opportunity Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Select Investment Grade Income
Fund, and Government Bond Fund, and 0.60% for Money Market Fund and Equity Index
Fund. The total operating expenses of these Funds of the Trust were less than
their respective expense limitations throughout 1999.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-advisor.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
10
<PAGE>
The declaration of a voluntary management fee or expense limitation in any year
does not bind AFIMS to declare future expense limitations with respect to these
Funds. These limitations may be terminated at any time.
(2) These Funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. These amounts have been treated as reductions
of expenses. Including these reductions, total annual fund operating expenses
were 1.01% for Select International Equity Fund, 1.88% for Select Emerging
Markets, 0.84% for Select Aggressive Growth Fund, 0.88% for Select Value
Opportunity Fund, 0.81% for Select Growth Fund, 1.17% for Select Strategic
Growth Fund, 0.45% for Core Equity Fund, and 0.73% for Select Growth and Income
Fund.
(3) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, through arrangements with certain funds, or
Fidelity Management & Research Company on behalf of certain funds, custodian
credits realized as a result of uninvested cash balances were used to reduce a
portion of the fund's expenses. Including these reductions, total operating
expenses presented in the table would have been 0.87% for the Fidelity VIP
Overseas Portfolio; 0.65% for the Fidelity Contrafund Portfolio; 0.56% for the
Fidelity VIP Equity-Income Portfolio; 0.62% for the Fidelity VIP II Asset
Manager Portfolio; 0.65% for the Fidelity VIP Growth Portfolio; and 0.28% for
the Fidelity VIP II Index 500 Portfolio.
(4) The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
(+) MSDW Investment Management has voluntarily agreed to waive its management
fees and to reimburse the MSDW Technology Portfolio and MSDW Fixed Income
Portfolio if processing of such fees would cause the total annual operating
expense of the portfolio to exceed 1.15% and 0.70% of average daily net assets.
This fee waiver is voluntary and may be terminated by Miller, Anderson and
Sherrerd, LLP ("MAS")at any time without notice.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
11
<PAGE>
SUMMARY OF CERTIFICATE FEATURES
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Certificate. If you are considering the purchase of
this product, you should read the remainder of this Prospectus carefully before
making a decision. It offers a more complete presentation of the topics
presented here, and will help you better understand the product. However, the
Certificate, together with its attached application, constitutes the entire
agreement between you and the Company.
Within limits, you may choose the amount of initial premium desired and the
initial Death Benefit. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Certificate's Surrender Value, or the Certificate may
be fully surrendered at any time, subject to certain limitations.
There is no guaranteed minimum Certificate Value. The value of a Certificate
will vary up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the
General Account. The Certificate Value will also be adjusted for other factors,
including the amount of charges imposed. The Certificate will remain in effect
so long as the Certificate Value less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Certificate. The
Certificate Value may decrease to the point where the Certificate will lapse and
provide no further death benefit without additional premium payments.
If the Certificate is in effect at the death of the Insured, the Company will
pay a Death Benefit (the "Death Proceeds") to the Beneficiary. Prior to the
Final Premium Payment Date, the Death Proceeds equal the Death Benefit, less any
Debt, partial withdrawals, and any due and unpaid charges. After the Final
Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate. If the Guideline Premium Test is in effect (see "Election of Death
Benefit Options"), you may choose either Death Benefit Option 1 (the Death
Benefit is fixed in amount) or Death Benefit Option 2 (the Death Benefit
includes the Certificate Value in addition to a fixed insurance amount) and may
change between Death Benefit Option 1 and Option 2, subject to certain
conditions. If the Cash Value Accumulation Test is in effect, Death Benefit
Option 3 (the Death Benefit is fixed in amount) will apply. A Minimum Death
Benefit, equivalent to a percentage of the Certificate Value, will apply if
greater than the Death Benefit otherwise payable under Option 1, Option 2 or
Option 3.
In certain circumstances, a Certificate may be considered a "modified endowment
contract." Under the Internal Revenue Code ("Code"), any Certificate loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
THE CERTIFICATE
The Certificate issued under a group flexible premium variable life policy
offered by this Prospectus allows you, subject to certain limitations, to make
premium payments in any amount and frequency. As long as the Certificate remains
in force, it will provide for:
- life insurance coverage on the named Insured;
- Certificate Value;
- surrender rights and partial withdrawal rights;
- loan privileges; and
- in some cases, additional insurance benefits available by rider for an
additional charge.
12
<PAGE>
The Certificates provide Death Benefits, Certificate Values, and other features
traditionally associated with life insurance policies. The Certificates are
"variable" because, unlike the fixed benefits of ordinary whole life insurance,
the Certificate Value will, and under certain circumstances the Death Proceeds
may, increase or decrease depending on the investment experience of the
Sub-Accounts of the Separate Account. They are "flexible premium" Certificates,
because, unlike traditional insurance policies, there is no fixed schedule for
premium payments. However, you may be required to provide evidence of
insurability as a condition to our accepting any payment that would increase the
Insurance Amount at Risk (the Death Benefit less the Certificate Value). If
evidence of insurability is required, the Company will return the payment to you
and if your payment exceeds our maximum limit (defined below) the Company may
not accept any additional payments which would increase the Insurance Amount at
Risk and shall not provide any additional death benefit until (1) evidence of
insurability for the Insured has been received by the Company and (2) the
Company has notified you that the Insured is in a satisfactory underwriting
class. You may then make payments that increase the Insurance Amount at Risk for
60 days (but not later than the Final Payment Date) following the date of such
notification by the Company.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause a Certificate to lapse, nor will making the planned premium payments
guarantee that a Certificate will remain in force. Thus, you may, but are not
required to, pay additional premiums. The Company may limit the maximum payment
received in any certificate year but in no event will the limit be less than the
maximum Level Premium shown in the certificate.
The Certificate will remain in force until the Surrender Value is insufficient
to cover the next Monthly Deduction and loan interest accrued, if any, and a
grace period of 62 days has expired without adequate payment being made by you.
ALLOCATION OF NET PREMIUMS
Net Premiums are the premiums paid less any premium expense charge. The
Certificate, together with its attached enrollment form, constitutes the entire
agreement between you and the Company. Net Premiums may be allocated to one or
more Sub-Accounts of the Separate Account, to the General Account, or to any
combination of Accounts. You bear the investment risk of Net Premiums allocated
to the Sub-Accounts. Allocations may be made to no more than 20 Sub-Accounts at
any one time. The minimum allocation is 1% of Net Premium. All allocations must
be in whole numbers and must total 100%. See THE CERTIFICATE -- "Allocation of
Net Premiums."
CERTIFICATE ISSUANCE
At the time of enrollment, the proposed Insured will complete an enrollment form
which lists the proposed amount of insurance and indicates how much of that
insurance is considered eligible for simplified underwriting. If the eligibility
questions on the enrollment form are answered "No," the Company will provide
immediate coverage equal to the simplified underwriting amount. If the proposed
insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examination, if any, are completed. If the proposed Insured cannot
answer the eligibility questions "No," and if the proposed Insured is not a
standard risk, insurance coverage will begin only after the Company
(1) approves the enrollment form, (2) the Certificate is delivered and accepted,
and (3) the first premium is paid.
If any premiums are paid prior to the issuance of the Certificate, such premiums
will be held in the General Account. If your enrollment form is approved and the
Certificate is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Company's Principal Office. IF A
CERTIFICATE IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO
YOU WITHOUT INTEREST.
13
<PAGE>
Premiums allocated to the General Account will earn a fixed rate of interest.
Net Premiums and minimum interest are guaranteed by the Company. For more
information, see MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days after you receive the Certificate, or
(c) 10 days (20 or 30 days if required in your state) after the Company mails or
personally delivers a Notice of Withdrawal Rights to you.
When you return the Certificate, the Company will mail a refund to you within
seven days. The refund of any premium paid by check may be delayed until the
check has cleared your bank. If your Certificate provides for a full refund of
the initial premium under its "Right-to-Examine Certificate" provision as
required in you state, your refund will be the greater of (a) your entire
premium, or (b) the Certificate Value plus deductions under the Certificate, or
by the Underlying Funds for taxes, charges or fees. If your Certificate does not
provide for a full refund of the initial premium, you will receive the
Certificate Value in the Separate Account, plus premiums paid (including fees
and charges), minus the amounts allocated to the Separate Account, plus the fees
and charges imposed on amounts in the Separate Account. After an increase in The
Face Amount, a right to cancel the increase also applies. See THE
CERTIFICATE -- "Free-Look Period."
CONVERSION PRIVILEGES
During the first 24 Certificate months after the Date of Issue, subject to
certain restrictions, you may convert this Certificate to a flexible premium
fixed adjustable life insurance Certificate by simultaneously transferring all
accumulated value in the Sub-Accounts to the General Account and instructing the
Company to allocate all future premiums to the General Account. A similar
conversion privilege is in effect for 24 Certificate months after the date of an
increase in the Face Amount. Where required by state law, and at your request,
the Company will issue a flexible premium adjustable life insurance Certificate
to you. The new Certificate will have the same face amount, issue Age, Date of
Issue, and risk classifications as the original Certificate. See THE
CERTIFICATE -- "Conversion Privileges."
PARTIAL WITHDRAWAL
After the first Certificate year, you may make partial withdrawals in a minimum
amount of $500 from the Certificate Value. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is described in CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal," will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. A partial withdrawal charge may also be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Certificate year in excess of 10% of the Certificate Value ("excess withdrawal")
are subject to the partial withdrawal charge. The partial withdrawal charge is
equal to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Certificate's outstanding
surrender charge will be reduced by the amount of the partial withdrawal charge
deducted. See THE CERTIFICATE -- "Partial Withdrawal" and CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawal."
LOAN PRIVILEGE
You may borrow against the Certificate Value. The total amount you may borrow is
the Loan Value. Loan Value in the first Certificate year is 75% of an amount
equal to the Certificate Value less surrender charge,
14
<PAGE>
Monthly Deductions, and interest on the Certificate loan to the end of the
Certificate year. Thereafter, Loan Value is 90% of an amount equal to
Certificate Value less the surrender charge.
Certificate loans will be allocated among the General Account and the
Sub-Accounts in accordance with your instructions. If no allocation is made by
you, the Company will make a Pro-Rata Allocation among the Accounts. In either
case, Certificate Value equal to the Certificate loan will be transferred from
the appropriate Sub-Accounts to the General Account, and will earn monthly
interest at an effective annual rate of at least 6%. Therefore, a Certificate
loan may have a permanent impact on the Certificate Value even though it is
eventually repaid. Although the loan amount is a part of the Certificate Value,
the Death Proceeds will be reduced by the amount of outstanding Debt at the time
of death.
Certificate loans will bear interest at a fixed rate of 8% per year, due and
payable in arrears at the end of each Certificate year. If interest is not paid
when due, it will be added to the loan balance. Certificate loans may be repaid
at any time. You must notify the Company if a payment is a loan repayment;
otherwise, it will be considered a premium payment. Any partial or full
repayment of Debt by you will be allocated to the General Account or
Sub-Accounts in accordance with your instructions. If you do not specify an
allocation, the Company will allocate the loan repayment in accordance with your
most recent premium allocation instructions. See CERTIFICATE LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificates. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth certificate anniversary
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. Our
current practice is to credit a rate of interest equal to the rate being charged
for the preferred loan.
There is some uncertainty as to the tax treatment of a preferred loan, which may
be treated as a taxable withdrawal from the Certificate. See FEDERAL TAX
CONSIDERATIONS -- "Certificate Loans." Consult a qualified tax adviser (and see
FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION IS NOT AVAILABLE IN ALL
STATES.
CERTIFICATE LAPSE AND REINSTATEMENT
Failure to make premium payments will not cause a Certificate to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued, if any, or (b) Debt exceeds the Certificate Value. A
62-day grace period applies to each situation. Subject to certain conditions
(including Evidence of Insurability showing that the Insured is insurable
according to the Company's underwriting rules and the payment of sufficient
premium), the Certificate may be reinstated at any time within three years after
the expiration of the grace period and prior to the Final Premium Payment Date.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
DEATH PROCEEDS
The Certificate provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Death Benefit, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Certificate month in
which the Insured dies. Three Death Benefit Options are available. Under Option
1 and Option 3, the Death Benefit is the greater of the Face Amount or the
applicable Minimum Death Benefit. Under Option 2, the Death Benefit is the
greater of the Face Amount plus the Certificate Value or the Minimum Death
Benefit. The Minimum Death Benefit is equivalent to a percentage (determined
each month based on the Insured's Age) of the Certificate Value. On or after the
Final Premium Payment Date, the Death Proceeds will equal the Surrender Value.
See THE
15
<PAGE>
CERTIFICATE -- "Death Proceeds." The Death Proceeds under the Certificate may be
received in a lump sum or under one of the Payment Options the Company offers.
See APPENDIX B -- PAYMENT OPTIONS.
FLEXIBILITY TO ADJUST DEATH BENEFIT
Subject to certain limitations, you may adjust the Death Benefit, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Certificate. Any change in the
Face Amount will affect the monthly cost of insurance charges and the amount of
the surrender charge. If the Face Amount is decreased, a pro-rata surrender
charge may be imposed. The Certificate Value is reduced by the amount of the
charge. See THE CERTIFICATE -- "Change in Face Amount."
The minimum increase in the Face Amount will vary by group, but will in no event
exceed $10,000. Any increase may also require additional Evidence of
Insurability. The increase is subject to a "free-look period" and, during the
first 24 months after the increase, to a conversion privilege. See THE
CERTIFICATE -- "Free-Look Period" and "Conversion Privileges."
You may, depending on the group to which the Policy is issued, have the
flexibility to add additional insurance benefits by rider. These may include the
Waiver of Premium Rider, Other Insured Rider, Children's Insurance Rider,
Accidental Death Benefit Rider, Option to Accelerate Benefits Rider, Refund of
Sales Load Rider, and Exchange Option Rider. See APPENDIX A -- OPTIONAL
BENEFITS.
The cost of these optional insurance benefits will be deducted from the
Certificate Value as part of the Monthly Deduction. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value."
INVESTMENT OPTIONS
The Certificates permit Net Premiums to be allocated either to the General
Account or to the Separate Account. The Separate Account consists of 47
Sub-Accounts, of which 24 are available under the Certificates. Each Sub-Account
invests exclusively in a corresponding Underlying Fund of the Allmerica
Investment Trust ("Trust") managed by Allmerica Financial Investment Management
Services, Inc. ("AFIMS"), of the Fidelity Variable Insurance Products Fund
("Fidelity VIP") or the Fidelity Variable Insurance Products Fund II ("Fidelity
VIP II") managed by Fidelity Management & Research Company, of T. Rowe Price
International Series, Inc. ("T. Rowe Price") managed by Rowe Price-Fleming
International, Inc., of the Delaware Group Premium Fund. ("DGPF") managed by
Delaware International Advisers Ltd., or of Morgan Stanley Dean Witter Universal
Funds, Inc. ("MSDW Universal Funds"), managed by Miller, Anderson and Sherrerd,
LLP ("MAS"). The MSDW Fixed Income Portfolio is available only to employees of
Duke Energy Corporation and its affiliates. In some states, insurance
regulations may restrict the availability of particular Underlying Funds. The
Certificates permit you to transfer Certificate Value among the available
Sub-Accounts and between the Sub-Accounts and the General Account, subject to
certain limitations described under THE CERTIFICATE -- "Transfer Privilege."
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved. For more information, see
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS.
TAX TREATMENT
The Certificate is generally subject to the same federal income tax treatment as
a conventional fixed benefit life insurance policy. Under current tax law, to
the extent there is no change in benefits, you will be taxed on the Certificate
Value withdrawn from the Certificate only to the extent that the amount
withdrawn exceeds the
16
<PAGE>
total premiums paid. Withdrawals in excess of premiums paid will be treated as
ordinary income. During the first 15 Certificate years, however, an
"interest-first" rule applies to any distribution of cash that is required under
Section 7702 of the Code because of a reduction in benefits under the
Certificate. Death Proceeds under the Certificate are excludable from the gross
income of the Beneficiary, but in some circumstances the Death Proceeds or the
Certificate Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Certificates."
The Certificate offered by this Prospectus may be considered a "modified
endowment contract" if it fails a "seven-pay" test. A Certificate fails to
satisfy the seven-pay test if the cumulative premiums paid under the Certificate
at any time during the first seven Certificate years, or within seven years of a
material change in the Certificate, exceed the sum of the net level premiums
that would have been paid, had the Certificate provided for paid-up future
benefits after the payment of seven level annual premiums. If the Certificate is
considered a modified endowment contract, all distributions (including
Certificate loans, partial withdrawals, surrenders or assignments) will be taxed
on an "income-first" basis. With certain exceptions, an additional 10% penalty
will be imposed on the portion of any distribution that is includible in income.
For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
------------------------
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Certificate. The Prospectus and the Certificate
provide further detail. The Certificate provides insurance protection for the
named beneficiary. The Certificate and its attached application or enrollment
form are the entire agreement between you and the Company.
THE PURPOSE OF THE CERTIFICATE IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE, OR IF YOU
ALREADY OWN A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CERTIFICATE.
NO CLAIM IS MADE THAT THE CERTIFICATE IS IN ANY WAY SIMILAR OR COMPARABLE TO A
SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND.
17
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, Telephone 508-855-1000 ("Principal Office"). Prior to
October 1, 1995, the Company was known as SMA Life Assurance Company. As of
December 31, 1999, the Company had over $17 billion in assets and over $26
billion of life insurance in force. The Company is subject to the laws of the
State of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, the Company is subject to
the insurance laws and regulations of other states and jurisdictions in which it
is licensed to operate. The Company is an indirectly wholly owned subsidiary of
First Allmerica Financial Life Insurance Company ("First Allmerica"), formerly
State Mutual Life Assurance Company of America, 440 Lincoln Street, Worcester,
Massachusetts. First Allmerica, organized under the laws of Massachusetts in
1844, is the fifth oldest life insurance company in America.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on November 22, 1993. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Certificates are set aside
in the Separate Account and are kept separate and apart from the general assets
of the Company. Under Delaware law, assets equal to the reserves and other
liabilities of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company. The Separate Account currently
has 47 Sub-Accounts, of which 24 are available under this Certificate. Each
Sub-Account is administered and accounted for as part of the general business of
the Company, but the income, capital gains, or capital losses of each
Sub-Account are allocated to such Sub-Account, without regard to other income,
capital gains, or capital losses of the Company or the other Sub-Accounts. Each
Sub-Account invests exclusively in a corresponding investment portfolio
("Underlying Fund") of the Allmerica Investment Trust, the Fidelity Variable
Insurance Products Fund, the Fidelity Variable Insurance Products Fund II, T.
Rowe Price International Series, Inc., the Delaware Group Premium Fund, or the
Morgan Stanley Dean Witter Universal Funds, Inc.
THE UNDERLYING FUNDS
Each Underlying Fund pays a management fee to an investment manager or adviser
for managing and providing services to the Underlying Fund. However, management
fee waivers and/or reimbursements may be in effect for certain or all of the
Underlying Funds. For specific information regarding the existence and effect of
any waiver/reimbursements see "CHARGES OF THE UNDERLYING FUNDS" under the
SUMMARY OF FEES AND CHARGES section. The prospectuses of the Underlying Funds
also contain information regarding fees for advisory services and should be read
in conjunction with this prospectus.
18
<PAGE>
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust (the "Trust") is an open-end, diversified, management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment Funds.
The Trust was established as a Massachusetts business trust on October 11, 1984
for the purpose of providing a vehicle for the investment of assets of various
separate accounts established by First Allmerica, the Company, or other
insurance companies. Thirteen investment portfolios of the Trust ("Funds") are
available under the Certificates, each issuing a series of shares: Select
Aggressive Growth Fund, Select Capital Appreciation Fund, Select Value
Opportunity Fund, Select Emerging Markets Fund, Select International Equity
Fund, Select Growth Fund, Select Strategic Growth Fund, Core Equity Fund, Equity
Index Fund, Select Growth and Income Fund, Select Investment Grade Income Fund,
Government Bond Fund, and Money Market Fund. The assets of each Fund are held
separate from the assets of the other Funds. Each Fund operates as a separate
investment vehicle and the income or losses of one Fund generally have no effect
on the investment performance of another Fund. Shares of the Trust are not
offered to the general public but solely to such separate accounts.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
investment manager of the Trust. AFIMS, which is a wholly-owned subsidiary of
Allmerica Financial, has entered into agreements with other investment managers
("Sub-Advisers"), who manage the investments of the Funds. The Trustees have
responsibility for the supervision of the affairs of the Trust. The Trustees
have entered into a management agreement with AFIMS.
AFIMS, subject to Trustee review, is responsible for the daily affairs of the
Trust and the general management of the Funds. AFIMS performs administrative and
management services for the Trust, furnishes to the Trust all necessary office
space, facilities and equipment, and pays the compensation, if any, of officers
and Trustees who are affiliated with AFIMS.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- Costs to register and qualify the Trust's shares under the Securities Act
of 1933 ("1933 Act"),
- Other fees payable to the SEC,
- Independent public accountant, legal and custodian fees,
- Association membership dues, taxes, interest, insurance payments and
brokerage commissions,
- Fees and expenses of the Trustees who are not affiliated with AFIMS,
- Expenses for proxies, prospectuses, reports to shareholders and other
expenses.
Under the Management Agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and Trustees in
consultation with BARRA RogersCasey, Inc. Under each Sub-Adviser Agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
Fund, subject to the Trustee's instructions. The Sub-Advisers (other than
Allmerica Asset Management, Inc.) are not affiliated with the Company or the
Trust.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Fidelity Variable Insurance Products Fund ("Fidelity VIP"), managed by Fidelity
Management & Research Company ("FMR"), is an open-end, diversified, management
investment company organized as a Massachusetts business trust on November 13,
1981, and is registered with the SEC under the 1940 Act. Four of its
19
<PAGE>
investment portfolios are available under the Certificates: the Fidelity VIP
High Income Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth
Portfolio and Fidelity VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate VIP.
FMR is one of America's largest investment management organizations, and has its
principal business address at 82 Devonshire Street, Boston, Massachusetts. It is
composed of a number of different companies which provide a variety of financial
services and products. FMR is the original Fidelity company, founded in 1946. It
provides a number of mutual funds and other clients with investment research and
portfolio management services. The Portfolios of Fidelity VIP, as part of their
operating expenses, pay a monthly management fee to FMR for managing investments
and business affairs. The prospectus of Fidelity VIP contains additional
information concerning the Portfolios, including information concerning
additional expenses paid by the Portfolios, and should be read in conjunction
with this Prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Fidelity Variable Insurance Products Fund II ("Fidelity VIP II"), managed by FMR
(see discussion under "Fidelity Variable Insurance Products Fund"), is an
open-end, diversified, management investment company organized as a
Massachusetts business trust on March 21, 1988 and is registered with the SEC
under the 1940 Act. Three of its investment portfolios are available under the
Certificate: the Fidelity VIP II Asset Manager Portfolio, Fidelity VIP II
Contrafund Portfolio, and Fidelity VIP II Index 500 Portfolio
T. ROWE PRICE INTERNATIONAL SERIES, INC.
T. Rowe Price International Series, Inc. ("T. Rowe Price"), managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), is an open-end, diversified
management investment company organized in 1994 as a Maryland corporation, and
is registered with the SEC under the 1940 Act. Price-Fleming, founded in 1979 as
a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings, Limited, is one of the largest no-load international mutual fund asset
managers, with approximately $42.5 billion (as of December 31, 1999) under
management in its offices in Baltimore, London, Tokyo, Hong Kong, Singapore and
Buenos Aires. One of its investment portfolios is available under the Policies:
the T. Rowe Price International Stock Portfolio. An affiliate of Price-Fleming,
T. Rowe Price Associates, Inc. serves as Sub-Adviser to the Select Capital
Appreciation Fund of the Trust.
DELAWARE GROUP PREMIUM FUND
Delaware Group Premium Fund ("DGPF") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of DGPF or its separate investment series. DGPF was established to provide a
vehicle for the investment of assets of various separate accounts supporting
variable insurance policies. One investment portfolio ("Series") is available
under the Policy: the DGPF International Equity Series. The Investment adviser
for the DGPF International Equity Series is Delaware International Advisers Ltd.
("Delaware International").
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Morgan Stanley Dean Witter Universal Funds, Inc. ("Morgan Stanley" or "MSDW") is
an open-end, management investment company that was organized as a Maryland
corporation, and is registered with the SEC under the 1940 Act. Miller
Anderson & Sherrerd, LLP ("MAS") is the investment adviser for the Morgan
Stanley MSDW Fixed Income Portfolio and MSDW Techology Portfolio. The investment
portfolios available under the Certificate are the MSDW Technology Portfolio and
the MSDW Fixed Income Portfolio. The MSDW Fixed Income Portfolio is available
only to employees of Duke Energy Corporation and its affiliates.
20
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The statements of additional information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies which are believed to have
significant potential for capital appreciation.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital.
Realization of income is not a significant investment consideration and any
income realized on the Fund's investments will be incidental to its primary
objective. The Fund invests primarily in common stock of industries and
companies which are believed to be experiencing favorable demand for their
products and services, and which operate in a favorable competitive environment
and regulatory climate.
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
FIDELITY VIP OVERSEAS PORTFOLIO -- seeks long-term growth of capital primarily
through investments in foreign securities and provides a means for aggressive
investors to diversify their own portfolios by participating in companies and
economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies.
SELECT GROWTH FUND -- seeks to achieve long-term growth of capital by investing
in a diversified portfolio consisting primarily of common stocks selected on the
basis of their long-term growth potential.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies.
CORE EQUITY FUND -- is invested in common stocks and securities convertible into
common stocks that are believed to represent significant underlying value in
relation to current market prices. The objective of the Core Equity Fund is to
achieve long-term growth of capital. Realization of current investment income,
if any, is incidental to this objective.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation also may be found
in other types of securities, including bonds and preferred stocks.
21
<PAGE>
FIDELITY VIP II INDEX 500 PORTFOLIO -- The Index 500 Portfolio of Fidelity VIP
II seeks investment results that correspond to the total return of a broad range
of common stocks publicly traded in the United States, as represented by the S&P
500.
EQUITY INDEX FUND -- seeks to provide investment results that correspond to the
aggregate price and yield performance of a representative selection of United
States publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the S&P 500.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on the
securities comprising the S&P 500. The Portfolio may invest in high yielding,
lower-rated fixed-income securities (commonly referred to as "junk bonds") which
are subject to greater risk than investments in higher-rated securities. See
"Risks of Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The Fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term money market instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities often are considered to be speculative, and involve
greater risk of default or price changes than securities assigned a high quality
rating.
SELECT INVESTMENT GRADE INCOME FUND -- is invested in a diversified portfolio of
fixed income securities with the objective of seeking as high a level of total
return (including both income and capital appreciation) as is consistent with
prudent investment management.
FIDELITY VIP II CONTRAFUND PORTFOLIO -- seeks long-term capital appreciation.
The Portfolio invests primarily in common stocks of domestic and foreign issuers
whose value is not fully recognized by the public. The Portfolio may invest in
either growth stocks or value stocks or both.
GOVERNMENT BOND FUND -- has the investment objectives of seeking high income,
preservation of capital and maintenance of liquidity, primarily through
investments in debt instruments issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, and in related options, futures and
repurchase agreements.
MONEY MARKET FUND -- is invested in a diversified portfolio of high-quality,
short-term money market instruments with the objective of obtaining maximum
current income consistent with the preservation of capital and liquidity.
MSDW TECHNOLOGY PORTFOLIO -- seeks to achieve long-term capital appreciation by
investing primarily in equity securities of companies that the investment
adviser expect to benefit from their involvement in technology and
technology-related industries. The focus of the Portfolio is to identify
significant long-term technology trends. Stocks selected for the Portfolio are
also expected to meet comprehensive selection criteria. The Portfolio may invest
up to 35% of its total assets in securities of foreign companies to participate
sufficiently in the global technology market.
THE FOLLOWING MSDW FIXED INCOME PORTFOLIO OF MORGAN STANLEY DEAN WITTER
UNIVERSAL FUNDS, INC. IS AVAILABLE ONLY TO EMPLOYEES OF DUKE ENERGY CORPORATION
AND ITS AFFILIATES:
22
<PAGE>
MSDW FIXED INCOME PORTFOLIO -- seeks above-average return over a market cycle of
three to five years by investing primarily in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, Mortgage-Backed Securities, Foreign
Bonds and other Fixed-Income Securities and Derivatives as further described in
the Morgan Stanley Dean Witter Universal Funds, Inc. prospectus. The Portfolio's
average weighted maturity will ordinarily exceed five years, and will usually be
between five and fifteen years.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE UNDERLYING FUNDS ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Certificate Value in that Sub-Account, the
Company will transfer it without charge on written request by you to another
Sub-Account or to the General Account. The Company must receive your Written
Request within sixty (60) days of the later of (1) the effective date of such
change in the investment policy, or (2) the receipt of the notice of your right
to transfer. You may then change your premium and deduction allocation
percentages.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Certificate interest in a Sub-Account without
notice to the Certificate Owner and prior approval of the SEC and state
insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other certificates or permit a conversion between
certificates upon request by a Certificate Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Fund, or in shares of another investment company having a specified
investment objective.
Subject to applicable law and any required SEC approval, the Company may, in its
sole discretion, establish new Sub-Accounts or eliminate one or more
Sub-Accounts if marketing needs, tax considerations or investment conditions
warrant. Any new Sub-Accounts may be made available to existing Certificate
Owners on a basis to be determined by the Company.
Shares of the Funds of the Trust are also issued to separate accounts of the
Company and its affiliates which issue variable annuity contracts ("mixed
funding"). Shares of the Portfolios of Fidelity VIP and Fidelity VIP II, the
Portfolio of T. Rowe Price, the Series of DGPF, and the Portfolios of Morgan
Stanley are also issued to variable annuity and variable life separate accounts
of other unaffiliated insurance companies ("mixed and shared funding"). It is
conceivable that in the future such mixed funding or shared funding may be
disadvantageous for variable life contract owners or variable annuity contract
owners. Although the Company and the Underlying Investment Companies do not
currently foresee any such disadvantages to either variable life insurance
contract owners or variable annuity contract owners, the Company and the
respective Trustees intend to monitor events in order to identify any material
conflicts between such contract owners and to determine what action, if any,
should be taken in response thereto. If the Trustees were to conclude that
separate funds should be established for variable life and variable annuity
separate accounts, the Company will bear the attendant expenses.
23
<PAGE>
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement change, the Certificate to reflect the substitution or
change and will notify Certificate Owners of all such changes. If the Company
deems it to be in the best interest of Certificate Owners, and subject to any
approvals that may be required under applicable law, the Separate Account or any
Sub-Accounts may be operated as a management company under the 1940 Act, may be
deregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Certificate
Owners with Certificate Value in such Sub-Account. If the 1940 Act or any
rules thereunder should be amended, or if the present interpretation of the 1940
Act or such rules should change, and as a result the Company determines that it
is permitted to vote shares in its own right, whether or not such shares are
attributable to the Certificates, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account
furnishing instructions to the Company. The Company will also vote shares held
in the Separate Account that it owns and which are not attributable to
Certificates in the same proportion.
The number of votes which a Certificate Owner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Certificate Owner's Certificate
Value in the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the Fund shares be voted so
as (1) to cause a change in the subclassification or investment objective of one
or more of the Funds, or (2) to approve or disapprove an investment advisory
contract for the Funds. In addition, the Company may disregard voting
instructions that are in favor of any change in the investment policies or in
any investment adviser or principal underwriter if the change has been initiated
by Certificate Owners or the Trustees. Our disapproval of any such change must
be reasonable and, in the case of a change in investment policies or investment
adviser, based on a good faith determination that such change would be contrary
to state law or otherwise is inappropriate in light of the objectives and
purposes of the Funds. In the event we do disregard voting instructions, a
summary of and the reasons for that action will be included in the next periodic
report to Certificate Owners.
24
<PAGE>
THE CERTIFICATE
ENROLLMENT FORM FOR A CERTIFICATE
Upon receipt at its Principal Office of a completed enrollment form from a
prospective Certificate Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed Certificate Owner before a determination of insurability can be made. A
Certificate cannot be issued until this underwriting procedure has been
completed. The Company reserves the right to reject an enrollment form which
does not meet the Company's underwriting guidelines, but in underwriting
insurance, the Company shall comply with all applicable federal and state
prohibitions concerning unfair discrimination.
At the time of enrollment, the proposed insured will complete an enrollment
form, which lists the proposed amount of insurance and indicates how much of
that insurance is considered eligible for simplified underwriting. If the
eligibility questions on the enrollment form are answered "No," the Company will
provide immediate coverage equal to the simplified underwriting amount. If the
proposed insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examinations, if any, are completed. If the proposed insured cannot
answer the eligibility questions "No," and if the proposed insured is not a
standard risk, insurance coverage will begin only after the Company
(1) approves the enrollment form, (2) the Certificate is delivered and accepted,
and (3) the first premium is paid.
Pending completion of insurance underwriting and Certificate issuance
procedures, any initial premiums will be held in the General Account. If the
enrollment form is approved and the Certificate is issued and accepted, the
initial premium held in the General Account will be credited with interest not
later than the date of receipt of the premium at the Principal Office. IF THE
CERTIFICATE IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days (20 or 30 days if required in your
state) after you receive the Certificate, or (c) 10 days after the Company mails
or personally delivers a Notice of Withdrawal Rights to you.
When you return the Certificate, the Company will mail a refund to you within
seven days. The refund of any premium paid by check may be delayed until the
check has cleared your bank. If the Certificate provides for a full refund of
the initial premium under its "Right-to-Examine Certificate" provision as
required in your state, your refund will be the greater of (a) your entire
premium, or (b) the Certificate Value plus deductions under the Certificate or
by the Underlying Funds for taxes, charges or fees. If the Certificate does not
provide for a full refund of the initial premium, you will receive the
Certificate Value in the Separate Account, plus premiums paid (including fees
and charges), minus the amounts allocated to the Separate Account, plus the fees
and charges imposed on amounts in the Separate Account.
After an increase in the Face Amount, a right to cancel the increase also
applies. The Company will mail or personally deliver a notice of a "Free Look"
with respect to the increase. You will have the right to cancel the increase
before the latest of (a) 45 days after the enrollment form for the increase is
signed, (b) 10 days after you receive the new specifications pages issued for
the increase, or (c) 10 days (20 or 30 days if required in your state) after the
Company mails or delivers a Notice of Withdrawal Rights to you. Upon canceling
the increase, you will receive a credit to the Certificate Value of charges
which would not have been deducted but
25
<PAGE>
for the increase. The amount to be credited will be refunded if you so request.
The Company will also waive any surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount, while the Certificate is in force, you may
convert your Certificate without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Certificate Value in the Separate Account to the General
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the General Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Certificate Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, and at your request, the Company will issue a
flexible premium adjustable life insurance policy to you. The new policy will
have the same face amount, issue age, date of issue, and risk classification as
the original Certificate.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the Separate Account or
General Account as of date of receipt at the Principal Office.
You may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Certificate to lapse. You may also make unscheduled premium
payments at any time prior to the Final Premium Payment Date or skip planned
premium payments, subject to the maximum and minimum premium limitations
described below. Therefore, unlike conventional insurance policies, a
Certificate does not obligate you to pay premiums in accordance with a rigid and
inflexible premium schedule.
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted from your
checking account each month, generally on the Monthly Processing Date, and
applied as a premium under the Certificate. The minimum payment permitted under
MAP is $50.
Premiums are not limited as to frequency and number. However, you may be
required to provide evidence of insurability as a condition to our accepting any
payment that would increase the Insurance Amount at Risk (the Death Benefit less
the Certificate Value). If evidence of insurability is required, the Company
will return the payment to you and if your payment exceeds our maximum limit
(defined below) the Company may not accept any additional payments which would
increase the Insurance Amount at Risk and shall not provide any additional death
benefit until (1) evidence of insurability for the Insured has been received by
the Company and (2) the Company has notified you that the Insured is in a
satisfactory underwriting class. You may then make payments that increase the
Insurance Amount at Risk for 60 days (but not later than the Final Payment Date)
following the date of such notification by the Company.
However, no premium payment may be less than $100 without the Company's consent.
Moreover, premium payments must be sufficient to cover the next Monthly
Deduction plus loan interest accrued, or the Certificate may lapse. See
CERTIFICATE TERMINATION AND REINSTATEMENT.
26
<PAGE>
The Company may limit the maximum payment received in any certificate year but
in no event will the limit be less than the maximum Level Premium shown in the
certificate. In no event may the total of all premiums paid exceed the current
maximum premium limitations set forth in the Certificate, if required by federal
tax laws. These maximum premium limitations will change whenever there is any
change in the Face Amount, the addition or deletion of a rider, or a change in
the Death Benefit Option. If a premium is paid which would result in total
premiums exceeding the current maximum premium limitations, the Company will
only accept that portion of the premiums which shall make total premiums equal
the maximum. Any part of the premiums in excess of that amount will be returned
and no further premiums will be accepted until allowed by the current maximum
premium limitation prescribed by Internal Revenue Service ("IRS") rules.
Notwithstanding the current maximum premium limitations, however, the Company
will accept a premium which is needed in order to prevent a lapse of the
Certificate during a Certificate year. See CERTIFICATE TERMINATION AND
REINSTATEMENT.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less any premium expense charge. In the
enrollment form for the Certificate, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have
Certificate Value in more than twenty Sub-Accounts at any one time. The minimum
amount which may be allocated to a Sub-Account is 1% of Net Premium paid.
Allocation percentages must be in whole numbers (for example, 33 1/3% may not be
chosen) and must total 100%.
You may change the allocation of future Net Premiums at any time pursuant to
written or telephone request. If allocation changes by telephone are elected by
the Certificate Owner, a properly completed authorization form must be on file
before telephone requests will be honored. The policy of the Company and its
agents and affiliates is that they will not be responsible for losses resulting
from acting upon telephone requests reasonably believed to be genuine. The
Company will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine; otherwise, the Company may be liable for
any losses due to unauthorized or fraudulent instructions. Such procedures may
include, among other things, requiring some form of personal identification
prior to acting upon instructions received by telephone. All transfer
instructions by telephone are tape recorded.
An allocation change will be effective as of the date of receipt of the notice
at the Principal Office. No charge is currently imposed for changing premium
allocation instructions. The Company reserves the right to impose such a charge
in the future, but guarantees that the charge will not exceed $25.
The Certificate Value in the Sub-Accounts will vary with their investment
experience; you bear this investment risk. The investment performance may affect
the Death Proceeds as well. Certificate Owners should periodically review their
allocations of premiums and Certificate Value in light of market conditions and
overall financial planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Certificate Value among the Sub-Accounts or between a Sub-Account and the
General Account. However, the Certificate Value held in the General Account to
secure a Certificate loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Certificate Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone requests. As discussed in THE CERTIFICATE -- "Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
27
<PAGE>
Transfers to and from the General Account are currently permitted only if:
(a) There has been at least a ninety (90) day period since the last transfer
from the General Account; and
(b) The amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Accumulated Value under the
Certificate.
These rules are subject to change by the Company.
DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS
You may have automatic transfers of at least $100 each made on a periodic basis
(a) from the Sub-Accounts which invest in the Money Market Fund and Government
Bond Fund of the Trust to one or more of the other Sub-Accounts ("Dollar Cost
Averaging Option"), or (b) to automatically reallocate Certificate Value among
the Sub-Accounts ("Automatic Rebalancing Option"). Automatic transfers may be
made on a monthly, bimonthly, quarterly, semiannual or annual schedule.
Generally, all transfers will be processed on the 15th of each scheduled month.
However, if the 15th is not a business day or is the Monthly Processing Date,
the automatic transfer will be processed on the next business day. The Dollar
Cost Averaging Option and the Automatic Rebalancing Option may not be in effect
at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITATIONS
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred, (2) the minimum amount that
may remain in a Sub-Account following a transfer from that Sub-Account, (3) the
minimum period of time between transfers involving the General Account, and
(4) the maximum amount that may be transferred each time from the General
Account.
The first twelve transfers in a Certificate year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Certificate year. The Company may increase or decrease
this charge, but it is guaranteed never to exceed $25. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year; each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made free of
charge. Any transfers made with respect to a conversion privilege, Certificate
loan or material change in investment policy will not count towards the twelve
free transfers.
ELECTION OF DEATH BENEFIT OPTIONS
Federal tax law requires a Guideline Minimum Death Benefit in relation to cash
value for a Certificate to qualify as life insurance. Under current federal tax
law, either the Guideline Premium test or the Cash Value Accumulation test can
be used to determine if the Certificate complies with the definition of "life
insurance" in Section 7702 of the Code. At the time of application, the Employer
may elect either of the tests.
The Guideline Premium test limits the amount of premiums payable under a
Certificate to a certain amount for an insured of a particular age and sex.
Under the Guideline Premium test, the Certificate Owner may choose between Death
Benefit Option 1 and Option 2, as described below. After issuance of the
Certificate, the Certificate Owner may change the selection from Option 1 to
Option 2 or vice versa. The Cash Value Accumulation test requires that the Death
Benefit must be sufficient so that the cash Surrender Value, as defined in
Section 7702, does not at any time exceed the net single premium required to
fund the future benefits under the Certificate. In the event the maximum premium
limit applies, we reserve the right to obtain evidence of insurability which is
satisfactory to us as a condition to accepting excess premium. If the Cash Value
Accumulation test is chosen by the employer, ONLY Death Benefit Option 3 will
apply. Death Benefits Option 1 and Option 2 are NOT available under the Cash
Value Accumulation test.
28
<PAGE>
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
There are two main differences between the Guideline Premium test and the Cash
Value Accumulation test. First, the Guideline Premium test limits the amount of
premium that may be paid into a Certificate, while no such limits apply under
the Cash Value Accumulation test. Second, the factors that determine the
Guideline Minimum Death Benefit relative to the Certificate Value are different.
Required increases in the Guideline Minimum Death Benefit due to growth in
Certificate Value will generally be greater under the Cash Value Accumulation
test than under the Guideline Premium test. APPLICANTS FOR A POLICY SHOULD
CONSULT A QUALIFIED TAX ADVISER IN CHOOSING A DEATH BENEFIT ELECTION.
OPTION 1 -- LEVEL DEATH BENEFIT
Under Option 1, the Death Benefit is equal to the greater of the Face Amount or
the Guideline Minimum Death Benefit, as set forth in the table below. Under
Option 1, the Death Benefit will remain level unless the Guideline Minimum Death
Benefit is greater than the Face Amount, in which case the Death Benefit will
vary as the Certificate Value varies. Option 1 will offer the best opportunity
for the Certificate Value under a Certificate to increase without increasing the
Death Benefit as quickly as it might under the other options. The Death Benefit
will never go below the Face Amount.
OPTION 2 -- ADJUSTABLE DEATH BENEFIT
Under Option 2, the Death Benefit is equal to the greater of the Face Amount
plus the Certificate Value or the Guideline Minimum Death Benefit, as set forth
in the table below. The Death Benefit will, therefore, vary as the Certificate
Value changes, but will never be less than the Face Amount. Option 2 will offer
the best opportunity for the Certificate Owner who would like to have an
increasing Death Benefit as early as possible. The Death Benefit will increase
whenever there is an increase in the Certificate Value, and will decrease
whenever there is a decrease in the Certificate Value, but will never go below
the Face Amount.
OPTION 3 -- LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION TEST
Under Option 3, the Death Benefit will equal the Face Amount, unless the
Certificate Value, multiplied by the applicable Option 3 Death Benefit Factor,
results in a higher Death Benefit. A complete list of Option 3 Death Benefit
Factors is set forth in the Certificate. The applicable Death Benefit Factor
depends upon the sex, risk classification, and then-attained age of the Insured.
The Death Benefit Factor decreases slightly from year to year as the attained
age of the Insured increases. Option 3 will offer the best opportunity for the
Certificate Owner who is looking for an increasing death benefit in later
Certificate years and/or would like to fund the Certificate at the "seven-pay"
limit for the full seven years. When the Certificate Value multiplied by the
applicable Death Benefit Factor exceeds the Face Amount, the Death Benefit will
increase whenever there is an increase in the Certificate Value, and will
decrease whenever there is a decrease in the Certificate Value, but will never
go below the Face Amount. OPTION 3 MAY NOT BE AVAILABLE IN ALL STATES.
DEATH PROCEEDS
As long as the Certificate remains in force (see CERTIFICATE TERMINATION AND
REINSTATEMENT), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Certificate to the named Beneficiary. The Company will
normally pay the Death Proceeds within seven days of receiving due proof of the
Insured's death, but the Company may delay payments under certain circumstances.
See OTHER CERTIFICATE PROVISIONS -- "Postponement of Payments." The Death
Proceeds may be received by the Beneficiary in a lump sum or under one or more
of the payment options the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
The Death Proceeds payable depend on the current Face Amount and the Death
Benefit Option that is in effect on the date of death. Prior to the Final
Premium Payment Date, the Death Proceeds are: (a) the Death Benefit provided
under Option 1, Option 2, or Option 3, whichever is in effect on the date of
death; plus (b) any additional insurance on the Insured's life that is provided
by rider; minus (c) any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid through the
Certificate month in which the Insured dies. After the Final Premium Payment
Date, the Death Proceeds equal the Surrender Value of the Certificate. The
amount of Death Proceeds payable will
29
<PAGE>
be determined as of the date the Company receives due proof of the Insured's
death for Option 2 and date of death for Options 1 and 3.
MORE INFORMATION ABOUT DEATH BENEFIT OPTIONS 1 AND 2
If the Guideline Premium Test is chosen by the Employer, the Certificate Owner
may choose between Death Benefit Option 1 or Option 2. The Certificate Owner may
designate the desired Death Benefit Option in the enrollment form, and may
change the option once per Certificate year by Written Request. There is no
charge for a change in option.
GUIDELINE MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2
The Guideline Minimum Death Benefit under Option 1 or Option 2 is equal to a
percentage of the Certificate Value as set forth below. The Guideline Minimum
Death Benefit is determined in accordance with the Code regulations to ensure
that the Certificate qualifies as a life insurance contract and that the
insurance proceeds may be excluded from the gross income of the Beneficiary.
GUIDELINE MINIMUM DEATH BENEFIT TABLE
(Option 1 and Option 2)
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Certificate Value
- ---------------- -----------------
<S> <C>
40 and under........................................... 250%
45..................................................... 215%
50..................................................... 185%
55..................................................... 150%
60..................................................... 130%
65..................................................... 120%
70..................................................... 115%
75..................................................... 105%
80..................................................... 105%
85..................................................... 105%
90..................................................... 105%
95 and above........................................... 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
For any Face Amount, the amount of the Death Benefit and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Certificate Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. However, the cost of insurance included in the Monthly Deduction
will be greater, and thus the rate at which Certificate Value will accumulate
will be slower, under Option 2 than under Option 1. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value."
If you desire to have premium payments and investment performance reflected in
the amount of the Death Benefit, you should choose Option 2. If you desire
premium payments and investment performance reflected to the maximum extent in
the Certificate Value, you should select Option 1.
ILLUSTRATION OF OPTION 1
For purposes of this illustration, assume that the Insured is under the Age of
40, and that there is no outstanding Debt.
Under Option 1, a Certificate with a $50,000 Face Amount will generally have a
Death Benefit equal to $50,000. However, because the Death Benefit must be equal
to or greater than 250% of Certificate Value, if at any time the Certificate
Value exceeds $20,000, the Death Benefit will exceed the $50,000 Face Amount. In
this example, each additional dollar of Certificate Value above $20,000 will
increase the Death Benefit by
30
<PAGE>
$2.50. For example, a Certificate with a Certificate Value of $35,000 will have
a Guideline Minimum Death Benefit of $87,500 ($35,000 X 2.50); Certificate Value
of $40,000 will produce a Guideline Minimum Death Benefit of $100,000 ($40,000 X
2.50); and Certificate Value of $50,000 will produce a Guideline Minimum Death
Benefit of $125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $20,000, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $25,000 to $20,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $62,500 to $50,000. If at any time, however, the Certificate
Value multiplied by the applicable percentage is less than the Face Amount, the
Death Benefit will equal the Face Amount of the Certificate.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Death Benefit would not
exceed the $50,000 Face Amount unless the Certificate Value exceeded $27,027
(rather than $20,000), and each dollar then added to or taken from Certificate
Value would change the Death Benefit by $1.85.
ILLUSTRATION OF OPTION 2
For purposes of this illustration, assume that the Insured is under the Age of
40 and that there is no outstanding Debt.
Under Option 2, a Certificate with a Face Amount of $50,000 will generally
produce a Death Benefit of $50,000 plus Certificate Value. For example, a
Certificate with Certificate Value of $5,000 will produce a Death Benefit of
$55,000 ($50,000 + $5,000); Certificate Value of $10,000 will produce a Death
Benefit of $60,000 ($50,000 + $10,000); Certificate Value of $25,000 will
produce a Death Benefit of $75,000 ($50,000 + $25,000). However, the Death
Benefit must be at least 250% of the Certificate Value. Therefore, if the
Certificate Value is greater than $33,333, 250% of that amount will be the Death
Benefit, which will be greater than the Face Amount plus Certificate Value. In
this example, each additional dollar of Certificate Value above $33,333 will
increase the Death Benefit by $2.50. For example, if the Certificate Value is
$35,000, the Guideline Minimum Death Benefit will be $87,500 ($35,000 X 2.50);
Certificate Value of $40,000 will produce a Guideline Minimum Death Benefit of
$100,000 ($40,000 X 2.50); and Certificate Value of $50,000 will produce a
Guideline Minimum Death Benefit of $125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $33,333, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $45,000 to $40,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $112,500 to $100,000. If at any time, however, Certificate Value
multiplied by the applicable percentage is less than the Face Amount plus
Certificate Value, then the Death Benefit will be the current Face Amount plus
Certificate Value.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Death Benefit must be at least
1.85 times the Certificate Value. The amount of the Death Benefit would be the
sum of the Certificate Value plus $50,000 unless the Certificate Value exceeded
$58,824 (rather than $33,333). Each dollar added to or subtracted from the
Certificate would change the Death Benefit by $1.85.
The Death Benefit under Option 2 will always be the greater of the Face Amount
plus Certificate Value or the Certificate Value multiplied by the applicable
percentage.
CHANGE IN DEATH BENEFIT OPTION
Generally, if Death Benefit Option 1 or Option 2 is in effect, the Death Benefit
Option in effect may be changed once each Certificate year by sending a Written
Request for change to the Principal Office. The
31
<PAGE>
effective date of any such change will be the Monthly Processing Date on or
following the date of receipt of the request. No charges will be imposed on
changes in Death Benefit Options. IF OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE
TO EITHER OPTION 1 OR OPTION 2.
If the Death Benefit Option is changed from Option 2 to Option 1, the Face
Amount will be increased to equal the Death Benefit which would have been
payable under Option 2 on the effective date of the change (i.e., the Face
Amount immediately prior to the change plus the Certificate Value on the date of
the change). The amount of the Death Benefit will not be altered at the time of
the change. However, the change in option will affect the determination of the
Death Benefit from that point on, since the Certificate Value will no longer be
added to the Face Amount in determining the Death Benefit. The Death Benefit
will equal the new Face Amount (or, if higher, the Guideline Minimum Death
Benefit). The cost of insurance may be higher or lower than it otherwise would
have been since any increases or decreases in Certificate Value will,
respectively, reduce or increase the Insurance Amount at Risk under Option 1.
Assuming a positive net investment return with respect to any amounts in the
Separate Account, changing the Death Benefit Option from Option 2 to Option 1
will reduce the Insurance Amount at Risk and, therefore, the cost of insurance
charge for all subsequent Monthly Deductions, compared to what such charge would
have been if no such change were made.
If the Death Benefit Option is changed from Option 1 to Option 2, the Face
Amount will be decreased to equal the Death Benefit less the Certificate Value
on the effective date of the change. This change may not be made if it would
result in a Face Amount less than $40,000. A change from Option 1 to Option 2
will not alter the amount of the Death Benefit at the time of the change, but
will affect the determination of the Death Benefit from that point on. Because
the Certificate Value will be added to the new specified Face Amount, the Death
Benefit will vary with the Certificate Value. Thus, under Option 2, the
Insurance Amount at Risk will always equal the Face Amount unless the Guideline
Minimum Death Benefit is in effect. The cost of insurance may also be higher or
lower than it otherwise would have been without the change in Death Benefit
Option. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from Certificate
Value."
A change in Death Benefit Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Certificate Owner.
See THE CERTIFICATE -- "Premium Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Certificate at any time by submitting a Written Request to the
Company. Any increase or decrease in the specified Face Amount requested by you
will become effective on the Monthly Processing Date on or next following the
date of receipt of the request at the Principal Office or, if Evidence of
Insurability is required, the date of approval of the request.
INCREASES
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured may also be required
whenever the Face Amount is increased. A request for an increase in the Face
Amount may not be less than an amount determined by the Company. This amount
varies by group but in no event will this amount exceed $10,000. You may not
increase the Face Amount after the Insured reaches Age 80. An increase must be
accompanied by an additional premium if the Certificate Value is less than $50
plus an amount equal to the sum of two Monthly Deductions. On the effective date
of each increase in the Face Amount, a transaction charge of $2.50 per $1,000 of
increase up to $40, will be deducted from the Certificate Value for
administrative costs. The effective date of the increase will be the first
Monthly Processing Date on or following the date all of the conditions for the
increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Underwriting Classes (if more than one Underwriting
32
<PAGE>
Class applies), both of which may affect the monthly cost of insurance charges.
A surrender charge will also be calculated for the increase. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value" and "Surrender Charge."
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Certificate, and
(2) during the first 24 months following the increase, to transfer any or all
Certificate Value to the General Account free of charge. See THE CERTIFICATE --
"Free-Look Period" and "Conversion Privileges." A refund of charges which would
not have been deducted but for the increase will be made at your request.
DECREASES
The minimum amount for a decrease in the Face Amount is $10,000. By current
Company practice, the Face Amount in force after any decrease may not be less
than $50,000. If, following a decrease in the Face Amount, the Certificate would
not comply with the maximum premium limitation applicable under the IRS rules,
the decrease may be limited or Certificate Value may be returned to the
Certificate Owner (at your election) to the extent necessary to meet the
requirements. A return of Certificate Value may result in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Underwriting
Classes, both of which may affect a Certificate Owner's monthly cost of
insurance charges. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
For purposes of determining the cost of insurance charge, any decrease in the
Face Amount will reduce the Face Amount in the following order: (a) the Face
Amount provided by the most recent increase; (b) the next most recent increases
successively; and (c) the initial Face Amount. This order will also be used to
determine whether a surrender charge will be deducted and in what amount. If the
Face Amount is decreased while the Payor Provisions apply (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Termination"), the above order may be modified
to determine the cost of insurance charge. You may then reduce or eliminate any
Face Amount for which you are paying the insurance charges, on a
last-in/first-out basis, before you reduce or eliminate amounts of insurance
which are paid by the Payor.
If you request a decrease in the Face Amount, the amount of any surrender charge
deducted will reduce the current Certificate Value. On the effective date of
each decrease in the Face Amount, a transaction charge of $2.50 per $1,000 of
decrease, up to a maximum of $40, will be deducted from the Certificate Value
for administrative costs. You may specify one Sub-Account from which the
transaction charge and, if applicable, any surrender charge will be deducted. If
you do not specify a Sub-Account, the Company will make a Pro-Rata Allocation.
The current surrender charge will be reduced by the amount of any surrender
charge deducted. See CHARGES AND DEDUCTIONS -- "Surrender Charge" and
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment and is equal
to the sum of the accumulation in the General Account and the value of the Units
in the Sub-Accounts. The Certificate Value is used in determining the Surrender
Value (the Certificate Value less any Debt and any surrender charge). See THE
CERTIFICATE -- "Surrender." There is no guaranteed minimum Certificate Value.
Because Certificate Value on any date depends upon a number of variables, it
cannot be predetermined.
Certificate Value and Surrender Value will reflect frequency and amount of Net
Premiums paid, interest credited to accumulations in the General Account, the
investment performance of the chosen Sub-Accounts, any partial withdrawals, any
loans, any loan repayments, any loan interest paid or credited, and any charges
assessed in connection with the Certificate.
33
<PAGE>
CALCULATION OF CERTIFICATE VALUE
The Certificate Value is determined on the Date of Issue and on each Valuation
Date. On the Date of Issue, the Certificate Value will be the Net Premiums
received, plus any interest earned during the underwriting period when premiums
are held in the General Account (before being transferred to the Separate
Account; see THE CERTIFICATE -- "Enrollment Form for a Certificate") less any
Monthly Deductions due. On each Valuation Date after the Date of Issue the
Certificate Value will be:
(1) the sum of the values in each of the Sub-Accounts on the Valuation Date,
determined for each Sub-Account by multiplying the value of a Unit in that
Sub-Account on that date by the number of such Units allocated to the
Certificate; PLUS
(2) the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
Thus, the Certificate Value is determined by multiplying the number of Units in
each Sub-Account by their value on the particular Valuation Date, adding the
products, and adding accumulations in the General Account, if any.
THE UNIT
You allocate the Net Premiums among the Sub-Accounts. Allocations to the
Sub-Accounts are credited to the Certificate in the form of Units. Units are
credited separately for each Sub-Account.
The number of Units of each Sub-Account credited to the Certificate is equal to
the portion of the Net Premium allocated to the Sub-Account, divided by the
dollar value of the applicable Unit as of the Valuation Date the payment is
received at the Principal Office. The number of Units will remain fixed unless
changed by a subsequent split of Unit value, transfer, partial withdrawal or
surrender. In addition, if the Company is deducting the Monthly Deduction or
other charges from a Sub-Account, each such deduction will result in
cancellation of a number of Units equal in value to the amount deducted.
The dollar value of a Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. That
experience, in turn, will reflect the investment performance, expenses and
charges of the respective Underlying Fund. The value of a Unit was set at $1.00
on the first Valuation Date for each Sub-Account. The dollar value of a Unit on
a given Valuation Date is determined by multiplying the dollar value of the
corresponding Unit as of the immediately preceding Valuation Date by the
appropriate net investment factor.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b), where
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any; and
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period.
The net investment factor may be greater or less than one. Therefore, the value
of a Unit may increase or decrease. You bear the investment risk. Subject to
applicable state and federal laws, the Company reserves the right to change the
methodology used to determine the net investment factor.
Allocations to the General Account are not converted into Units, but are
credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
34
<PAGE>
PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the payment options then offered by the
Company. These payment options are also available at the Final Premium Payment
Date and if the Certificate is surrendered. If no election is made, the Company
will pay the Death Proceeds in a single sum. See APPENDIX B -- PAYMENT OPTIONS.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Certificate by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
SURRENDER
You may at any time surrender the Certificate and receive its Surrender Value.
The Surrender Value is the Certificate Value, less Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Certificate are received at the
Principal Office. A surrender charge may be deducted when a Certificate is
surrendered if less than 15 full Certificate years have elapsed from the Date of
Issue of the Certificate or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- Surrender Charge."
The proceeds on surrender may be paid in a lump sum or under one of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments."
For important tax considerations which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
PAID-UP INSURANCE OPTION
On Written Request, you may elect life insurance coverage, usually for a reduced
amount, for the life of the Insured with no further premiums due. The Paid-Up
Insurance will be the amount that the Surrender Value can purchase for a net
single premium at the Insured's Age and Underwriting Class on the date this
option is elected. If the Surrender Value exceeds the net single premium, we
will pay the excess to you. The net single premium is based on the Commissioners
1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Table B for
unisex certificates) with increases in the tables for non-standard risks.
Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING
CERTIFICATE OWNER RIGHTS AND BENEFITS WILL BE AFFECTED:
- As described above, the Paid-Up Insurance benefit will be computed
differently from the net Death Benefit and the Death Benefit options will
not apply.
- We will not allow transfers of Certificate Value from the General Account
back to the Separate Account.
- You may not make further payments.
- You may not increase or decrease the Face Amount or make partial
withdrawals.
35
<PAGE>
- Riders will continue only with our consent.
You may, after electing Paid-Up Insurance, surrender the Certificate for its net
cash value. The guaranteed cash value is the net single premium for the Paid-Up
Insurance at the Insured's attained Age. The net cash value is the cash value
less any outstanding Debt. We will transfer the Certificate Value in the
Separate Account to the General Account on the date we receive Written Request
to elect the option.
On election of Paid-Up Insurance, the Certificate often will become a modified
endowment contract. If a Certificate becomes a modified endowment contract,
Certificate loans, partial withdrawals or surrender will receive unfavorable
federal tax treatment. See FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
PARTIAL WITHDRAWAL
Any time after the first Certificate year, you may withdraw a portion of the
Surrender Value of the Certificate, subject to the limits stated below, upon
Written Request filed at the Principal Office. The Written Request must indicate
the dollar amount you wish to receive and the Accounts from which such amount is
to be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts
and the General Account. If you do not provide allocation instructions, the
Company will make a Pro-Rata Allocation. Each partial withdrawal must be in a
minimum amount of $500. Under Option 1 or Option 3, the Face Amount is reduced
by the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawal." The Company will normally pay the
amount of the partial withdrawal within seven days following the Company's
receipt of the partial withdrawal request, but the Company may delay payment
under certain circumstances described in OTHER CERTIFICATE PROVISIONS --
"Postponement of Payments." For important tax consequences which may result from
partial withdrawals, see FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted to compensate the Company for providing the insurance
benefits set forth in the Certificate and any additional benefits added by
rider, providing servicing, incurring distribution expenses, and assuming
certain risks in connection with the Certificates. Certain of the charges
described below may be reduced for Certificates issued in connection with a
specific group under a non-qualified benefit plan. Charges and deductions may
vary based on criteria, for example, such as the purpose for which the
Certificates are purchased, the size of the benefit plan and the expected number
of participants, the underwriting characteristics of the group, the levels and
types of administrative services provided to the benefit plan and participants,
and anticipated aggregate premium payments. From time to time the Company may
modify both the amounts and criteria for reductions, which will not be unfairly
discriminatory against any person.
Upon full surrender of the Certificate within the first three certificate years,
in certain situations the Company will, upon written request, refund a
percentage of the portion of the previously paid Premium Expense Charge that
exceeded our local, state and federal tax expenses. The following conditions
apply:
- The original owner of the Certificate and certificates thereunder is a
corporation, a corporate grantor trust, or an individual or trust under a
corporate sponsored collateral assignment split dollar agreement, and the
ownership has not been changed;
36
<PAGE>
- The request to surrender the Certificate and all certificates thereunder
must be received prior to the end of the third Certificate year; and
- The Certificate and certificates have not been exchanged to another
carrier.
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company. State premium taxes generally range from 0.75% to 5%,
while local premium taxes (if any) vary by jurisdiction within a state. The
Company guarantees that the charge for premium taxes will not exceed 10%. Upon
request, the Company may permit all or part of the Premium Expense Charge to be
deducted as part of the monthly deduction.
The premium tax charge may change when either the applicable jurisdiction
changes or the tax rate within the applicable jurisdiction changes. The Company
should be notified of any change in address of the Insured as soon as possible.
Additional charges are made to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes and for distribution expenses
related to the Certificates. The DAC tax deduction may range from zero to 1% of
premiums, depending on the group to which the Policy is issued. The charge for
distribution expenses may range from zero to 10%. The distribution charge may
vary, depending upon such factors, for example, as the type of the benefit plan,
average number of participants, average Face Amount of the Certificates,
anticipated average annual premiums, and the actual distribution expenses
incurred by the Company.
MONTHLY DEDUCTION FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deduction") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider and a charge for Certificate administrative expenses that may be up to
$10, depending on the group to which the Policy is issued. The Monthly Deduction
may also include a charge for Separate Account administrative expenses and a
charge for mortality and expense risks. The Separate Account administrative
charge may continue for up to 10 Certificate years and may be up to 0.25% of
Certificate Value in each Sub-Account, depending on the group to which the
Policy was issued. The mortality and expense risk charge may be up to 0.90% of
Certificate Value in each Sub-Account. The Monthly Deduction on or following the
effective date of a requested change in the Face Amount will also include a
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, for
administrative costs associated with the change. See THE CERTIFICATE -- "Charge
for Change in Face Amount."
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses, the mortality and expense risk charge,
and the charge for the cost of additional benefits provided by rider will be
deducted. If the Payor Provision is in force, all cost of insurance charges and
administrative charges will be deducted from the Monthly Deduction Sub-Account.
If no allocation is specified, the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the Company will make a Pro-Rata
Allocation of the unpaid balance.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date.
37
<PAGE>
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount and for each
subsequent increase in the Face Amount. Because the cost of insurance depends
upon a number of variables, it can vary from month to month and from group to
group.
CALCULATION OF THE CHARGE
If Death Benefit Option 2 is in effect, the monthly cost of insurance charge for
the initial Face Amount will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If Death Benefit Option 1 or Option 3 is
in effect, however, the applicable cost of insurance rate will be multiplied by
the initial Face Amount less the Certificate Value (minus charges for rider
benefits) at the beginning of the Certificate month. Thus, the cost of insurance
charge may be greater if Death Benefit Option 2 is in effect than if Death
Benefit Option 1 or Option 3 is in effect, assuming the same Face Amount in each
case and assuming that the Guideline Minimum Death Benefit is not in effect.
In other words, since the Death Benefit under Option 1 or Option 3 remains
constant while the Death Benefit under Option 2 varies with the Certificate
Value, any Certificate Value increases will reduce the insurance charge under
Option 1 or Option 3, but not under Option 2.
If Death Benefit Option 2 is in effect, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Death
Benefit Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If Death Benefit
Option 1 or Option 3 is in effect, the applicable cost of insurance rate will be
multiplied by the increase in the Face Amount reduced by any Certificate Value
(minus rider charges) in excess of the initial Face Amount at the beginning of
the Certificate month.
If the Minimum Death Benefit is in effect under any Option, a monthly cost of
insurance charge will also be calculated for that portion of the Death Benefit
which exceeds the current Face Amount. This charge will be calculated by:
- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Guideline Minimum Death Benefit (Certificate Value times
the applicable percentage), MINUS
- the greater of the Face Amount or the Certificate Value under Death
Benefit Option 1 or Option 3,
or
- the Face Amount plus the Certificate Value under Death Benefit Option 2.
When the Guideline Minimum Death Benefit is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth in the preceding two paragraphs.
The monthly cost of insurance charge will also be adjusted for any decreases in
the Face Amount. See THE CERTIFICATE -- "Change in Face Amount: Decreases."
COST OF INSURANCE RATES
This Certificate is sold to eligible individuals who are members of a
non-qualified benefit plan having a minimum, depending on the group, of five or
more members. A portion of the initial Face Amount may be issued on a preferred,
standard, guaranteed or simplified underwriting basis. The amount of this
portion will be determined for each group, and may vary based on characteristics
within the group.
38
<PAGE>
The determination of the Underwriting Class for the guaranteed or simplified
issue portion will, in part, be based on the type of group; purpose for which
the Certificates are purchased; the number of persons eligible to participate in
the plan; expected percentage of eligible persons participating in the plan;
aggregate premiums paid and the amount of guaranteed or simplified underwriting
insurance to be issued. Larger groups, higher participation rates and
occupations with historically favorable mortality rates will generally result in
the individuals within that group being placed in a more favorable Underwriting
Class.
Cost of insurance rates are based on a blended unisex rate table, Age and
Underwriting Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less any
debt and any partial withdrawals and withdrawal charges. For those Certificates
issued on a unisex basis, sex-distinct rates do not apply. The cost of insurance
rates are determined at the beginning of each Certificate year for the initial
Face Amount. The cost of insurance rates for an increase in the Face Amount or
rider are determined annually on the anniversary of the effective date of each
increase or rider. The cost of insurance rates generally increase as the
Insured's Age increases. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Certificate. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables (Mortality Table B, Smoker, Non-smoker or
Uni-smoker, for unisex Certificates) and the Insured's Age. The tables used for
this purpose may set forth different mortality estimates for smokers and
non-smokers. Any change in the cost of insurance rates will apply to all persons
in the group of the same insuring Age and Underwriting Class whose Certificates
have been in force for the same length of time.
The Underwriting Class of an Insured will affect the cost of insurance rates.
The Company currently places Insureds into preferred Underwriting Classes,
standard Underwriting Classes and substandard Underwriting Classes. In an
otherwise identical Certificate, an Insured in the preferred Underwriting Class
will generally have a lower cost of insurance than an Insured in a standard
Underwriting Class who, in turn, will have a lower cost of insurance than an
Insured in a substandard Underwriting Class with a higher mortality risk. The
Underwriting Classes may be divided into two categories or aggregated: smokers
and non-smokers. Non-smoking Insureds will incur lower cost of insurance rates
than Insureds who are classified as smokers but who are otherwise in the same
Underwriting Class. Any Insured with an Age at issuance under 18 will be
classified initially as regular, unless substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a non-smoker. The Company will provide notice to
you of the opportunity for the Insured to be classified as a non-smoker when the
Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Underwriting Class than previously, a correspondingly higher cost of insurance
rate will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Underwriting Class previously applicable. On the other hand, if the
Insured's Underwriting Class improves on an increase, the lower cost of
insurance rate generally will apply to the entire Insurance Amount at Risk.
MONTHLY CERTIFICATE ADMINISTRATIVE CHARGE
Prior to the Final Premium Payment Date, a monthly Certificate administrative
charge of up to $10 per month, depending on the group to which the Policy was
issued, will be deducted from the Certificate Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Certificate, and will compensate the Company for first-year underwriting and
other start-up expenses incurred in connection with the Certificate. These
expenses include the cost of processing enrollment forms, conducting medical
examinations, determining insurability and the Insured's Underwriting Class, and
establishing Certificate records. The Company does not expect to derive a profit
from these charges.
39
<PAGE>
MONTHLY SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
The Company can make an administrative charge on an annual basis of up to 0.25%
of the Certificate Value in each Sub-Account. The duration of this charge can be
for up to 10 years. This charge is designed to reimburse the Company for the
costs of administering the Separate Account and Sub-Accounts. The charge is not
expected to be a source of profit. The administrative expenses assumed by the
Company in connection with the Separate Account and Sub-Accounts include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expenses of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
MONTHLY MORTALITY AND EXPENSE RISK CHARGE
The Company can make a mortality and expense risk charge on an annual basis of
up to 0.90% of the Certificate Value in each Sub-Account. This charge is for the
mortality risk and expense risk which the Company assumes in relation to the
variable portion of the Certificates. The total charges may be different between
groups and increased or decreased within a group, subject to compliance with
applicable state and federal requirements, but may not exceed 0.90% on an annual
basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will, therefore, pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the
Certificates will exceed the amounts realized from the administrative charges
provided in the Certificates. If the charge for mortality and expense risks is
not sufficient to cover actual mortality experience and expenses, the Company
will absorb the losses. If costs are less than the amounts provided, the
difference will be a profit to the Company. To the extent this charge results in
a current profit to the Company, such profit will be available for use by the
Company for, among other things, the payment of distribution, sales and other
expenses. Since mortality and expense risks involve future contingencies which
are not subject to precise determination in advance, it is not feasible to
identify specifically the portion of the charge which is applicable to each.
CHARGES REFLECTED IN THE ASSETS OF THE SEPARATE ACCOUNT
Because the Sub-Accounts purchase shares of the Underlying Investment Companies,
the value of the Units of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Underlying Investment Companies. The
prospectuses and Statements of Additional Information of the Underlying Funds
contain additional information concerning such fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Certificate Value in the Sub-Accounts.
SURRENDER CHARGE
The Certificate may provide for a contingent surrender charge. A separate
surrender charge, described in more detail below, may be calculated upon the
issuance of the Certificate and for each increase in the Face Amount. The
surrender charge is comprised of a contingent deferred administrative charge and
a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Certificate. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Certificate, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
A surrender charge may be deducted if you request a full surrender of the
Certificate or a decrease in the Face Amount. The duration of the surrender
charge may be up to 15 years from the Date of Issue or from the effective date
of any increase in the Face Amount. The maximum surrender charge calculated upon
issuance
40
<PAGE>
of the Certificate is an amount up to the sum of (a) plus (b), where (a) is a
deferred administrative charge equal to $8.50 per thousand dollars of the
initial Face Amount, and (b) is a deferred sales charge of up to 50% (less any
premium expense charge not associated with state and local premium taxes) of
premiums received up to the Guideline Annual Premium. In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per thousand dollars of
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. The maximum surrender charge remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. This reduction in the maximum
surrender charge will reduce the deferred sales charge and the deferred
administrative charge proportionately.
If you surrender the Certificate during the first two years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge equal $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 30% (less any
premium expense charge not associated with state and local premium taxes) of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
A separate surrender charge may apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is up
to the sum of (a) plus (b), where (a) is up to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of up to 50% (less any premium
expense charge not associated with state and local premium taxes) of premiums
associated with the increase, up to the Guideline Annual Premium for the
increase. In accordance with limitations under state insurance regulations, the
amount of the surrender charge will not exceed a specified amount per thousand
dollars of increase, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. As is true for the initial Face Amount, (a) is a deferred
administrative charge, and (b) is a deferred sales charge.
The maximum surrender charge for the increase remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. During the first two
Certificate years following an increase in the Face Amount before making premium
payments associated with the increase in the Face Amount which are at least
equal to one Guideline Annual Premium, the deferred administrative charge will
be $8.50 per thousand dollars of increase in the Face Amount, as described
above, but the deferred sales charge imposed will be less than the maximum
described above. Upon such a surrender, the deferred sales charge will not
exceed 30% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to one Guideline
Annual Premium (for the increase), plus 9% of premiums associated with the
increase in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below. Additional premium payments may not
be required to fund a requested increase in the Face Amount.
Therefore, a special rule, which is based on relative Guideline Annual Premium
payments, applies whereby the Certificate Value will be allocated between the
initial Face Amount and the increase. Subsequent premium payments are allocated
between the initial Certificate and the increase. For example, suppose the
Guideline Annual Premium is equal to $1,500 before an increase and is equal to
$2,000 as a result of the increase. The Certificate Value on the effective date
of the increase would be allocated 75% ($1,500/$2,000) to the initial Face
Amount and 25% to the increase. All future premiums would also be allocated 75%
to the initial Face Amount and 25% to the increase. Thus, existing Certificate
Value associated with the increase will equal the portion of Certificate Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase.
41
<PAGE>
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES, for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Certificate. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Certificate), the surrender charge will be applied in the following order:
(1) the most recent increase; (2) the next most recent increases successively;
and (3) the initial Face Amount. Where a decrease causes a partial reduction in
an increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.
CHARGES ON PARTIAL WITHDRAWAL
After the first Certificate year, partial withdrawals of Surrender Value may be
made. The minimum withdrawal is $500. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is the smaller of 2% of the amount withdrawn, or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge. The transaction fee applies to all partial withdrawals,
including a Withdrawal without a surrender charge.
A partial withdrawal charge may also be deducted from Certificate Value. For
each partial withdrawal you may withdraw an amount equal to 10% of the
Certificate Value on the date the written withdrawal request is received by the
Company less the total of any prior withdrawals in that Certificate year which
were not subject to the partial withdrawal charge, without incurring a partial
withdrawal charge. Any partial withdrawal in excess of this amount ("excess
withdrawal") will be subject to the partial withdrawal charge. The partial
withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal. There will be no partial
withdrawal charge if there is no surrender charge on the date of withdrawal
(i.e., 15 years have passed from the Date of Issue and from the effective date
of any increase in the Face Amount).
This right is not cumulative from Certificate year to Certificate year. For
example, if only 8% of Certificate Value was withdrawn in Certificate year two,
the amount you could withdraw in subsequent Certificate years would not be
increased by the amount you did not withdraw in the second Certificate year.
The Certificate's outstanding surrender charge will be reduced by the amount of
the partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for an example
illustrating the calculation of the charges on partial withdrawal and their
impact on the surrender charges.
42
<PAGE>
TRANSFER CHARGES
The first twelve transfers in a Certificate year will be free of charge.
Thereafter, a transfer charge of $10 will be imposed for each transfer request
to reimburse the Company for the administrative costs incurred in processing the
transfer request. The Company reserves the right to increase the charge, but it
will never exceed $25. The Company also reserves the right to change the number
of free transfers allowed in a Certificate year. See THE CERTIFICATE --
"Transfer Privilege."
You may have automatic transfers of at least $100 made on a periodic basis,
every 1, 2 or 3 months (a) from the Sub-Accounts which invest in the Money
Market Fund and Government Bond Fund of the Trust, respectively, to one or more
of the other Sub-Accounts, or (b) to reallocate Certificate Value among the
Sub-Accounts. The first automatic transfer counts as one transfer towards the
twelve free transfers allowed in each Certificate year. Each subsequent
automatic transfer is without charge and does not reduce the remaining number of
transfers which may be made without charge.
If you utilize the Conversion Privilege, Loan Privilege, or reallocate
Certificate Value within 20 days of the Date of Issue of the Certificate, any
resulting transfer of Certificate Value from the Sub-Accounts to the General
Account will be free of charge, and in addition to the twelve free transfers in
a Certificate year. See THE CERTIFICATE -- "Conversion Privileges" and
CERTIFICATE LOANS.
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount you request, a transaction
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, may be
deducted from the Certificate Value to reimburse the Company for administrative
costs associated with the change. This charge is guaranteed not to increase, and
the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge (not to exceed $25) for the
administrative costs incurred for changing the Net Premium allocation
instructions, for changing the allocation of any Monthly Deductions among the
various Sub-Accounts, or for a projection of values.
43
<PAGE>
CERTIFICATE LOANS
Loans may be obtained by request to the Company on the sole security of the
Certificate. The total amount which may be borrowed is the Loan Value. In the
first Certificate year, the Loan Value is 75% of Certificate Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on the
loan to the end of the Certificate year. The Loan Value in the second
Certificate year and thereafter is 90% of an amount equal to Certificate Value
reduced by applicable surrender charges. There is no minimum limit on the amount
of the loan. The loan amount will normally be paid within seven days after the
Company receives the loan request at its Principal Office, but the Company may
delay payments under certain circumstances. See OTHER CERTIFICATE PROVISIONS --
"Postponement of Payments."
A Certificate loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Certificate Value in each Sub-Account equal to the Certificate
loan allocated to such Sub-Account will be transferred to the General Account,
and the number of Units equal to the Certificate Value so transferred will be
cancelled. This will reduce the Certificate Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN AMOUNT EARNS INTEREST IN THE GENERAL ACCOUNT
As long as the Certificate is in force, Certificate Value in the General Account
equal to the loan amount will be credited with interest at an effective annual
yield of at least 6.00% per year (7.5% for preferred loans). The current
credited rate is 7.1% (8% for preferred loans). NO ADDITIONAL INTEREST WILL BE
CREDITED TO SUCH CERTIFICATE VALUE.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificate. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. You may change a preferred loan to a non-preferred loan at any time upon
written request. If this option has been selected, after the tenth Certificate
anniversary Certificate Value in the General Account equal to the loan amount
will be credited with interest at an effective annual yield of at least 7.5%.
The Company's current practice is to credit a rate of interest equal to the rate
being charged for the preferred loan.
There is some uncertainty as to the tax treatment of a preferred loan, which may
be treated as a taxable withdrawal from the Certificate. Consult a qualified tax
adviser (and see FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION IS NOT
AVAILABLE IN ALL STATES.
LOAN INTEREST CHARGED
Interest accrues daily, and is payable in arrears at the annual rate of 8%.
Interest is due and payable at the end of each Certificate year or on a pro-rata
basis for such shorter period as the loan may exist. Interest not paid when due
will be added to the loan amount and bear interest at the same rate. After the
due and unpaid interest is added to the loan amount, if the new loan amount
exceeds the Certificate Value in the General Account, the Company will transfer
Certificate Value equal to that excess loan amount from the Certificate Value in
each Sub-Account to the General Account as security for the excess loan amount.
The Company will allocate the amount transferred among the Sub-Accounts in the
same proportion that the Certificate Value in each Sub-Account bears to the
total Certificate Value in all Sub-Accounts.
REPAYMENT OF DEBT
Loans may be repaid at any time prior to the lapse of the Certificate. Upon
repayment of Debt, the portion of the Certificate Value that is in the General
Account securing the Debt repaid will be allocated to the various Accounts and
increase the Certificate Value in such Accounts in accordance with your
instructions. If you do not make a repayment allocation, the Company will
allocate Certificate Value in accordance with your most recent premium
allocation instructions; provided, however, that loan repayments allocated to
the Separate
44
<PAGE>
Account cannot exceed Certificate Value previously transferred from the Separate
Account to secure the Debt.
If Debt exceeds the Certificate Value less the surrender charge, the Certificate
will terminate. A notice of such pending termination will be mailed to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Certificate will terminate with
no value. See CERTIFICATE TERMINATION AND REINSTATEMENT.
EFFECT OF CERTIFICATE LOANS
Although Certificate loans may be repaid at any time prior to the lapse of the
Certificate, Certificate loans will permanently affect the Certificate Value and
Surrender Value, and may permanently affect the Death Proceeds. The effect could
be favorable or unfavorable, depending upon whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to the
Certificate Value in the General Account attributable to the loan.
Moreover, outstanding Certificate loans and the accrued interest will be
deducted from the proceeds payable upon surrender or the death of the Insured.
CERTIFICATE TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Certificate to lapse
unless:
- the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued; or
- if Debt exceeds the Certificate Value.
If one of these situations occurs, the Certificate will be in default. You will
then have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Certificate. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the Certificate month in which the Insured dies and any other overdue
charges will be deducted from the Death Proceeds.
PAYOR PROVISIONS
Subject to approval in the state in which the Certificate was issued, if you
name a "Payor" in your enrollment form supplement, the following "Payor
Provisions" will apply:
The Payor may designate what portion, if any, of each payment of a premium is
"excess premium." You may allocate the excess premium among the General Account
and Sub-Accounts. The remaining Payor's premium which is not excess premium
("Payor's premium") will automatically be allocated to the Monthly Deduction
Sub-Account, from which the Monthly Deduction charges will be made. Payor
premiums are initially held in the General Account, and will be transferred to
the Monthly Deduction Sub-Account not later than three days after underwriting
approval of the Certificate. No Certificate loans, partial withdrawals or
transfers may be made from the amount in the Monthly Deduction Sub-Account
attributable to Payor's premiums.
If the amount in the Monthly Deduction Sub-Account attributable to Payor's
premiums is insufficient to cover the next Monthly Deduction, the Company will
send to the Payor a notice of the due date and amount of
45
<PAGE>
premium which is due. The premium may be paid during a grace period of 62 days,
beginning on the premium due date. If the necessary premium is not received by
the Company within 31 days of the end of the grace period, a second notice will
be sent to the Payor. A 31-day grace period notice at this time will also be
sent to you if the Certificate Value is insufficient to cover the Monthly
Deductions then due.
If the amount in the Monthly Deduction Sub-Account attributable to Payor
premiums is insufficient to cover the Monthly Deductions due at the end of the
grace period, the balance of such Monthly Deductions will be withdrawn on a
Pro-Rata Allocation from the Certificate Value, if any, in the General Account
and the Sub-Accounts.
A lapse occurs if the Certificate Value is insufficient, at the end of the grace
period, to pay the Monthly Deductions which are due. The Certificate terminates
on the date of lapse. Any Death Benefit payable during the grace period will be
reduced by any overdue charges.
The above Payor Provisions, if applicable, are in lieu of the grace-period
notice and default provisions applicable when the Surrender Value is
insufficient to cover the next Monthly Deduction plus loan interest accrued.
However, they do not apply if Debt exceeds the Certificate Value. See the
discussion under "Termination," above. You or the Payor may, upon Written
Request, discontinue the above Payor Provisions. If the Payor makes a written
request to discontinue the Payor Provisions, the Company will send you a notice
of the discontinuance to your last known address.
REINSTATEMENT
If the Certificate has not been surrendered and the Insured is alive, the
terminated Certificate may be reinstated anytime within three years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Processing Date following the date you submit
the following to the Company:
- a written enrollment form for reinstatement,
- Evidence of Insurability; and
- a premium that, after the deduction of the premium expense charge, is
large enough to cover the Monthly Deductions for the three-month period
beginning on the date of reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
should have been in effect had the Certificate remained in force from the Date
of Issue.
CERTIFICATE VALUE ON REINSTATEMENT
The Certificate Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Certificate increased by interest
from the date the payment was received at the Principal Office; PLUS
- an amount equal to the Certificate Value less Debt on the date of default;
MINUS
- the Monthly Deduction due on the date of reinstatement. You may reinstate
any Debt outstanding on the date of default or foreclosure.
46
<PAGE>
OTHER CERTIFICATE PROVISIONS
The following Certificate provisions may vary in certain states in order to
comply with requirements of the insurance laws, regulations, and insurance
regulatory agencies in those states.
CERTIFICATE OWNER
The Certificate Owner is the Insured unless another Certificate Owner has been
named in the enrollment form or the Certificate. The Certificate Owner is
generally entitled to exercise all rights under the Certificate while the
Insured is alive, subject to the consent of any irrevocable Beneficiary (the
consent of a revocable Beneficiary is not required). The consent of the Insured
may be required when the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Certificate,
the Beneficiary has no rights in the Certificate before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the Certificate Owner (or the Certificate Owner's estate) will
be the Beneficiary. If more than one Beneficiary is alive when the Insured dies,
they will be paid in equal shares, unless you have chosen otherwise. Where there
is more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionately.
ASSIGNMENT
The Certificate Owner may assign a Certificate as collateral or make an absolute
assignment of the Certificate. All rights under the Certificate will be
transferred to the extent of the assignee's interest. The Consent of the
assignee may be required in order to make changes in premium allocations, to
make transfers, or to exercise other rights under the Certificate. The Company
is not bound by an assignment or release thereof, unless it is in writing and is
recorded at the Principal Office. When recorded, the assignment will take effect
as of the date the Written Request was signed. Any rights created by the
assignment will be subject to any payments made or actions taken by the Company
before the assignment is recorded. The Company is not responsible for
determining the validity of any assignment or release.
INCONTESTABILITY
The Company will not contest the validity of a Certificate after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or any increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide, while sane
or insane, within two years from the Date of Issue. Instead, the Company will
pay the Beneficiary an amount equal to all premiums paid for the Certificate,
without interest, less any outstanding Debt and less any partial withdrawals. If
the Insured commits suicide, while sane or insane, within two years from the
effective date of any increase in the Death Benefit, the Company's liability
with respect to such increase will be limited to a refund of the cost thereof.
The Beneficiary will receive the administrative charges and insurance charges
paid for such increase.
47
<PAGE>
AGE
If the Insured's Age as stated in the enrollment form for the Certificate is not
correct, benefits under the Certificate will be adjusted to reflect the correct
Age, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age. In no event will the Death Benefit be reduced to
less than the Minimum Death Benefit.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Certificate loan
and transfers 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, or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Certificate of
any amounts derived from the premiums paid by check may be delayed until such
time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal, or death of the Insured, as
well as payments of Certificate loans and transfers from the General Account,
for a period not to exceed six months.
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984)
Director and Assistant Secretary (since 1992) of First
Allmerica
Warren E. Barnes
Vice President and Corporate Vice President (since 1996) and Corporate Controller
Controller (since 1998) of First Allmerica
Mark R. Colborn Director (since 2000) and Vice President (since 1992)
Director and Vice President of First Allmerica.
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary
Secretary (since 1999) of Allmerica Investments, Inc.; and
Secretary (since 1999) of Allmerica Financial
Investment Management Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First
Director, Vice President and Allmerica (since 2000); Vice President (1999) of
General Counsel Promos Hotel Corporation; Vice President & Deputy
General Counsel (1998-1999) of Legg Mason, Inc.; Vice
President and Deputy General Counsel (1995-1998) of
USF&G Corporation.
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and Chief and Vice President (since 1991) of First Allmerica;
Investment Officer Vice President (since 1998) of Allmerica Financial
Investment Management Services, Inc.; and President
(since 1995) and Director (since 1996) of Allmerica
Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover Insurance
Company; and Vice President (1993 to 1996) of The
Hanover Insurance Company
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief
Executive Officer (since 1996) of Citizens Insurance
Company of America
Mark C. McGivney Vice President (since 1997) and Treasurer (since
Vice President and Treasurer 2000) of First Allmerica; Associate, Investment
Banking (1996-1997) of Merrill Lynch & Co.;
Associate, Investment Banking (1995) of Salomon
Brothers, Inc.; Treasurer (since 2000) of Allmerica
Investments, Inc., Allmerica Asset Management, Inc.
and Allmerica Financial Investment Management
Services, Inc.
John F. O'Brien Allmerica; director (since 1989) of Allmerica
Director and Chairman of the Board Investments, Inc. of the Board Director, President
and Chief Executive Officer (since 1989) of First
Allmerica
Edward J. Parry, III Director and Chief Financial Officer (since 1996),
Director, Vice President Chief Vice President (since 1993), and Treasurer
Financial Officer (1993-2000) of First Allmerica
Richard M. Reilly Director (since 1996) and Vice President (since 1990)
Director, President and Chief of First Allmerica; President (since 1995) of
Executive Officer Allmerica Financial Life Insurance and Annuity
Company; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since
1998) of Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Director (since 1998) of The Hanover
Insurance Company; Chief Executive Officer (1996 to
1998) of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990)
Director and Vice President of First Allmerica; Director (since 1991) of
Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect subsidiary of First Allmerica, acts as
the principal underwriter of the Certificates pursuant to a Sales and
Administrative Services Agreement with the Company and the Separate Account.
Allmerica Investments, Inc. is registered with the SEC as a broker-dealer and is
a member of the National Association of Securities Dealers ("NASD"). The
Certificates are sold by agents of the Company who are registered
representatives of Allmerica Investments, Inc. or of independent broker-dealers.
The Company pays commissions to broker-dealers and registered representatives
which sell the Certificates based on a commission schedule. After issuance of a
Certificate or an increase in Face Amount, commissions may be up to 25% of the
first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions may be up to 10% of any additional premiums. Alternative
compensation schedules, which may include ongoing annual compensation of up to
0.50% of Certificate Value, are available based on premium payments and the
level of enrollment and ongoing administrative services provided to participants
and benefit plans by the broker-dealer or registered representative. Certain
registered representatives, including registered representatives enrolled in the
Company's training program for new agents, may receive additional first-year and
renewal commissions and training reimbursements. General Agents of the Company
and certain registered representatives may also be eligible to receive expense
reimbursements based on the
49
<PAGE>
amount of earned commissions. General Agents may also receive overriding
commissions, which will not exceed 2.5% of first-year, or 4% of renewal
premiums. To the extent permitted by NASD rules, promotional incentives or
payments may also be provided to broker-dealers based on sales volumes, the
assumption of wholesaling functions or other sales related criteria. Other
payments may be made for other services that do not directly involve the sales
of the Certificates. These services may include the recruitment and training of
personnel, production of promotional literature, and similar services.
The Company intends to recoup the commission and other sales expenses through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges through a portion of the premium expense charge,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to the Certificate Owners or to the Separate Account.
Any surrender charge assessed on a Certificate will be retained by the Company
except for amounts it may pay to Allmerica Investments, Inc. for services it
performs and expenses it may incur as principal underwriter and general
distributor.
REPORTS
The Company will maintain the records relating to the Separate Account. You will
be promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), changes in the
specified Face Amount, changes in the Death Benefit Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement. An annual statement will also be sent to you. The annual
statement will summarize all of the above transactions and deductions of charges
during the Certificate year. It will also set forth the status of the Death
Proceeds, Certificate Value, Surrender Value, amounts in the Sub-Accounts and
General Account, and any Certificate loan(s). The Owner should review the
information in all statements carefully. All errors or corrections must be
reported to the Company immediately to assure proper crediting to the
Certificate. The Company will assume that all transactions are accurately
reported on confirmation statements and quarterly/annual statements unless the
Owner notifies the Principal Office in writing within 30 days after receipt of
the statement. In addition, you will be sent periodic reports containing
financial statements and other information for the Separate Account and the
Underlying Investment Companies as required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company and
Allmerica Investments, Inc. are not involved in any litigation that is of
material importance in relation to their total assets or that relates to the
Separate Account.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Certificate and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, and the financial
statements for Group VEL Account as of December 31, 1999 and for the periods
indicated, included in this Prospectus constituting part of this Registration
Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
50
<PAGE>
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Certificate.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Certificate, on loans,
withdrawals, or surrenders, on Death Benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely, and
possibly retroactively, affect the taxation of the Certificates. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Certificates is not exhaustive, does not purport
to cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Certificate Owner is a corporation or the trustee of an employee benefit
plan. A qualified tax adviser should always be consulted with regard to the
enrollment form of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
of 1986, and files a consolidated tax return with its parent and affiliates. The
Company does not expect to incur any income tax upon the earnings or realized
capital gains attributable to the Separate Account. Based on these expectations,
no charge is made for federal income taxes which may be attributable to the
Separate Account.
The Company will review periodically the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
TAXATION OF THE CERTIFICATES
The Company believes that the Certificates described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Certificate Value to the Insurance Amount
at Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in Certificate Value is not
taxable until received by the Certificate Owner or the Certificate Owner's
designee. See "Modified Endowment Contracts."
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Certificate for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Certificate Owners may direct
their investments to particular
51
<PAGE>
divisions of a separate account. Regulations in this regard may be issued in the
future. It is possible that if and when regulations are issued, the Certificates
may need to be modified to comply with such regulations. For these reasons, the
Certificates or the Company's administrative rules may be modified as necessary
to prevent a Certificate Owner from being considered the owner of the assets of
the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Death Benefit Option, change in the Face Amount, lapse with Certificate loan
outstanding, or assignment of the Certificate may have tax consequences. In
particular, under specified conditions, a distribution under the Certificate
during the first 15 years from Date of Issue that reduces future benefits under
the Certificate will be taxed to the Certificate Owner as ordinary income to the
extent of any investment earnings in the Certificate. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of Certificate proceeds depend on the circumstances of each Insured, Certificate
Owner, or Beneficiary.
CERTIFICATE LOANS
The Company believes that non-preferred loans received under a Certificate will
be treated as indebtedness of the Certificate Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Certificate Owner while the Certificate is in force. See "Modified Endowment
Contracts." However, there is a risk that a preferred loan may be characterized
by the IRS as a withdrawal and taxed accordingly. At the present time, the IRS
has not issued any guidance on whether a loan with the attributes of a preferred
loan should be treated differently than a non-preferred loan. This lack of
specific guidance makes the tax treatment of preferred loans uncertain. In the
event pertinent IRS guidelines are issued in the future, you may convert your
preferred loan to a non-preferred loan. However, it is possible that,
notwithstanding the conversion, some or all of the loan could be treated as a
taxable withdrawal from the Certificate.
Section 264 of the Code restricts the deduction of interest on policy or
certificate loans. Consumer interest paid on policy or certificate loans under
an individually owned policy or certificate is not tax deductible. Generally, no
tax deduction for interest is allowed on policy or certificate loans, if the
insured is an officer or employee of, or is financially interested in, any
business carried on by the taxpayer. There is an exception to this rule which
permits a deduction for interest on loans up to $50,000 related to any
business-owned policies or certificates covering officers or 20-percent owners,
up to a maximum equal to the greater of (1) five individuals, or (2) the lesser
of (a) 5% of the total number of officers and employees of the corporation, or
(b) 20 individuals.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance certificate, including a
Certificate offered by this Prospectus, that fails to satisfy a "seven-pay" test
is considered a modified endowment contract. A certificate fails to satisfy the
seven-pay test if the cumulative premiums paid under the certificate at any time
during the first seven certificate years, or within seven years of a material
change in the certificate, exceed the sum of the net level premiums that would
have been paid, had the certificate provided for paid-up future benefits after
the payment of seven level annual premiums. In addition, if benefits are reduced
at anytime during the life of the Certificate, there may be adverse tax
consequences. Please consult your tax adviser.
If the Certificate is considered a modified endowment contract, all
distributions under the Certificate will be taxed on an "income-first" basis.
Most distributions received by a Certificate Owner directly or indirectly
(including loans, withdrawals, partial surrenders, or the assignment or pledge
of any portion of the value of the Certificate) will be includible in gross
income to the extent that the cash Surrender Value of the Certificate exceeds
the Certificate Owner's investment in the contract. Any additional amounts will
be treated as a return of capital to the extent of the Certificate Owner's basis
in the Certificate. With certain exceptions, an additional 10% tax will be
imposed on the portion of any distribution that is includible in income. All
52
<PAGE>
modified endowment contracts issued by the same insurance company to the same
Certificate Owner during any calendar period will be treated as a single
modified endowment contract in determining taxable distributions.
Currently, each Certificate is reviewed when premiums are received to determine
if it satisfies the seven-pay test. If the Certificate does not satisfy the
seven-pay test, the Company will notify the Certificate Owner of the option of
requesting a refund of the excess premium. The refund process must be completed
within 60 days after the Certificate anniversary, or the Certificate will be
permanently classified as a modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Certificate
Value to the General Account. Because of exemption and exclusionary provisions
in the securities law, any amount in the General Account is not generally
subject to regulation under the provisions of the 1933 Act or the 1940 Act.
Accordingly, the disclosures in this Section have not been reviewed by the SEC.
Disclosures regarding the fixed portion of the Certificate and the General
Account may, however, be subject to certain generally applicable provisions of
the Federal Securities Laws concerning the accuracy and completeness of
statements made in prospectuses.
GENERAL DESCRIPTION
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE AND CERTIFICATE LOANS
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Certificate Owner's
Certificate Value in the General Account will not be less than an annual rate of
4% ("Guaranteed Minimum Rate"). (Under the Certificate, the Guaranteed Minimum
Rate may be higher than 4%.)
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of the Guaranteed Minimum Rate, and might not do so. However, the excess
interest rate, if any, in effect on the date a premium is received at the
Principal Office is guaranteed on that premium for one year, unless the
Certificate Value associated with the premium becomes security for a Certificate
loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY
INTEREST CREDITED ON THE CERTIFICATE VALUE IN THE GENERAL ACCOUNT IN EXCESS OF
THE GUARANTEED MINIMUM RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION
OF THE COMPANY. THE CERTIFICATE OWNER ASSUMES THE RISK THAT INTEREST CREDITED
MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Certificate Value
which is equal to Debt. However, such Certificate Value will be credited
interest at an effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Processing Date, the Certificate
Value in the General Account will be the amount of the Net Premiums allocated or
Certificate Value transferred to the General
53
<PAGE>
Account, plus interest at the Guaranteed Minimum Rate, plus any excess interest
which the Company credits, less the sum of all Certificate charges allocable to
the General Account and any amounts deducted from the General Account in
connection with loans, partial withdrawals, surrenders or transfers.
Certificate loans may also be made from the Certificate Value in the General
Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Certificate loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed.
THE CERTIFICATE
This Prospectus describes certificates issued under a flexible premium variable
life insurance Certificate, and is generally intended to serve as a disclosure
document only for the aspects of the Certificate relating to the Separate
Account. For complete details regarding the General Account, see the Certificate
itself.
TRANSFERS, SURRENDERS, AND PARTIAL WITHDRAWALS
If a Certificate is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed if such event
occurs before the Certificate, or an increase in the Face Amount, has been in
force for 15 Certificate years. In the event of a decrease in the Face Amount,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Certificate. Partial withdrawals are made on a
last-in/first-out basis from Certificate Value allocated to the General Account.
This means that the last payments allocated to General Account will be withdrawn
first.
The first twelve transfers in a Certificate year are free of charge. Thereafter,
a $10 transfer charge will be deducted for each transfer in that Certificate
year. The transfer privilege is subject to the consent of the Company and to the
Company's then current rules.
FINANCIAL STATEMENTS
Financial Statements for the Company and for the Separate Account are included
in this Prospectus, beginning immediately after the Appendices. The financial
statements of the Company and for the Separate Account should be considered only
as bearing on the ability of the Company to meet its obligations under the
Certificate. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account.
54
<PAGE>
APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. The following supplemental benefits are
available for issue under the Certificates for an additional charge.
WAIVER OF PREMIUM RIDER
This Rider provides that, during periods of total disability continuing for
more than the period of time specified in the Rider, the Company will add to
the Certificate Value each month an amount selected by you or the amount
necessary to maintain the Certificate in force, whichever is greater. This
benefit is subject to the Company's maximum issue benefits. Its cost may
change yearly.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At
present this benefit is only available for the spouse and children of the
primary Insured. The Rider includes a feature that allows the "Other
Insured" to convert the coverage to a flexible premium adjustable life
insurance Certificate.
CHILDREN'S INSURANCE RIDER
This Rider provides coverage for eligible minor children. It also covers
future children, including adopted children and stepchildren.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider pays an additional benefit for death resulting from a covered
accident prior to the Certificate anniversary nearest the Insured's Age 70.
OPTION TO ACCELERATE BENEFITS RIDER
This Rider permits part of the proceeds of the Certificate to be available
before death if the Insured becomes terminally ill and, depending on the
group to which the Policy is issued, may also pay part of the proceeds if
the Insured is permanently confined to a nursing home.
EXCHANGE OPTION RIDER
This Rider allows you to use the Certificate to insure a different person,
subject to Company guidelines.
EXCHANGE TO TERM INSURANCE RIDER
This Rider allows a Certificate Owner which is a corporation, a corporate
grantor trust, or a corporate assignee in the case of a split dollar
arrangement, to exchange the Certificate prior to the third Certificate
anniversary for a five-year non-convertible term insurance policy. An
exchange credit will be paid to the Certificate Owner or the corporate
assignee in the case of a corporate-sponsored collateral assignment split
dollar arrangement.
REFUND OF SALES LOAD RIDER
This Rider allows a Certificate Owner which is a corporation, a corporate
grantor trust, or a corporate assignee in the case of a split dollar
arrangement, to exchange the Certificate prior to the third Certificate
anniversary for a five-year non-convertible term insurance policy. An
exchange credit will be paid to the Certificate Owner or the corporate
assignee in the case of a corporate-sponsored collateral assignment split
dollar arrangement. The Company will, upon written request, refund a
percentage of a portion of the previously paid Premium Expense Charge that
exceeded our local, state and federal tax expenses upon full surrender of
the Certificate within the first three certificate years, in certain
situations. See CHARGES AND DEDUCTIONS.
CERTAIN OF THESE RIDERS MAY NOT BE AVAILABLE IN ALL STATES.
A-1
<PAGE>
APPENDIX B
PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options then offered by the
Company. If you do not make an election, the Company will pay the benefits in a
single sum. A certificate will be provided to the payee describing the payment
option selected.
If a payment option is selected, the Beneficiary may pay to the Company any
amount that would otherwise by deducted from the Death Benefit.
The amounts payable under a payment option are paid from the General account.
These amounts are not based on the investment experience of the Separate
Account.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds become payable.
B-1
<PAGE>
APPENDIX C
ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES
AND ACCUMULATED PREMIUMS
The tables illustrate the way in which a Certificate's Sum Insured and
Certificate Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Certificate issued to a person, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Certificate
issued to a person, Age 45, under a standard Premium Class and qualifying for
the non-smoker discount. The tables illustrate the guaranteed cost of insurance
rates and the current cost of insurance rates as presently in effect.
The tables illustrate the Certificate Values that would result based upon the
assumptions that no Certificate loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Certificate year (so that no transaction or transfer charges have been
incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown, and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6% and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the premiums paid
were invested each year to earn interest (after taxes) at 5% compounded
annually.
The Certificate Values and Death Proceeds would be different from those shown if
the gross annual investment rates of return averaged 0%, 6% and 12% over a
period of years, but fluctuated above or below such averages for individual
Certificate years. The values would also be different depending on the
allocation of a Certificate's total Certificate Value among the Sub-Accounts of
the Separate Account, if the actual rates of return averaged 0%, 6% or 12%, but
the rates of each Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Certificate Values take into
account the deduction from premium for the premium expense charge, the Monthly
Deduction from Certificate Value, and the monthly charge against the Separate
Account for mortality and expense risks. In both the Current Cost of Insurance
Charges tables and the Guaranteed Cost of Insurance Charges tables, the Separate
Account charge for mortality and expense risks is equivalent to an effective
annual rate of 0.90% of the average monthly value of the assets in the Separate
Account attributable to the Certificates.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary and, in 1999, ranged from an
annual rate of 0.29% to an annual rate of 1.92% of average daily net assets. The
fees and expenses associated with the Certificate may be more or less than 0.85%
in the aggregate, depending upon how you make allocations of Certificate Value
among the Sub-Accounts.
Until further notice, Allmerica Financial Investment Management Services, Inc.
("AFIMS") has declared a voluntary expense limitation of 1.50% of average net
assets for Select International Equity Fund, 1.35% for Select Aggressive Growth
Fund and Select Capital Appreciation Fund, 1.25% for Select Value Opportunity
Fund, 1.20% for Select Growth Fund and Core Equity Fund, 1.10% for Select Growth
and Income Fund,
C-1
<PAGE>
1.00% for Select Investment Grade Income Fund, and Government Bond Fund, and
0.60% for Money Market Fund and Equity Index Fund. The total operating expenses
of these Funds of the Trust were less than their respective expense limitations
throughout 1999.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee to the extent that
expenses of the Select Emerging Markets Fund exceed 2.00% of the Fund's average
daily net assets, except that such waiver shall not exceed the net amount of
management fees earned by AFIMS from the Fund after subtracting fees paid by
AFIMS to a sub-advisor. Until further notice, the Select Value Opportunity
Fund's management fee rate has been voluntarily limited to an annual rate of
0.90% of average daily net assets, and total expenses are limited to 1.25% of
average daily net assets. The declaration of a voluntary management fee or
expense limitation in any year does not bind AFIMS to declare future expense
limitations with respect to these Funds. These limitations may be terminated at
any time.
The investment adviser for the DGPF International Equity Series is Delaware
International Advisers Ltd. ("Delaware International"). Effective May 1, 2000
through October 31, 2000, Delaware International has agreed voluntarily to waive
its management fee and reimburse the Series for expenses to the extent that
total expenses will not exceed 0.95%. This limitation replaces a prior
limitation of 0.95% that expired on April 30, 2000. The fee ratios shown above
have been restated, if necessary, to reflect the new voluntary limitation which
took effect on May 1, 2000. The declaration of a voluntary expense limitation
does not bind Delaware International to declare future expense limitations with
respect to this Series. For the fiscal year ended December 31, 1999, before
waiver and/or reimbursement by Delaware International, total fund expenses as a
percentage of average daily net assets were 0.97%.
MSDW Investment Management has voluntarily agreed to waive its management fees
and to reimburse the MSDW Technology Portfolio and MSDW Fixed Income Portfolio
if processing of such fees would cause the total annual operating expense of the
portfolio to exceed 1.15% and 0.70% of average daily net assets. This fee waiver
is voluntary and may be terminated by MAS at any time without notice.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
NET ANNUAL RATES OF INVESTMENT
Taking into account the 0.90% charge to the Separate Account and the assumed
0.85% charge for Underlying Investment Company advisory fees and operating
expenses, the gross annual rates of investment return of 0%, 6% and 12%
correspond to net annual rates of -1.75%, 4.25% and 10.25%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSURED'S AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- --------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 3,149 250,000 0 3,356 250,000 179 3,564 250,000
2 9,041 2,363 6,217 250,000 2,975 6,829 250,000 3,613 7,467 250,000
3 13,903 7,071 9,202 250,000 8,290 10,421 250,000 9,610 11,741 250,000
4 19,008 11,038 12,104 250,000 13,068 14,134 250,000 15,358 16,423 250,000
5 24,368 14,921 14,921 250,000 17,973 17,973 250,000 21,556 21,556 250,000
6 29,996 17,653 17,653 250,000 21,941 21,941 250,000 27,184 27,184 250,000
7 35,906 20,294 20,294 250,000 26,038 26,038 250,000 33,354 33,354 250,000
8 42,112 22,845 22,845 250,000 30,269 30,269 250,000 40,124 40,124 250,000
9 48,627 25,304 25,304 250,000 34,639 34,639 250,000 47,556 47,556 250,000
10 55,469 27,667 27,667 250,000 39,150 39,150 250,000 55,721 55,721 250,000
11 62,652 29,932 29,932 250,000 43,806 43,806 250,000 64,693 64,693 250,000
12 70,195 32,066 32,066 250,000 48,581 48,581 250,000 74,535 74,535 250,000
13 78,114 34,065 34,065 250,000 53,480 53,480 250,000 85,342 85,342 250,000
14 86,430 35,933 35,933 250,000 58,513 58,513 250,000 97,231 97,231 250,000
15 95,161 37,661 37,661 250,000 63,681 63,681 250,000 110,321 110,321 250,000
16 104,330 39,237 39,237 250,000 68,981 68,981 250,000 124,749 124,749 250,000
17 113,956 40,682 40,682 250,000 74,443 74,443 250,000 140,691 140,691 250,000
18 124,064 41,984 41,984 250,000 80,068 80,068 250,000 158,324 158,324 250,000
19 134,677 43,130 43,130 250,000 85,858 85,858 250,000 177,853 177,853 250,000
20 145,821 44,107 44,107 250,000 91,816 91,816 250,000 199,512 199,512 250,000
Age 60 95,161 37,661 37,661 250,000 63,681 63,681 250,000 110,321 110,321 250,000
Age 65 145,821 44,107 44,107 250,000 91,816 91,816 250,000 199,512 199,512 250,000
Age 70 210,477 45,554 45,554 250,000 124,108 124,108 250,000 345,814 345,814 401,144
Age 75 292,995 39,227 39,227 250,000 161,792 161,792 250,000 581,754 581,754 622,477
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST -------------------------------- ------------------------------- -------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- -------- --------- ----------- ------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 2,644 250,000 0 2,833 250,000 0 3,021 250,000
2 9,041 1,330 5,183 250,000 1,872 5,726 250,000 2,438 6,291 250,000
3 13,903 5,484 7,616 250,000 6,547 8,678 250,000 7,701 9,832 250,000
4 19,008 8,869 9,935 250,000 10,619 11,684 250,000 12,599 13,664 250,000
5 24,368 12,141 12,141 250,000 14,746 14,746 250,000 17,818 17,818 250,000
6 29,996 14,231 14,231 250,000 17,862 17,862 250,000 22,323 22,323 250,000
7 35,906 16,191 16,191 250,000 21,018 21,018 250,000 27,202 27,202 250,000
8 42,112 18,014 18,014 250,000 24,209 24,209 250,000 32,488 32,488 250,000
9 48,627 19,686 19,686 250,000 27,422 27,422 250,000 38,214 38,214 250,000
10 55,469 21,195 21,195 250,000 30,644 30,644 250,000 44,414 44,414 250,000
11 62,652 22,592 22,592 250,000 33,953 33,953 250,000 51,257 51,257 250,000
12 70,195 23,810 23,810 250,000 37,268 37,268 250,000 58,707 58,707 250,000
13 78,114 24,839 24,839 250,000 40,580 40,580 250,000 66,832 66,832 250,000
14 86,430 25,672 25,672 250,000 43,886 43,886 250,000 75,712 75,712 250,000
15 95,161 26,295 26,295 250,000 47,174 47,174 250,000 85,436 85,436 250,000
16 104,330 26,679 26,679 250,000 50,422 50,422 250,000 96,095 96,095 250,000
17 113,956 26,801 26,801 250,000 53,611 53,611 250,000 107,803 107,803 250,000
18 124,064 26,623 26,623 250,000 56,708 56,708 250,000 120,688 120,688 250,000
19 134,677 26,095 26,095 250,000 59,675 59,675 250,000 134,895 134,895 250,000
20 145,821 25,171 25,171 250,000 62,471 62,471 250,000 150,609 150,609 250,000
Age 60 95,161 26,295 26,295 250,000 47,174 47,174 250,000 85,436 85,436 250,000
Age 65 145,821 25,171 25,171 250,000 62,471 62,471 250,000 150,609 150,609 250,000
Age 70 210,477 13,032 13,032 250,000 72,707 72,707 250,000 260,185 260,185 301,814
Age 75 292,995 0 0 250,000 70,410 70,410 250,000 438,328 438,328 469,011
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- -------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 139 1,063 76,063 208 1,132 76,132 278 1,202 76,202
2 3,014 1,056 2,106 77,106 1,261 2,312 77,312 1,476 2,526 77,526
3 4,634 2,640 3,130 78,130 3,050 3,540 78,540 3,495 3,984 78,984
4 6,336 3,889 4,134 79,134 4,574 4,819 79,819 5,346 5,590 80,590
5 8,123 5,117 5,117 80,117 6,148 6,148 81,148 7,358 7,358 82,358
6 9,999 6,081 6,081 81,081 7,533 7,533 82,533 9,304 9,304 84,304
7 11,969 7,025 7,025 82,025 8,972 8,972 83,972 11,446 11,446 86,446
8 14,037 7,948 7,948 82,948 10,468 10,468 85,468 13,803 13,803 88,803
9 16,209 8,850 8,850 83,850 12,023 12,023 87,023 16,397 16,397 91,397
10 18,490 9,731 9,731 84,731 13,638 13,638 88,638 19,250 19,250 94,250
11 20,884 10,590 10,590 85,590 15,316 15,316 90,316 22,390 22,390 97,390
12 23,398 11,428 11,428 86,428 17,058 17,058 92,058 25,845 25,845 100,845
13 26,038 12,244 12,244 87,244 18,867 18,867 93,867 29,646 29,646 104,646
14 28,810 13,038 13,038 88,038 20,745 20,745 95,745 33,828 33,828 108,828
15 31,720 13,810 13,810 88,810 22,694 22,694 97,694 38,431 38,431 113,431
16 34,777 14,559 14,559 89,559 24,716 24,716 99,716 43,495 43,495 118,495
17 37,985 15,285 15,285 90,285 26,814 26,814 101,814 49,068 49,068 124,068
18 41,355 15,988 15,988 90,988 28,990 28,990 103,990 55,200 55,200 130,200
19 44,892 16,666 16,666 91,666 31,247 31,247 106,247 61,949 61,949 136,949
20 48,607 17,320 17,320 92,320 33,586 33,586 108,586 69,376 69,376 144,376
Age 60 97,665 22,169 22,169 97,169 61,886 61,886 136,886 199,840 199,840 274,840
Age 65 132,771 22,935 22,935 97,935 79,499 79,499 154,499 329,594 329,594 404,594
Age 70 177,576 21,933 21,933 96,933 99,233 99,233 174,233 538,524 538,524 624,688
Age 75 234,759 18,272 18,272 93,272 120,363 120,363 195,363 874,961 874,961 949,961
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- --------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 40 964 75,964 105 1,030 76,030 171 1,095 76,095
2 3,014 857 1,907 76,907 1,048 2,098 77,098 1,247 2,297 77,297
3 4,634 2,339 2,828 77,828 2,717 3,207 78,207 3,128 3,617 78,617
4 6,336 3,484 3,728 78,728 4,112 4,357 79,357 4,821 5,066 80,066
5 8,123 4,605 4,605 79,605 5,547 5,547 80,547 6,653 6,653 81,653
6 9,999 5,459 5,459 80,459 6,780 6,780 81,780 8,395 8,395 83,395
7 11,969 6,289 6,289 81,289 8,055 8,055 83,055 10,303 10,303 85,303
8 14,037 7,096 7,096 82,096 9,374 9,374 84,374 12,394 12,394 87,394
9 16,209 7,876 7,876 82,876 10,735 10,735 85,735 14,684 14,684 89,684
10 18,490 8,631 8,631 83,631 12,141 12,141 87,141 17,192 17,192 92,192
11 20,884 9,384 9,384 84,384 13,623 13,623 88,623 19,985 19,985 94,985
12 23,398 10,109 10,109 85,109 15,155 15,155 90,155 23,050 23,050 98,050
13 26,038 10,810 10,810 85,810 16,740 16,740 91,740 26,415 26,415 101,415
14 28,810 11,483 11,483 86,483 18,375 18,375 93,375 30,108 30,108 105,108
15 31,720 12,129 12,129 87,129 20,064 20,064 95,064 34,164 34,164 109,164
16 34,777 12,745 12,745 87,745 21,806 21,806 96,806 38,616 38,616 113,616
17 37,985 13,332 13,332 88,332 23,603 23,603 98,603 43,505 43,505 118,505
18 41,355 13,888 13,888 88,888 25,455 25,455 100,455 48,873 48,873 123,873
19 44,892 14,411 14,411 89,411 27,362 27,362 102,362 54,767 54,767 129,767
20 48,607 14,902 14,902 89,902 29,326 29,326 104,326 61,239 61,239 136,239
Age 60 97,665 17,230 17,230 92,230 51,608 51,608 126,608 173,185 173,185 248,185
Age 65 132,771 15,680 15,680 90,680 63,695 63,695 138,695 282,555 282,555 357,555
Age 70 177,576 10,763 10,763 85,763 74,549 74,549 149,549 456,075 456,075 531,075
Age 75 234,759 454 454 75,454 81,247 81,247 156,247 731,074 731,074 806,074
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST -------------------------------- ------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- -------- --------- ----------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 6,716 10,997 250,000 7,402 11,684 250,000 8,089 12,371 250,000
2 28,327 16,325 21,791 250,000 18,389 23,855 250,000 20,536 26,002 250,000
3 43,561 30,254 32,385 250,000 34,404 36,535 250,000 38,895 41,026 250,000
4 59,557 41,715 42,781 250,000 48,682 49,747 250,000 56,524 57,590 250,000
5 76,353 52,984 52,984 250,000 63,518 63,518 250,000 75,859 75,859 250,000
6 93,989 62,998 62,998 250,000 77,875 77,875 250,000 96,014 96,014 257,317
7 112,506 72,822 72,822 250,000 92,843 92,843 250,000 118,140 118,140 307,164
8 131,950 82,463 82,463 250,000 108,403 108,403 273,175 142,410 142,410 358,874
9 152,365 91,926 91,926 250,000 124,537 124,537 303,870 169,029 169,029 412,430
10 173,801 101,212 101,212 250,000 141,258 141,258 334,782 198,211 198,211 469,761
11 196,309 110,301 110,301 253,692 158,584 158,584 364,743 230,199 230,199 529,457
12 219,943 119,150 119,150 265,706 176,504 176,504 393,604 265,212 265,212 591,423
13 244,758 127,764 127,764 275,969 195,033 195,033 421,272 303,527 303,527 655,619
14 270,814 136,144 136,144 285,902 214,188 214,188 449,796 345,448 345,448 725,442
15 298,173 144,291 144,291 294,354 233,980 233,980 477,319 391,296 391,296 798,244
16 326,899 152,197 152,197 302,873 254,404 254,404 506,263 441,392 441,392 878,370
17 357,062 159,896 159,896 308,599 275,526 275,526 531,766 496,212 496,212 957,689
18 388,733 167,378 167,378 314,671 297,346 297,346 559,010 556,151 556,151 1,045,564
19 421,988 174,645 174,645 319,600 319,877 319,877 585,374 621,668 621,668 1,137,652
20 456,905 181,699 181,699 323,425 343,136 343,136 610,783 693,270 693,270 1,234,020
Age 60 298,173 144,291 144,291 294,354 233,980 233,980 477,319 391,296 391,296 798,244
Age 65 456,905 181,699 181,699 323,425 343,136 343,136 610,783 693,270 693,270 1,234,020
Age 70 659,493 213,493 213,493 337,320 470,061 470,061 742,696 1,161,205 1,161,205 1,834,704
Age 75 918,052 239,871 239,871 340,617 615,877 615,877 874,546 1,879,840 1,879,840 2,669,372
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST -------------------------------- ------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- -------- --------- ----------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 5,983 10,265 250,000 6,638 10,919 250,000 7,293 11,575 250,000
2 28,327 14,834 20,300 250,000 16,788 22,254 250,000 18,822 24,289 250,000
3 43,561 27,979 30,110 250,000 31,893 34,024 250,000 36,131 38,262 250,000
4 59,557 38,630 39,696 250,000 45,180 46,246 250,000 52,561 53,626 250,000
5 76,353 49,065 49,065 250,000 58,946 58,946 250,000 70,534 70,534 250,000
6 93,989 58,221 58,221 250,000 72,148 72,148 250,000 89,154 89,154 250,000
7 112,506 67,161 67,161 250,000 85,872 85,872 250,000 109,550 109,550 284,829
8 131,950 75,887 75,887 250,000 100,145 100,145 252,365 131,759 131,759 332,033
9 152,365 84,398 84,398 250,000 114,834 114,834 280,195 155,928 155,928 380,465
10 173,801 92,695 92,695 250,000 129,920 129,920 307,911 182,201 182,201 431,817
11 196,309 101,042 101,042 250,000 145,755 145,755 335,237 211,227 211,227 485,821
12 219,943 109,203 109,203 250,000 162,041 162,041 361,351 242,824 242,824 541,497
13 244,758 117,121 117,121 252,981 178,785 178,785 386,176 277,211 277,211 598,776
14 270,814 124,770 124,770 262,017 195,982 195,982 411,563 314,605 314,605 660,670
15 298,173 132,156 132,156 269,599 213,638 213,638 435,822 355,255 355,255 724,720
16 326,899 139,260 139,260 277,128 231,720 231,720 461,122 399,366 399,366 794,739
17 357,062 146,103 146,103 281,978 250,254 250,254 482,990 447,259 447,259 863,211
18 388,733 152,661 152,661 287,003 269,196 269,196 506,088 499,152 499,152 938,406
19 421,988 158,929 158,929 290,839 288,521 288,521 527,994 555,311 555,311 1,016,220
20 456,905 164,906 164,906 293,533 308,218 308,218 548,628 616,041 616,041 1,096,552
Age 60 298,173 132,156 132,156 269,599 213,638 213,638 435,822 355,255 355,255 724,720
Age 65 456,905 164,906 164,906 293,533 308,218 308,218 548,628 616,041 616,041 1,096,552
Age 70 659,493 190,397 190,397 300,827 411,444 411,444 650,081 999,444 999,444 1,579,121
Age 75 918,052 208,764 208,764 296,445 520,467 520,467 739,063 1,550,685 1,550,685 2,201,973
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-8
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge may be calculated upon issuance of the Certificate
and upon each increase in the Face Amount. The maximum surrender charge
calculated upon issuance of the Certificate is equal to $8.50 per thousand
dollars of the initial Face Amount plus up to 50% (less any premium expense
charge not associated with state and local premium taxes) of the Guideline
Annual Premium, depending on the group to which the Policy is issued. The
maximum surrender charge for an increase in the Face Amount is $8.50 per
thousand dollars of increase, plus up to 50% (less any premium expense charge
not associated with state and local premium taxes) of the Guideline Annual
Premium for the increase. The calculation may be summarized in the following
formula:
Maximum Surrender Charge = (8.5 X Face Amount) + (up to 50% X Guideline Annual
Premium)
1000
A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Certificate and upon
each increase in the Face Amount are shown in the following table. During the
first two Certificate years following issue or an increase in Face Amount, the
actual surrender charge may be less than the maximum. See CHARGES AND
DEDUCTIONS -- "Surrender Charge."
The maximum surrender charge remains level for up to the first 24 Certificate
months, reduces uniformly for the balance of the surrender charge period, and is
zero thereafter. The actual surrender charge imposed may be less than the
maximum.
The Factors used in calculating the maximum surrender charges vary with the
issue Age and Underwriting Class as indicated in the following table.
D-1
<PAGE>
MAXIMUM SURRENDER CHARGE PER $1000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at
Issue or Unisex Unisex Unisex
Increase Non-smoker Smoker Uni-smoker
- -------- ---------- ------ ----------
<S> <C> <C> <C>
0 14.89 14.37
1 14.84 14.31
2 15.00 14.44
3 15.17 14.58
4 15.35 14.73
5 15.53 14.88
6 15.73 15.05
7 15.94 15.23
8 16.16 15.41
9 16.39 15.61
10 16.64 15.82
11 16.91 16.05
12 17.18 16.28
13 17.47 16.52
14 17.77 16.77
15 18.08 17.02
16 18.38 17.28
17 18.67 17.54
18 17.15 18.98 17.80
19 17.40 19.29 18.07
20 17.65 19.62 18.35
21 17.92 19.95 18.64
22 18.20 20.31 18.95
23 18.49 20.68 19.27
24 18.80 21.08 19.61
25 19.13 21.49 19.97
26 19.48 21.94 20.35
27 19.85 22.42 20.75
28 20.24 22.92 21.18
29 20.65 23.45 21.63
30 21.08 24.02 22.11
31 21.54 24.62 22.61
32 22.03 25.25 23.15
33 22.54 25.92 23.71
34 23.03 26.62 24.30
35 23.64 27.36 24.92
36 24.24 28.15 25.57
37 24.87 28.97 26.26
38 25.53 29.84 26.99
39 26.23 30.76 27.75
40 26.97 31.72 28.55
41 27.74 32.73 29.39
42 28.55 33.79 30.27
43 29.41 34.91 31.19
44 30.31 36.08 32.17
45 31.26 37.31 33.19
46 32.27 38.60 34.27
</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
Age at
Issue or Unisex Unisex Unisex
Increase Non-smoker Smoker Uni-smoker
- -------- ---------- ------ ----------
<S> <C> <C> <C>
47 33.33 39.95 35.40
48 34.46 41.38 36.59
49 35.64 42.89 37.86
50 36.90 44.48 39.19
51 38.24 46.17 40.60
52 39.66 47.95 42.10
53 41.17 49.84 43.68
54 42.76 51.82 45.36
55 44.46 53.91 47.12
56 46.25 56.11 48.98
57 48.16 56.87 50.95
58 50.18 56.76 53.03
59 52.34 56.65 55.24
60 54.64 56.54 56.71
61 56.54 56.44 56.59
62 56.41 56.34 56.47
63 56.29 56.26 56.36
64 56.16 56.18 56.25
65 56.03 56.10 56.13
66 55.90 56.01 56.00
67 55.74 55.90 55.85
68 55.58 55.76 55.70
69 55.41 55.63 55.53
70 55.27 55.49 55.37
71 55.12 55.38 55.22
72 54.96 55.29 55.10
73 54.85 55.23 54.99
74 54.75 55.19 54.89
75 54.64 55.16 54.80
76 54.52 55.10 54.69
77 54.36 55.01 54.53
78 54.18 54.86 54.35
79 53.97 54.68 54.14
80 53.75 54.49 53.91
</TABLE>
D-3
<PAGE>
EXAMPLES
For the purposes of these examples, assume that a unisex, Age 35 non-smoker
purchases a $100,000 Certificate. In this example the Guideline Annual Premium
("GAP") equals $1,032.25. The maximum surrender charge is calculated as follows:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $516.13
(50% X GAP)
------------
$1,366.13
Maximum surrender charge per Table (23.64 X 100)
$2,364.00
During the first two Certificate years after the Date of Issue, the actual
surrender charge is the smaller of the maximum surrender charge and the
following sum:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge Varies
(not to exceed 30% of premiums received, up to one
GAP, plus 9% of premiums
received in excess of one GAP)
--------------------
Sum of (1) and (2)
The maximum surrender charge is $1,366.13. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
EXAMPLE 1:
Assume the Certificate Owner surrenders the Certificate in the 10th Certificate
month, having paid total premiums of $900. The actual surrender charge would be
$1,120.
EXAMPLE 2:
Assume the Certificate Owner surrenders the Certificate in the 120th Certificate
month. Also assume that after the 24th Certificate month, the maximum surrender
charge decreases by 1/156 per month, thereby reaching zero at the end of the
15th Certificate year. In this example, the maximum surrender charge would be
$525.43.
D-4
<PAGE>
APPENDIX E
PERFORMANCE INFORMATION
The Certificates were first offered to the public in 1995. However, the Company
may advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Sub-Accounts have been in existence
(Tables I(A) and I(B)), and based on the periods that the Underlying Funds have
been in existence (Tables II (A) and II (B)). The results for any period prior
to the Certificates being offered will be calculated as if the Certificates had
been offered during that period of time, with all charges assumed to be those
applicable to the Sub-Accounts, the Underlying Funds, and (in Tables I(A) and
II(A)) under a "representative" Certificate that is surrendered at the end of
the applicable period. For more information on charges under the Certificates,
see CHARGES AND DEDUCTIONS.
In each Table in Appendix E, "One-Year Total Return" refers to the total of the
income generated by a Sub-Account, based on certain charges and assumptions as
described in the respective tables, for the one-year period ended December 31,
1999. "Average Annual Total Return" is based on the same charges and
assumptions, but reflects the hypothetical annually compounded return that would
have produced the same cumulative return if the Sub-Account's performance had
been constant over the entire period. Because average annual total returns tend
to smooth out variations in annual performance return, they are not the same as
actual year-by-year results.
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other unmanaged
indices so that investors may compare results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (2) other groups of variable life separate accounts or other
investment products tracked by Lipper Inc., a widely used independent research
firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, such as Morningstar, Inc., who rank such
investment products on overall performance or other criteria; or (3) the
Consumer Price Index (a measure for inflation) to assess the real rate of return
from an investment. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management costs
and expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
The Company may provide information on various topics of interest to Certificate
Owners and prospective Certificate Owners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and invest ment scenarios, financial management and tax
and retirement planning, and investment alternatives to certificates of deposit
and other financial instruments.
E-1
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (non-smoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
<TABLE>
TEN YEARS OR
LIFE OF
ONE-YEAR 5 SUB-ACCOUNT
UNDERLYING FUND TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund -87.35% N/A 13.92%
Select Capital Appreciation Fund -98.74% N/A 11.74%
Select Value Opportunity Fund -100.00% N/A 3.40%
Select Emerging Markets Fund -64.13% N/A -59.81%
T. Rowe Price International Stock Portfolio -91.93% N/A 2.43%
Fidelity VIP Overseas Portfolio -84.02% N/A 8.55%
Select International Equity Fund -93.31% N/A 8.90%
DGPF International Equity Series -100.00% N/A -5.30%
Fidelity VIP Growth Portfolio -88.40% N/A 20.10%
Select Growth Fund -94.94% N/A 20.19%
Select Strategic Growth Fund N/A N/A -83.96%
Core Equity Fund -95.35% N/A 14.76%
Fidelity VIP II Index 500 Portfolio N/A N/A -63.65%
Equity Index Fund -100.00% N/A 17.11%
Fidelity VIP Equity-Income Portfolio -100.00% N/A 7.39%
Select Growth and Income Fund -100.00% N/A 11.73%
Fidelity VIP II Asset Manager Portfolio -100.00% N/A 6.18%
Fidelity VIP High Income Portfolio -100.00% N/A -0.06%
Select Investment Grade Income Fund -100.00% N/A -3.17%
Fidelity VIP II Contrafund Portfolio N/A N/A N/A
Government Bond Fund -100.00% N/A -4.05%
Money Market Fund -100.00% N/A -4.39%
MSDW Fixed Income Portfolio N/A N/A N/A
MSDW Technology Portfolio N/A N/A N/A
</TABLE>
The inception dates for the Sub-Accounts are: 5/1/95 for Core Equity, Select
Investment Grade Income, Money Market, Equity Index, Government Bond, Select
Aggressive Growth, Select Growth, Select Growth and Income, Select Value
Opportunity, Select International Equity, Fidelity VIP Equity-Income, Fidelity
VIP Growth, Fidelity VIP High Income, Fidelity VIP Overseas and Fidelity VIP II
Asset Manager; 5/3/95 for Select Capital Appreciation; 7/2/96 for DGPF
International Equity; 2/12/96 for T. Rowe Price International Stock; and 11/9/98
for Select Emerging Markets.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-2
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE SUB-ACCOUNTS
EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Sub-Accounts have been in existence. The performance information is net of total
Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT REFLECT
MONTHLY CHARGES UNDER THE CERTIFICATE OR SURRENDER CHARGES. It is assumed that
an annual premium payment of $3,000 (approximately one Guideline Annual Premium)
was made at the beginning of each Certificate year and that ALL premiums were
allocated to EACH Sub-Account individually.
<TABLE>
TEN YEARS
OR
LIFE OF
ONE-YEAR 5 SUB-ACCOUNT
UNDERLYING FUND TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund 37.41% N/A 22.47%
Select Capital Appreciation Fund 24.23% N/A 20.32%
Select Value Opportunity Fund -5.56% N/A 12.03%
Select Emerging Markets Fund 64.23% N/A 56.38%
T. Rowe Price International Stock Portfolio 32.12% N/A 14.89%
Fidelity VIP Overseas Portfolio 41.27% N/A 17.14%
Select International Equity Fund 30.53% N/A 17.47%
DGPF International Equity Series 14.72% N/A 11.06%
Fidelity VIP Growth Portfolio 36.20% N/A 28.63%
Select Growth Fund 28.63% N/A 28.71%
Select Strategic Growth Fund N/A N/A 16.69%
Core Equity Fund 28.17% N/A 23.30%
Fidelity VIP II Index 500 Portfolio N/A N/A 14.44%
Equity Index Fund 19.33% N/A 25.64%
Fidelity VIP Equity-Income Portfolio 5.37% N/A 15.98%
Select Growth and Income Fund 17.36% N/A 20.29%
Fidelity VIP II Asset Manager Portfolio 10.09% N/A 14.79%
Fidelity VIP High Income Portfolio 7.18% N/A 8.62%
Select Investment Grade Income Fund -1.86% N/A 5.57%
Fidelity Contrafund Portfolio N/A N/A N/A
Government Bond Fund -0.67% N/A 4.70%
Money Market Fund 4.24% N/A 4.36%
MSDW Fixed Income Portfolio N/A N/A N/A
MSDW Technology Portfolio N/A N/A N/A
</TABLE>
The inception dates for the Sub-Accounts are: 5/1/95 for Core Equity, Select
Investment Grade Income, Money Market, Equity Index, Government Bond, Select
Aggressive Growth, Select Growth, Select Growth and Income, Select Value
Opportunity, Select International Equity, Fidelity VIP Equity-Income, Fidelity
VIP Growth, Fidelity VIP High Income, Fidelity VIP Overseas and Fidelity VIP II
Asset Manager; 5/3/95 for Select Capital Appreciation; 7/2/96 for DGPF
International Equity; 2/12/96 for T. Rowe Price International Stock; and 11/9/98
for Select Emerging Markets.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-3
<PAGE>
TABLE II(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Certificate charges
(including surrender charges) for a representative Certificate. It is assumed
that the Insured is male (unisex rates), Age 36, standard (nonsmoker) Premium
Class, that the Face Amount of the Certificate is $250,000, that an annual
premium payment of $3,000 (approximately one Guideline Annual Premium) was made
at the beginning of each Certificate year, that ALL premiums were allocated to
EACH Sub-Account individually, and that there was a full surrender of the
Certificate at the end of the applicable period.
<TABLE>
TEN YEARS OR
ONE-YEAR 5 LIFE OF FUND
UNDERLYING FUND TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund -87.35% 14.94% 14.55%
Select Capital Appreciation Fund -98.74% N/A 11.80%
Select Value Opportunity Fund -100.00% 5.26% 4.87%
Select Emerging Markets Fund -64.13% N/A -51.08%
T. Rowe Price International Stock Portfolio -91.93% 6.94% 5.98%
Fidelity VIP Overseas Portfolio -84.02% 9.07% 6.47%
Select International Equity Fund -93.31% 10.22% 7.90%
DGPF International Equity Series -100.00% 4.98% 5.43%
Fidelity VIP Growth Portfolio -88.40% 21.27% 15.15%
Select Growth Fund -94.94% 20.60% 14.41%
Select Strategic Growth Fund -100.00% N/A -60.56%
Core Equity Fund -95.35% 16.82% 12.48%
Fidelity VIP II Index 500 Portfolio -100.00% 19.71% 14.90%
Equity Index Fund -100.00% 19.33% 15.56%
Fidelity VIP Equity-Income Portfolio -100.00% 10.29% 9.61%
Select Growth and Income Fund -100.00% 13.33% 9.74%
Fidelity VIP II Asset Manager Portfolio -100.00% 7.35% 8.23%
Fidelity VIP High Income Portfolio -100.00% 2.65% 7.50%
Select Investment Grade Income Fund -100.00% -0.82% 2.62%
Fidelity VIP II Contrafund Portfolio -99.69% N/A 19.27%
Government Bond Fund -100.00% -1.97% 0.37%
Money Market Fund -100.00% -2.72% 0.07%
MSDW Fixed Income Portfolio -100.00% N/A -17.87%
MSDW Technology Portfolio N/A N/A -16.25%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Core Equity,
Select Investment Grade Income and Money Market; 9/28/90 for Equity Index;
8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth, Select
Growth, and Select Growth and Income; 4/30/93 for Select Value Opportunity;
5/2/94 for Select International Equity; 4/28/95 for Select Capital Appreciation;
10/9/86 for Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for
Fidelity VIP High Income; 1/28/87 for Fidelity VIP Overseas; 9/06/89 for
Fidelity VIP II Asset Manager; 10/29/92 for DGPF International Equity; 3/31/94
for T. Rowe Price International Stock; 11/9/98 for Select Emerging Markets,
Select Strategic Growth; 8/27/92 for Fidelity VIP II Index 500; 8/27/92 for
Fidelity VIP II Contrafund; 1/2/97 for MSDW Fixed Income; and 11/30/99 for MSDW
Technology.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-4
<PAGE>
TABLE II(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT
REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE OR SURRENDER CHARGES. It is
assumed that an annual premium payment of $3,000 (approximately one Guideline
Annual Premium) was made at the beginning of each Certificate year and that ALL
premiums were allocated to EACH Sub-Account individually.
<TABLE>
TEN YEARS
OR
LIFE OF
ONE-YEAR 5 FUND
UNDERLYING FUND TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C>
Select Aggressive Growth Fund 37.41% 22.21% 19.62%
Select Capital Appreciation Fund 24.23% N/A 20.33%
Select Value Opportunity Fund -5.56% 12.50% 10.57%
Select Emerging Markets Fund 64.23% N/A 14.18%
T. Rowe Price International Stock Portfolio 32.12% 14.18% 12.43%
Fidelity VIP Overseas Portfolio 41.27% 16.31% 10.43%
Select International Equity Fund 30.53% 17.47% 14.43%
DGPF International Equity Series 14.72% 12.22% 10.76%
Fidelity VIP Growth Portfolio 36.20% 28.57% 18.86%
Select Growth Fund 28.63% 27.90% 19.49%
Select Strategic Growth Fund 15.02% N/A 5.93%
Core Equity Fund 28.17% 24.10% 16.25%
Fidelity VIP II Index 500 Portfolio 19.44% 27.01% 19.98%
Equity Index Fund 19.33% 26.62% 19.57%
Fidelity VIP Equity-Income Portfolio 5.37% 17.54% 13.46%
Select Growth and Income Fund 17.36% 20.60% 14.88%
Fidelity VIP II Asset Manager Portfolio 10.09% 14.59% 12.12%
Fidelity VIP High Income Portfolio 7.18% 9.88% 11.42%
Select Investment Grade Income Fund -1.86% 6.41% 6.72%
Fidelity VIP II Contrafund Portfolio 23.13% N/A 26.58%
Government Bond Fund -0.67% 5.26% 5.20%
Money Market Fund 4.24% 4.52% 4.28%
MSDW Fixed Income Portfolio -2.52% N/A 4.34%
MSDW Technology Portfolio N/A N/A 23.04%
</TABLE>
The inception dates for the Underlying Funds are: 4/29/85 for Core Equity,
Select Investment Grade Income and Money Market; 9/28/90 for Equity Index;
8/26/91 for Government Bond; 8/21/92 for Select Aggressive Growth, Select
Growth, and Select Growth and Income; 4/30/93 for Select Value Opportunity;
5/2/94 for Select International Equity; 4/28/95 for Select Capital Appreciation;
10/9/86 for Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/19/85 for
Fidelity VIP High Income; 1/28/87 for Fidelity VIP Overseas; 9/06/89 for
Fidelity VIP II Asset Manager; 10/29/92 for DGPF International Equity; 3/31/94
for T. Rowe Price International Stock; 11/9/98 for Select Emerging Markets,
Select Strategic Growth; 8/27/92 for Fidelity VIP II Index 500; 8/27/92 for
Fidelity VIP II Contrafund; 1/2/97 for MSDW Fixed Income; and 11/30/99 for MSDW
Technology.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-5
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 0.5 $ 22.8
Universal life and investment product
policy fees.............................. 328.1 267.4 212.2
Net investment income...................... 150.2 151.3 164.2
Net realized investment (losses) gains..... (8.7) 20.0 2.9
Other income............................... 36.9 0.6 1.4
------ ------ ------
Total revenues......................... 507.0 439.8 403.5
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims and losses......... 173.6 153.9 187.8
Policy acquisition expenses................ 49.8 64.6 2.8
Sales practice litigation.................. -- 21.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Other operating expenses................... 151.3 104.1 101.3
------ ------ ------
Total benefits, losses and expenses.... 374.7 343.6 345.8
------ ------ ------
Income before federal income taxes............. 132.3 96.2 57.7
------ ------ ------
FEDERAL INCOME TAX EXPENSE
Current.................................... 15.5 22.1 13.9
Deferred................................... 30.5 11.8 7.1
------ ------ ------
Total federal income tax expense....... 46.0 33.9 21.0
------ ------ ------
Net income..................................... $ 86.3 $ 62.3 $ 36.7
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,354.2 and $1,284.6)............................ $ 1,324.6 $ 1,330.4
Equity securities at fair value (cost of $25.2 and
$27.4)............................................ 32.6 31.8
Mortgage loans...................................... 223.7 230.0
Policy loans........................................ 166.8 151.5
Real estate and other long-term investments......... 25.1 23.6
--------- ---------
Total investments............................... 1,772.8 1,767.3
--------- ---------
Cash and cash equivalents............................. 132.9 217.9
Accrued investment income............................. 36.0 33.5
Deferred policy acquisition costs..................... 1,156.4 950.5
Reinsurance receivable on paid and unpaid losses,
benefits and unearned premiums...................... 287.2 308.0
Other assets.......................................... 64.8 46.9
Separate account assets............................... 14,527.9 11,020.4
--------- ---------
Total assets.................................... $17,978.0 $14,344.5
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,274.7 $ 2,284.8
Outstanding claims and losses....................... 13.7 17.9
Unearned premiums................................... 2.6 2.7
Contractholder deposit funds and other policy
liabilities....................................... 44.3 38.1
--------- ---------
Total policy liabilities and accruals........... 2,335.3 2,343.5
--------- ---------
Expenses and taxes payable............................ 216.8 146.2
Reinsurance premiums payable.......................... 17.9 45.7
Deferred federal income taxes......................... 94.8 78.8
Separate account liabilities.......................... 14,527.9 11,020.4
--------- ---------
Total liabilities............................... 17,192.7 13,634.6
--------- ---------
Contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,526 and 2,524 shares, issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 423.7 407.9
Accumulated other comprehensive (loss) income......... (2.6) 24.1
Retained earnings..................................... 361.7 275.4
--------- ---------
Total shareholder's equity...................... 785.3 709.9
--------- ---------
Total liabilities and shareholder's equity...... $17,978.0 $14,344.5
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
------ ------ ------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 407.9 386.9 346.3
Issuance of common stock................... 15.8 21.0 40.6
------ ------ ------
Balance at end of period................... 423.7 407.9 386.9
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 24.1 38.5 20.5
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (41.1) (23.4) 27.0
Benefit (provision) for deferred
federal income taxes................. 14.4 9.0 (9.0)
------ ------ ------
(26.7) (14.4) 18.0
------ ------ ------
Balance at end of period................... (2.6) 24.1 38.5
------ ------ ------
RETAINED EARNINGS
Balance at beginning of period............. 275.4 213.1 176.4
Net income................................. 86.3 62.3 36.7
------ ------ ------
Balance at end of period................... 361.7 275.4 213.1
------ ------ ------
Total shareholder's equity............. $785.3 $709.9 $641.0
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Net income.................................. $ 86.3 $ 62.3 $36.7
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (41.1) (23.4) 27.0
Benefit (provision) for deferred federal
income taxes.......................... 14.4 9.0 (9.0)
------ ------ -----
Other comprehensive (loss) income... (26.7) (14.4) 18.0
------ ------ -----
Comprehensive income.................... $ 59.6 $ 47.9 $54.7
====== ====== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 86.3 $ 62.3 $ 36.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized losses/(gains)......... 8.7 (20.0) (2.9)
Net amortization and depreciation... (2.3) (7.1) --
Sales practice litigation expense... -- 21.0 --
Loss from cession of disability
income business................... -- -- 53.9
Deferred federal income taxes....... 30.5 11.8 7.1
Payment related to cession of
disability income business........ -- -- (207.0)
Change in deferred acquisition
costs............................. (169.7) (177.8) (181.3)
Change in reinsurance premiums
payable........................... (31.5) 40.8 3.9
Change in accrued investment
income............................ (2.5) 0.7 3.5
Change in policy liabilities and
accruals, net..................... (8.4) 193.1 (72.4)
Change in reinsurance receivable.... 20.7 (56.9) 22.1
Change in expenses and taxes
payable........................... 64.1 55.4 0.2
Other, net.......................... (14.8) (28.5) (7.1)
------- ------- -------
Net cash (used in) provided by
operating activities.......... (18.9) 94.8 (343.3)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 330.9 187.0 909.7
Proceeds from disposals of equity
securities............................ 30.9 53.3 2.4
Proceeds from disposals of other
investments........................... 0.8 22.7 23.7
Proceeds from mortgages matured or
collected............................. 30.5 60.1 62.9
Purchase of available-for-sale fixed
maturities............................ (415.5) (136.0) (579.7)
Purchase of equity securities........... (20.2) (30.6) (3.2)
Purchase of other investments........... (44.1) (22.7) (9.0)
Purchase of mortgages................... -- (58.9) (70.4)
Other investing activities, net......... 2.0 (3.9) --
------- ------- -------
Net cash (used in) provided by
investing activities.............. (84.7) 71.0 336.4
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from subsidiaries.......... 14.6 -- --
Proceeds from issuance of stock and
capital paid in....................... 4.0 21.0 19.2
------- ------- -------
Net cash provided by financing
activities........................ 18.6 21.0 19.2
------- ------- -------
Net change in cash and cash equivalents..... (85.0) 186.8 12.3
Cash and cash equivalents, beginning of
period..................................... 217.9 31.1 18.8
------- ------- -------
Cash and cash equivalents, end of period.... $ 132.9 $ 217.9 $ 31.1
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ -- $ --
Income taxes paid....................... $ 4.4 $ 36.2 $ 5.4
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of First Allmerica Financial Life Insurance Company ("FAFLIC") which
is a wholly-owned subsidiary of Allmerica Financial Corporation ("AFC"). As
noted below, the consolidated accounts of AFLIAC include the accounts of certain
wholly-owned non-insurance subsidiaries (principally brokerage and investment
advisory subsidiaries).
Prior to July 1, 1999, AFLIAC was a wholly-owned subsidiary of SMA Financial
Corporation ("SMAFCO"), which was a wholly-owned subsidiary of FAFLIC. Effective
July 1, 1999 and in connection with AFC's restructuring activities, SMAFCO was
renamed Allmerica Asset Management , Inc. ("AAM") and contributed it's ownership
of AFLIAC to FAFLIC. AAM also contributed Allmerica Investments, Inc., Allmerica
Investment Management Company, Inc., Allmerica Financial Investment Management
Services, Inc., and Allmerica Financial Services Insurance Agency, Inc., to
AFLIAC in exchange for one share of AFLIAC common stock. The equity of these
four companies on July 1, 1999 was $11.8 million. For the six months ended
December 31, 1999, the subsidiaries of AFLIAC had total revenue of $35.5 million
and total benefits, losses and expenses of $24.4 million. All significant
intercompany accounts and transactions have been eliminated.
In addition, effective November 1, 1999, the Company's consolidated financial
statements include five wholly-owned insurance agencies. These agencies are
Allmerica Investments Insurance Agency Inc. of Alabama, Allmerica Investments
Insurance Agency of Florida Inc., Allmerica Investment Insurance Agency Inc. of
Georgia, Allmerica Investment Insurance Agency Inc. of Kentucky, and Allmerica
Investments Insurance Agency Inc. of Mississippi.
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary effective
November 30, 1998. Its results of operations are included for eleven months of
1998 and for the month of December, 1997.
The statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities," the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
F-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there was one property remaining in the Company's real
estate portfolio, which is being actively marketed. This asset is carried at the
estimated fair value less costs of disposal. Depreciation is not recorded on
this asset while it is held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other than temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the
F-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated total revenues over the contract periods based upon the same
assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of variable annuity and variable
life insurance contractholders. Assets consist principally of bonds, common
stocks, mutual funds, and short-term obligations at market value. The investment
income, gains and losses of these accounts generally accrue to the
contractholders and, therefore, are not included in the Company's net income.
Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for individual life and annuity policies, and are based upon
estimates as to future investment yield, mortality and withdrawals that include
provisions for adverse deviation. Future policy benefits for individual life
insurance and annuity policies are computed using interest rates ranging from
3.0% to 6.0% for life insurance and 3 1/2% to 9 1/2% for annuities. Mortality,
morbidity and withdrawal assumptions for all policies are based on the Company's
own experience and industry standards. Liabilities for universal life, variable
universal life and variable annuities include deposits received from customers
and investment earnings on their fund balances, less administrative charges.
Universal life fund balances are also assessed mortality and surrender charges.
Liabilities for variable annuities include a reserve for benefit claims in
excess of a guaranteed minimum fund value.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity and
interest which provide a margin for adverse deviation. Benefit liabilities for
disabled lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims and losses are estimates of payments to be
made for reported claims and estimates of claims incurred but not reported for
individual life and disability income policies. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
F-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life insurance and individual and group annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual disability income insurance premiums are
recognized as revenue over the related contract periods. The unexpired portion
of these premiums is recorded as unearned premiums. Benefits, losses and related
expenses are matched with premiums, resulting in their recognition over the
lives of the contracts. This matching is accomplished through the provision for
future benefits, estimated and unpaid losses and amortization of deferred policy
acquisition costs. Revenues for investment-related products consist of net
investment income and contract charges assessed against the fund values. Related
benefit expenses include annuity benefit claims in excess of a guaranteed
minimum fund value, and net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). These differences result primarily from policy reserves,
policy acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. OTHER INCOME AND OTHER OPERATING EXPENSES
Other income and other operating expenses for the year ended December 31, 1999
include investment management and brokerage income and sub-advisory expenses
arising from the activities of the non-insurance subsidiaries that were
transferred to AFLIAC during 1999, as more fully described in Note 1A.
F-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (an indirect wholly-owned
subsidiary of Allmerica Financial Corporation) years beginning after June 15,
2000. The Company is currently assessing the impact of adoption of Statement No.
133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $9.8 million through December 31, 1998. The adoption of SOP 98-1 did
not have a material effect on the results of operations or financial position
for the three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this statement had no effect on the results
of operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. AFLIAC consists
of one segment, Allmerica Financial Services, which underwrites and distributes
variable annuities and variable universal life insurance via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). Statement No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and
F-10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 130 for the first quarter of 1998, which resulted
primarily in reporting unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
L. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
During 1999, AFLIAC's parent contributed $11.8 million of additional paid-in
capital to the Company in the form of four subsidiaries as disclosed in Note 1A
above. These subsidiaries consisted of assets of $22.0 million, of which $14.6
million was cash and cash equivalents, and liabilities of $10.2 million. During
1999, 1998 and 1997, SMAFCO contributed $4.0 million, $21.0 million, and $40.6
million respectively, of additional paid-in capital to the Company. The nature
of the 1997 contribution was $19.2 million in cash and $21.4 million in other
assets including Somerset Square, Inc.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.2 $ 0.2 $-- $ 5.4
States and political subdivisions....... 12.4 0.1 -- 12.5
Foreign governments..................... 38.6 0.9 0.6 38.9
Corporate fixed maturities.............. 1,180.0 10.3 38.9 1,151.4
Mortgage-backed securities.............. 118.0 1.1 2.7 116.4
-------- ----- ----- --------
Total fixed maturities.................. $1,354.2 $12.6 $42.2 $1,324.6
======== ===== ===== ========
Equity securities....................... $ 25.2 $ 7.4 $-- $ 32.6
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
-------- ----- ----- --------
Total fixed maturities.................. $1,284.6 $66.4 $20.6 $1,330.4
======== ===== ===== ========
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1999, the amortized
cost and market value of these assets on deposit in New York were
$196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $4.1 million and
$4.2 million were on deposit with various state and governmental authorities at
December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 54.5 $ 54.8
Due after one year through five years....................... 349.1 347.2
Due after five years through ten years...................... 652.9 637.1
Due after ten years......................................... 297.7 285.5
-------- --------
Total....................................................... $1,354.2 $1,324.6
======== ========
</TABLE>
F-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1999
Net appreciation, beginning of year......................... $ 16.2 $ 7.9 $ 24.1
------ ------ ------
Net depreciation on available-for-sale securities........... (75.3) (0.2) (75.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 34.4 -- 34.4
Benefit from deferred federal income taxes.................. 14.3 0.1 14.4
------ ------ ------
(26.6) (0.1) (26.7)
------ ------ ------
Net (depreciation) appreciation, end of year................ $(10.4) $ 7.8 $ (2.6)
====== ====== ======
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
------ ------ ------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
------ ------ ------
(5.9) (8.5) (14.4)
------ ------ ------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
====== ====== ======
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
------ ------ ------
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
------ ------ ------
9.4 8.6 18.0
------ ------ ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
====== ====== ======
</TABLE>
(1) Includes net (depreciation) appreciation on other investments of $(3.1)
million, $0.9 million, and $1.3 million in 1999, 1998, and 1997,
respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans are diversified by property type and location. The real
estate investment was obtained by an affiliate through foreclosure. Mortgage
loans are collateralized by the related properties and generally are no more
than 75% of the property's value at the time the original loan is made.
The carrying values of mortgage loans and the real estate investment net of
applicable reserves were $234.6 million and $244.5 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $2.4 million and
$3.3 million at December 31, 1999 and 1998, respectively.
F-13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there was one property remaining in the Company's
real estate portfolio which is being actively marketed. Depreciation is not
recorded on this asset while it is held for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $136.1 $129.2
Residential............................................... 18.5 18.9
Retail.................................................... 28.3 37.4
Industrial/warehouse...................................... 51.1 59.2
Other..................................................... 3.0 3.1
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
Geographic region:
South Atlantic............................................ $ 60.7 $ 55.5
Pacific................................................... 76.2 80.0
East North Central........................................ 35.9 41.4
Middle Atlantic........................................... 20.1 22.5
New England............................................... 29.9 26.9
West South Central........................................ 1.9 6.7
Other..................................................... 12.3 14.8
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows:
2000 -- $40.8 million; 2001 -- $6.3 million; 2002 -- $11.2 million; 2003 --
$0.5 million; 2004 -- $23.7 million; and $141.2 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1999, the Company did not refinance any mortgage loans
based on terms which differed from those granted to new borrowers.
F-14
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $ 3.3 $(0.8) $0.1 $2.4
===== ===== ==== ====
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $3.3
===== ===== ==== ====
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $1.2 $9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ----- ---- ----
Total................................................... $11.2 $ 4.8 $6.6 $9.4
===== ===== ==== ====
</TABLE>
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $5.4 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $11.4 million and $15.3 million, with
related reserves of $0.7 million and $1.5 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $14.3 million, $17.0 million
and $19.8 million, with related interest income while such loans were impaired
of $1.5 million, $2.0 million and $2.2 million as of December 31, 1999, 1998 and
1997, respectively.
D. OTHER
At December 31, 1999 and 1998, AFLIAC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.2 $107.7 $130.0
Mortgage loans.............................................. 19.0 25.5 20.4
Equity securities........................................... 0.4 0.3 1.3
Policy loans................................................ 12.4 11.7 10.8
Real estate and other long-term investments................. 4.0 4.8 4.9
Short-term investments...................................... 9.5 4.2 1.4
------ ------ ------
Gross investment income................................. 152.5 154.2 168.8
Less investment expenses.................................... (2.3) (2.9) (4.6)
------ ------ ------
Net investment income................................... $150.2 $151.3 $164.2
====== ====== ======
</TABLE>
F-15
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the Company had fixed maturities with a carrying value of
$0.8 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. There were no mortgage loans or fixed maturities on
non-accrual status at December 31, 1998. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, was a reduction in net income of $1.2 million in 1999,
and had no impact in 1998 and 1997.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.2 million, $12.6 million and $21.1 million at December 31,
1999, 1998 and 1997, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $0.9 million, $1.4 million and $1.9 million in 1999,
1998, and 1997, respectively. Actual interest income on these loans included in
net investment income aggregated $1.1 million, $1.8 million and $2.1 million in
1999, 1998 and 1997, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the year ended December 31, 1999.
Included in other long-term investments is income from limited partnerships of
$0.9 million and $0.7 million in 1999 and 1998, respectively. There was no
income from limited partnerships included in other long-term investments in
1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized (losses) gains on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- -----
<S> <C> <C> <C>
Fixed maturities............................................ $(18.8) $(6.1) $ 3.0
Mortgage loans.............................................. 0.8 8.0 (1.1)
Equity securities........................................... 8.5 15.7 0.5
Real estate and other....................................... 0.8 2.4 0.5
------ ----- -----
Net realized investment (losses) gains...................... $ (8.7) $20.0 $ 2.9
====== ===== =====
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------- ------------- ----- ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $162.3 $ 2.7 $4.3
Equity securities........................................... $ 30.4 $10.1 $1.6
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $2.0
Equity securities........................................... $ 52.6 $17.5 $0.9
1997
Fixed maturities............................................ $702.9 $11.4 $5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
</TABLE>
F-16
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the consolidated statements of comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (net
of taxes of $(18.0) million, $(5.6) million and
$10.2 million in 1999, 1998 and 1997, respectively)........ $(33.4) $ (8.2) $20.3
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes of $(3.6) million,
$3.4 million and $1.2 million in 1999, 1998 and 1997,
respectively).............................................. (6.7) 6.2 2.3
------ ------ -----
Other comprehensive (loss) income........................... $(26.7) $(14.4) $18.0
====== ====== =====
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases, may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
F-17
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
FIXED ANNUITY AND OTHER CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under individual fixed annuity
contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 132.9 $ 132.9 $ 217.9 $ 217.9
Fixed maturities.......................................... 1,324.6 1,324.6 1,330.4 1,330.4
Equity securities......................................... 32.6 32.6 31.8 31.8
Mortgage loans............................................ 223.7 222.8 230.0 241.9
Policy loans.............................................. 166.8 166.8 151.5 151.5
-------- -------- -------- --------
$1,880.6 $1,879.7 $1,961.6 $1,973.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $1,048.0 $1,014.9 $1,069.4 $1,034.6
Supplemental contracts without life contingencies......... 25.0 25.0 21.0 21.0
Other individual contract deposit funds................... 19.3 19.3 17.0 17.0
-------- -------- -------- --------
$1,092.3 $1,059.2 $1,107.4 $1,072.6
======== ======== ======== ========
</TABLE>
F-18
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense in
the consolidated statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense
Current................................................... $15.5 $22.1 $13.9
Deferred.................................................. 30.5 11.8 7.1
----- ----- -----
Total....................................................... $46.0 $33.9 $21.0
===== ===== =====
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
The deferred income tax (asset) liability represents the tax effects of
temporary differences:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------- -------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $(233.7) $(205.1)
Deferred acquisition costs................................ 339.7 278.8
Investments, net.......................................... (4.0) 12.5
Litigation reserves....................................... (4.3) (7.4)
Bad debt reserve.......................................... -- (0.4)
Other, net................................................ (2.9) 0.4
------- -------
Deferred tax liability, net................................. $ 94.8 $ 78.8
======= =======
</TABLE>
Gross deferred income tax liabilities totaled $360.4 million and $291.7 million
at December 31, 1999 and 1998, respectively. Gross deferred income tax assets
totaled $265.6 million and $212.9 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The Company has appealed certain adjustments proposed by the IRS with respect
federal income tax returns for 1992, 1993, and 1994 for the FAFLIC/AFLIAC
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In the Company's opinion, adequate tax liabilities have
F-19
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $173.9 million, $145.4 million and $124.1 million in
1999, 1998 and 1997 respectively. The net amounts payable to FAFLIC and
affiliates for accrued expenses and various other liabilities and receivables
were $48.6 million and $16.4 million at December 31, 1999 and 1998,
respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
No dividends were declared by the Company during 1999, 1998 or 1997. During
2000, AFLIAC could pay dividends of $34.3 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement
No. 113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain
F-20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
standard terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
Amounts recoverable from reinsurers at December 31, 1999 and 1998 for the
disability income business were $241.5 million and $230.8 million, respectively,
traditional life were $9.7 million and $11.4 million, respectively, and
universal and variable universal life were $36.0 million and $65.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 41.3 $ 45.5 $ 48.8
Assumed................................................... -- -- 2.6
Ceded..................................................... (40.8) (45.0) (28.6)
------ ------ ------
Net premiums................................................ $ 0.5 $ 0.5 $ 22.8
====== ====== ======
Insurance and other individual policy benefits, claims and
losses:
Direct.................................................... $210.6 $204.0 $226.0
Assumed................................................... -- -- 4.2
Ceded..................................................... (37.0) (50.1) (42.4)
------ ------ ------
Net policy benefits, claims and losses...................... $173.6 $153.9 $187.8
====== ====== ======
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition cost
asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 950.5 $765.3 $632.7
Acquisition expenses deferred............................. 219.5 242.4 184.2
Amortized to expense during the year...................... (49.8) (64.6) (53.1)
Adjustment to equity during the year...................... 36.2 7.4 (10.2)
Adjustment for cession of disability income insurance..... -- -- (38.6)
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- -- 50.3
-------- ------ ------
Balance at end of year...................................... $1,156.4 $950.5 $765.3
======== ====== ======
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims and losses as new information becomes available
and further events occur which may impact the resolution of
F-21
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unsettled claims. Changes in prior estimates are recorded in results of
operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims and losses
related to the Company's disability income business was $240.7 million and
$233.3 million at December 31, 1999 and 1998. Due to the reinsurance agreement
whereby the Company has ceded substantially all of its disability income
business to a highly rated reinsurer, the Company believes that no material
adverse development of losses will occur. However, the amount of the liabilities
could be revised in the near term if the estimates used in determining the
liability are revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement. The court granted preliminary approval of the settlement
on December 4, 1998. On May 19, 1999, the Court issued an order certifying the
class for settlement purposes and granting final approval of the settlement
agreement. AFLIAC recognized a $21.0 million pre-tax expense during the third
quarter of 1998 related to this litigation. Although the Company believes that
this expense reflects appropriate recognition of its obligation under the
settlement, this estimate assumes the availability of insurance coverage for
certain claims, and the estimate may be revised based on the amount of
reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion, based on the advice of
legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's consolidated financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
F-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. In 1999, 49 out of 50 states have adopted the
National Association of Insurance Commissioners proposed Codification, which
provides for uniform statutory accounting principles. These principles are
effective January 1, 2001. The Company is currently assessing the impact that
the adoption of Codification will have on its statutory results of operations
and financial position. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ 5.0 $ (8.2) $ 31.5
Statutory shareholder's surplus............................. $342.7 $312.2 $309.7
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Policyowners of the Group VEL Account of Allmerica Financial
Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Group VEL Account of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1999, the results of each of their operations
and the changes in each of their net assets for each of the periods indicated,
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of Allmerica Financial
Life Insurance and Annuity Company; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT
INVESTMENT MONEY EQUITY GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MARKET INDEX BOND GROWTH
---------- ------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $4,668,521 $24,452,781 $5,440,130 $2,458,780 $ 25,703 $1,376,807
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- 150 -- -- --
---------- ----------- ---------- ---------- --------- ----------
Total assets.............................. 4,668,521 24,452,781 5,440,280 2,458,780 25,703 1,376,807
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 29 9 -- 212 3 5
---------- ----------- ---------- ---------- --------- ----------
Net assets................................ $4,668,492 $24,452,772 $5,440,280 $2,458,568 $ 25,700 $1,376,802
========== =========== ========== ========== ========= ==========
Net asset distribution by category:
Variable life policies.................... $4,668,492 $24,452,772 $5,440,280 $2,458,568 $ 25,700 $1,376,802
========== =========== ========== ========== ========= ==========
Units outstanding, December 31, 1999........ 1,682,116 18,201,719 4,272,526 811,422 19,878 512,135
Net asset value per unit, December 31,
1999...................................... $ 2.775368 $ 1.343432 $ 1.273317 $ 3.029949 $1.292882 $2.688360
<CAPTION>
SELECT SELECT
SELECT GROWTH VALUE
GROWTH AND INCOME OPPORTUNITY
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $19,730,630 $ 360,630 $21,143,601
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
----------- --------- -----------
Total assets.............................. 19,730,630 360,630 21,143,601
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 255 -- 75
----------- --------- -----------
Net assets................................ $19,730,375 $ 360,630 $21,143,526
=========== ========= ===========
Net asset distribution by category:
Variable life policies.................... $19,730,375 $ 360,630 $21,143,526
=========== ========= ===========
Units outstanding, December 31, 1999........ 5,817,688 145,870 11,920,865
Net asset value per unit, December 31,
1999...................................... $ 3.391446 $2.472277 $ 1.773657
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT SELECT SELECT FIDELITY
INTERNATIONAL SELECT CAPITAL EMERGING STRATEGIC VIP HIGH FIDELITY VIP
EQUITY APPRECIATION MARKETS GROWTH INCOME EQUITY-INCOME
------------- -------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $6,399,666 $ 416,787 $ 38,426 $ 14,425 $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- 229,432 392,179
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- 2
---------- --------- --------- --------- --------- ---------
Total assets.............................. 6,399,666 416,787 38,426 14,425 229,432 392,181
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 1 -- 3 -- -- --
---------- --------- --------- --------- --------- ---------
Net assets................................ $6,399,665 $ 416,787 $ 38,423 $ 14,425 $ 229,432 $ 392,181
========== ========= ========= ========= ========= =========
Net asset distribution by category:
Variable life policies.................... $6,399,665 $ 416,787 $ 38,423 $ 14,425 $ 229,432 $ 392,181
========== ========= ========= ========= ========= =========
Units outstanding, December 31, 1999........ 2,891,414 168,585 22,820 12,251 149,451 188,109
Net asset value per unit, December 31,
1999...................................... $ 2.213334 $2.472283 $1.683890 $1.177443 $1.535166 $2.084855
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP VIP VIP II ASSET
GROWTH OVERSEAS MANAGER
---------- --------- ------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 2,011,071 121,440 942,626
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
---------- --------- ---------
Total assets.............................. 2,011,071 121,440 942,626
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 6 -- 5
---------- --------- ---------
Net assets................................ $2,011,065 $ 121,440 $ 942,621
========== ========= =========
Net asset distribution by category:
Variable life policies.................... $2,011,065 $ 121,440 $ 942,621
========== ========= =========
Units outstanding, December 31, 1999........ 594,798 55,613 474,523
Net asset value per unit, December 31,
1999...................................... $ 3.381090 $2.183667 $1.986462
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
T. ROWE PRICE DGPF DGPF
FIDELITY VIP II INTERNATIONAL GROWTH & DGPF Capital
INDEX 500 STOCK INCOME(a) Delchester(a) Reserves(a)
--------------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 52,967,255 -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- 670,974 -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- --
----------- --------- --------- --------- ---------
Total assets.............................. 52,967,255 670,974 -- -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 123 6 -- -- --
----------- --------- --------- --------- ---------
Net assets................................ $52,967,132 $ 670,968 $ -- $ -- $ --
=========== ========= ========= ========= =========
Net asset distribution by category:
Variable life policies.................... $52,967,132 $ 670,968 $ -- $ -- $ --
=========== ========= ========= ========= =========
Units outstanding, December 31, 1999........ 46,033,157 377,847 -- -- --
Net asset value per unit, December 31,
1999...................................... $ 1.150630 $1.775768 $1.000000 $1.000000 $1.000000
<CAPTION>
DGPF DGPF DGPF
Cash DGPF Delaware International
Reserves(a) DelCap(a) Balanced(a) Equity
----------- --------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- 44,794,844
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- --
--------- --------- --------- -----------
Total assets.............................. -- -- -- 44,794,844
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- 3
--------- --------- --------- -----------
Net assets................................ $ -- $ -- $ -- $44,794,841
========= ========= ========= ===========
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ -- $44,794,841
========= ========= ========= ===========
Units outstanding, December 31, 1999........ -- -- -- 30,064,075
Net asset value per unit, December 31,
1999...................................... $1.000000 $1.000000 $1.000000 $ 1.489979
</TABLE>
(a) For the year ended 12/31/99, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DGPF DGPF DGPF DGPF
SMALL CAP DGPF Strategic DGPF Emerging Social
VALUE(a) Trend(a) Income(a) Devon(a) Markets(a) Awareness(a)
---------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total assets.............................. -- -- -- -- -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net assets................................ $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
Units outstanding, December 31, 1999........ -- -- -- -- -- --
Net asset value per unit, December 31,
1999...................................... $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000
<CAPTION>
DGPF
DGPF Aggressive DGPF U.S.
REIT(a) Growth(a) Growth(a)
--------- ---------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
--------- --------- ---------
Total assets.............................. -- -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
--------- --------- ---------
Net assets................................ $ -- $ -- $ --
========= ========= =========
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ --
========= ========= =========
Units outstanding, December 31, 1999........ -- -- --
Net asset value per unit, December 31,
1999...................................... $1.000000 $1.000000 $1.000000
</TABLE>
(a) For the year ended 12/31/99, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESCO INVESCO MFVAT U.S. MFVAT
VIF EQUITY VIF TOTAL MORGAN STANLEY GOVERNMENT Asset
INCOME* RETURN FIXED INCOME INCOME(a) Allocation(a)
---------- ---------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. 10,555 27,685 -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- 29,912,451 -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- 12 -- --
--------- --------- ----------- --------- ---------
Total assets.............................. 10,555 27,685 29,912,463 -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- --
--------- --------- ----------- --------- ---------
Net assets................................ $ 10,555 $ 27,685 $29,912,463 $ -- $ --
========= ========= =========== ========= =========
Net asset distribution by category:
Variable life policies.................... $ 10,555 $ 27,685 $29,912,463 $ -- $ --
========= ========= =========== ========= =========
Units outstanding, December 31, 1999........ 5,713 19,938 28,095,948 -- --
Net asset value per unit, December 31,
1999...................................... $1.847415 $1.388528 $ 1.064654 $1.000000 $1.000000
<CAPTION>
MFVAT
Growth MFVAT MFVAT
& Capital International
Income(a) Growth(a) Equity(a)
--------- --------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
--------- --------- ---------
Total assets.............................. -- -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
--------- --------- ---------
Net assets................................ $ -- $ -- $ --
========= ========= =========
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ --
========= ========= =========
Units outstanding, December 31, 1999........ -- -- --
Net asset value per unit, December 31,
1999...................................... $1.000000 $1.000000 $1.000000
</TABLE>
* Name changed. See Note 1.
(a) For the year ended 12/31/99, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 23,481 $ 24,155 $ 19,495 $ 1,343,154 $882,578 $611,287
EXPENSES:
Mortality and expense risk
fees......................... 5,592 12,008 6,270 117,498 92,564 61,160
-------- -------- -------- ----------- -------- --------
Net investment income
(loss)..................... 17,889 12,147 13,225 1,225,656 790,014 550,127
-------- -------- -------- ----------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 286,696 21,129 282,628 18,099 -- --
Net realized gain (loss) from
sales of investments......... 47,530 (4,698) 22,096 (42,607) 20,005 7,069
-------- -------- -------- ----------- -------- --------
Net realized gain (loss)..... 334,226 16,431 304,724 (24,508) 20,005 7,069
Net unrealized gain (loss)..... 456,438 330,418 (57,127) (1,572,308) 166,355 282,868
-------- -------- -------- ----------- -------- --------
Net realized and unrealized
gain (loss)................ 790,664 346,849 247,597 (1,596,816) 186,360 289,937
-------- -------- -------- ----------- -------- --------
Net increase (decrease) in
net assets from
operations................. $808,553 $358,996 $260,822 $ (371,160) $976,374 $840,064
======== ======== ======== =========== ======== ========
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $63,607 $222,239 $168,681 $ 130,745 $ 340,554 $ 99,982
EXPENSES:
Mortality and expense risk
fees......................... 7,616 21,736 24,667 97,822 122,802 49,283
------- -------- -------- ----------- ---------- ----------
Net investment income
(loss)..................... 55,991 200,503 144,014 32,923 217,752 50,699
------- -------- -------- ----------- ---------- ----------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... -- -- -- 3,576 1,091,932 231,984
Net realized gain (loss) from
sales of investments......... -- -- -- 11,658,579 313,038 57,606
------- -------- -------- ----------- ---------- ----------
Net realized gain (loss)..... -- -- -- 11,662,155 1,404,970 289,590
Net unrealized gain (loss)..... -- -- -- (7,166,459) 5,974,791 1,759,333
------- -------- -------- ----------- ---------- ----------
Net realized and unrealized
gain (loss)................ -- -- -- 4,495,696 7,379,761 2,048,923
------- -------- -------- ----------- ---------- ----------
Net increase (decrease) in
net assets from
operations................. $55,991 $200,503 $144,014 $ 4,528,619 $7,597,513 $2,099,622
======= ======== ======== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $1,412 $ 911 $837 $ -- $ -- $ --
EXPENSES:
Mortality and expense risk
fees......................... 78 103 19 5,695 3,950 706
------ ------ ---- -------- ------- -------
Net investment income
(loss)..................... 1,334 808 818 (5,695) (3,950) (706)
------ ------ ---- -------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... -- -- -- -- -- 17,916
Net realized gain (loss) from
sales of investments......... (153) 926 1 16,919 (3,058) 748
------ ------ ---- -------- ------- -------
Net realized gain (loss)..... (153) 926 1 16,919 (3,058) 18,664
Net unrealized gain (loss)..... (596) 83 (88) 356,020 42,784 3,863
------ ------ ---- -------- ------- -------
Net realized and unrealized
gain (loss)................ (749) 1,009 (87) 372,939 39,726 22,527
------ ------ ---- -------- ------- -------
Net increase (decrease) in
net assets from
operations................. $ 585 $1,817 $731 $367,244 $35,776 $21,821
====== ====== ==== ======== ======= =======
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 8,328 $ 7,079 $ 20,160 $ 3,501 $ 2,753 $1,134
EXPENSES:
Mortality and expense risk
fees......................... 83,487 58,229 39,740 1,862 1,576 365
---------- ---------- ---------- ------- ------- ------
Net investment income
(loss)..................... (75,159) (51,150) (19,580) 1,639 1,177 769
---------- ---------- ---------- ------- ------- ------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 529,243 93,491 363,902 23,247 922 13,936
Net realized gain (loss) from
sales of investments......... 518,323 576,009 51,101 1,849 1,778 296
---------- ---------- ---------- ------- ------- ------
Net realized gain (loss)..... 1,047,566 669,500 415,003 25,096 2,700 14,232
Net unrealized gain (loss)..... 3,239,541 2,339,939 1,431,596 22,927 25,056 (5,403)
---------- ---------- ---------- ------- ------- ------
Net realized and unrealized
gain (loss)................ 4,287,107 3,009,439 1,846,599 48,023 27,756 8,829
---------- ---------- ---------- ------- ------- ------
Net increase (decrease) in
net assets from
operations................. $4,211,948 $2,958,289 $1,827,019 $49,662 $28,933 $9,598
========== ========== ========== ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY SELECT INTERNATIONAL EQUITY
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
----------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 118 $ 5,317 $ 1,289 $ -- $ 117,829 $131,715
EXPENSES:
Mortality and expense risk
fees......................... 64,483 2,543 633 42,211 53,990 35,909
----------- ------- ------- ---------- ---------- --------
Net investment income
(loss)..................... (64,365) 2,774 656 (42,211) 63,839 95,806
----------- ------- ------- ---------- ---------- --------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 1,173,968 1,651 30,900 -- -- 182,156
Net realized gain (loss) from
sales of investments......... (58,716) (3,746) 700 803,256 77,352 11,256
----------- ------- ------- ---------- ---------- --------
Net realized gain (loss)..... 1,115,252 (2,095) 31,600 803,256 77,352 193,412
Net unrealized gain (loss)..... (2,332,303) 16,497 (5,610) 900,525 1,085,145 (15,069)
----------- ------- ------- ---------- ---------- --------
Net realized and unrealized
gain (loss)................ (1,217,051) 14,402 25,990 1,703,781 1,162,497 178,343
----------- ------- ------- ---------- ---------- --------
Net increase (decrease) in
net assets from
operations................. $(1,281,416) $17,176 $26,646 $1,661,570 $1,226,336 $274,149
=========== ======= ======= ========== ========== ========
<CAPTION>
SELECT EMERGING MARKETS
SELECT CAPITAL APPRECIATION
FOR THE YEAR ENDED FOR THE FOR THE
DECEMBER 31, YEAR ENDED PERIOD
-------------------------------- DECEMBER 31, 11/9/98* TO
1999 1998 1997 1999 12/31/98
-------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ -- $ -- $ -- $ 100 $ --
EXPENSES:
Mortality and expense risk
fees......................... 1,681 914 204 40 --
------- -------- ------ ------ ---------------
Net investment income
(loss)..................... (1,681) (914) (204) 60 --
------- -------- ------ ------ ---------------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 412 37,550 -- -- --
Net realized gain (loss) from
sales of investments......... 28 (803) 544 21 --
------- -------- ------ ------ ---------------
Net realized gain (loss)..... 440 36,747 544 21 --
Net unrealized gain (loss)..... 74,213 (13,375) 6,529 5,716 --
------- -------- ------ ------ ---------------
Net realized and unrealized
gain (loss)................ 74,653 23,372 7,073 5,737 --
------- -------- ------ ------ ---------------
Net increase (decrease) in
net assets from
operations................. $72,972 $ 22,458 $6,869 $5,797 $ --
======= ======== ====== ====== ===============
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT STRATEGIC FIDELITY VIP HIGH INCOME
GROWTH FOR THE YEAR ENDED
FOR THE DECEMBER 31,
PERIOD 3/5/99* --------------------------------
TO 12/31/99 1999 1998 1997
---------------- -------- -------- --------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 40 $ 8,271 $ 3,501 $ 351
EXPENSES:
Mortality and expense risk fees........... 20 783 354 119
---- ------- ------- ------
Net investment income (loss)............ 20 7,488 3,147 232
---- ------- ------- ------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 309 2,225 43
Net realized gain (loss) from sales of
investments............................. (17) (2,862) (683) 94
---- ------- ------- ------
Net realized gain (loss)................ (17) (2,553) 1,542 137
Net unrealized gain (loss)................ 918 2,236 (8,346) 2,892
---- ------- ------- ------
Net realized and unrealized gain
(loss)................................ 901 (317) (6,804) 3,029
---- ------- ------- ------
Net increase (decrease) in net assets
from
operations............................ $921 $ 7,171 $(3,657) $3,261
==== ======= ======= ======
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $2,402 $ 898 $ 91 $ 2,233 $ 1,819 $ 2,224
EXPENSES:
Mortality and expense risk fees........... 1,479 569 177 6,781 2,312 1,311
------ ------- ------ -------- -------- -------
Net investment income (loss)............ 923 329 (86) (4,548) (493) 913
------ ------- ------ -------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 5,309 3,197 457 140,400 47,583 9,956
Net realized gain (loss) from sales of
investments............................. 3,125 802 242 114,230 37,911 16,498
------ ------- ------ -------- -------- -------
Net realized gain (loss)................ 8,434 3,999 699 254,630 85,494 26,454
Net unrealized gain (loss)................ (277) 5,752 5,483 242,219 115,549 43,944
------ ------- ------ -------- -------- -------
Net realized and unrealized gain
(loss)................................ 8,157 9,751 6,182 496,849 201,043 70,398
------ ------- ------ -------- -------- -------
Net increase (decrease) in net assets
from
operations............................ $9,080 $10,080 $6,096 $492,301 $200,550 $71,311
====== ======= ====== ======== ======== =======
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II
FOR THE ASSET MANAGER
YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,054 $1,056 $ 344 $20,569 $11,971 $ 6,739
EXPENSES:
Mortality and expense risk fees........... 502 338 205 1,247 2,662 994
------- ------ ------ ------- ------- -------
Net investment income (loss)............ 552 718 139 19,322 9,309 5,745
------- ------ ------ ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 1,699 3,112 1,365 26,054 35,913 16,905
Net realized gain (loss) from sales of
investments............................. 1,721 165 201 1,785 5,268 499
------- ------ ------ ------- ------- -------
Net realized gain (loss)................ 3,420 3,277 1,566 27,839 41,181 17,404
Net unrealized gain (loss)................ 30,111 1,086 285 12,862 15,917 28,899
------- ------ ------ ------- ------- -------
Net realized and unrealized gain
(loss)................................ 33,531 4,363 1,851 40,701 57,098 46,303
------- ------ ------ ------- ------- -------
Net increase (decrease) in net assets
from
operations............................ $34,083 $5,081 $1,990 $60,023 $66,407 $52,048
======= ====== ====== ======= ======= =======
<CAPTION>
FIDELITY VIP II T. ROWE PRICE
INDEX 500 INTERNATIONAL STOCK
FOR THE YEAR ENDED
FOR THE DECEMBER 31,
PERIOD --------------------------------
5/4/99* TO 12/31/99 1999 1998 1997
------------------- -------- -------- --------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 2,334 $ 4,272 $ 898
EXPENSES:
Mortality and expense risk fees........... 56,677 2,485 1,337 560
---------- -------- ------- ------
Net investment income (loss)............ (56,677) (151) 2,935 338
---------- -------- ------- ------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 7,335 1,508 1,272
Net realized gain (loss) from sales of
investments............................. 1,274 1,538 318 183
---------- -------- ------- ------
Net realized gain (loss)................ 1,274 8,873 1,826 1,455
Net unrealized gain (loss)................ 4,566,606 144,131 23,676 (326)
---------- -------- ------- ------
Net realized and unrealized gain
(loss)................................ 4,567,880 153,004 25,502 1,129
---------- -------- ------- ------
Net increase (decrease) in net assets
from
operations............................ $4,511,203 $152,853 $28,437 $1,467
========== ======== ======= ======
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
INVESCO VIF
DGPF INTERNATIONAL EQUITY EQUITY INCOME**
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 183,862 $ 11,680 $ 118 $ 123 $ 150 $ 112
EXPENSES:
Mortality and expense risk
fees......................... 50,747 16,877 251 39 38 23
---------- -------- ----- ------ ------ ------
Net investment income
(loss)..................... 133,115 (5,197) (133) 84 112 89
---------- -------- ----- ------ ------ ------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 13,428 -- -- 55 311 398
Net realized gain (loss) from
sales of investments......... 20,862 7,893 164 234 401 25
---------- -------- ----- ------ ------ ------
Net realized gain (loss)..... 34,290 7,893 164 289 712 423
Net unrealized gain (loss)..... 2,827,542 442,761 (695) 947 312 752
---------- -------- ----- ------ ------ ------
Net realized and unrealized
gain (loss)................ 2,861,832 450,654 (531) 1,236 1,024 1,175
---------- -------- ----- ------ ------ ------
Net increase (decrease) in
net assets from
operations................. $2,994,947 $445,457 $(664) $1,320 $1,136 $1,264
========== ======== ===== ====== ====== ======
<CAPTION>
INVESCO VIF MORGAN STANLEY FIXED INCOME
TOTAL RETURN
FOR THE YEAR ENDED FOR THE FOR THE
DECEMBER 31, YEAR ENDED PERIOD
-------------------------------- DECEMBER 31, 2/17/98* TO
1999 1998 1997 1999 12/31/98
-------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 642 $1,276 $1,045 $ 1,356,031 $648,460
EXPENSES:
Mortality and expense risk
fees......................... 149 257 137 78,341 35,898
------- ------ ------ ----------- --------
Net investment income
(loss)..................... 493 1,019 908 1,277,690 612,562
------- ------ ------ ----------- --------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 107 1,325 245 3,424 256,451
Net realized gain (loss) from
sales of investments......... 4,008 553 31 (11,666) 8,635
------- ------ ------ ----------- --------
Net realized gain (loss)..... 4,115 1,878 276 (8,242) 265,086
Net unrealized gain (loss)..... (5,835) 2,122 5,287 (1,680,097) (179,067)
------- ------ ------ ----------- --------
Net realized and unrealized
gain (loss)................ (1,720) 4,000 5,563 (1,688,339) 86,019
------- ------ ------ ----------- --------
Net increase (decrease) in
net assets from
operations................. $(1,227) $5,019 $6,471 $ (410,649) $698,581
======= ====== ====== =========== ========
</TABLE>
* Date of initial investment.
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH
YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..................... $ 17,889 $ 12,147 $ 13,225
Net realized gain (loss)......................... 334,226 16,431 304,724
Net unrealized gain (loss)....................... 456,438 330,418 (57,127)
---------- ---------- ----------
Net increase (decrease) in net assets from
operations..................................... 808,553 358,996 260,822
---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums..................................... 873,749 675,094 793,195
Terminations..................................... (337,479) (48,810) (2,053)
Insurance and other charges...................... (13,900) (7,692) (3,267)
Transfers between sub-accounts (including fixed
account), net.................................. 540,030 (72,668) 75,006
Other transfers from (to) the General Account.... 116,813 492 (6,615)
Net increase (decrease) in investment by
Sponsor........................................ -- -- --
---------- ---------- ----------
Net increase (decrease) in net assets from policy
transactions................................... 1,179,213 546,416 856,266
---------- ---------- ----------
Net increase (decrease) in net assets............ 1,987,766 905,412 1,117,088
NET ASSETS:
Beginning of year.................................. 2,680,726 1,775,314 658,226
---------- ---------- ----------
End of year........................................ $4,668,492 $2,680,726 $1,775,314
========== ========== ==========
<CAPTION>
INVESTMENT GRADE INCOME
YEAR ENDED
DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..................... $ 1,225,656 $ 790,014 $ 550,127
Net realized gain (loss)......................... (24,508) 20,005 7,069
Net unrealized gain (loss)....................... (1,572,308) 166,355 282,868
----------- ----------- ----------
Net increase (decrease) in net assets from
operations..................................... (371,160) 976,374 840,064
----------- ----------- ----------
FROM POLICY TRANSACTIONS:
Net premiums..................................... 8,011,892 2,981,137 9,313,499
Terminations..................................... (13,958) (53,707) --
Insurance and other charges...................... (633,839) (451,085) (447,871)
Transfers between sub-accounts (including fixed
account), net.................................. 2,113,615 2,055,119 138,291
Other transfers from (to) the General Account.... (6,858) 892 402
Net increase (decrease) in investment by
Sponsor........................................ -- (265) --
----------- ----------- ----------
Net increase (decrease) in net assets from policy
transactions................................... 9,470,852 4,532,091 9,004,321
----------- ----------- ----------
Net increase (decrease) in net assets............ 9,099,692 5,508,465 9,844,385
NET ASSETS:
Beginning of year.................................. 15,353,080 9,844,615 230
----------- ----------- ----------
End of year........................................ $24,452,772 $15,353,080 $9,844,615
=========== =========== ==========
<CAPTION>
MONEY MARKET
YEAR ENDED
DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..................... $ 55,991 $ 200,503 $ 144,014
Net realized gain (loss)......................... -- -- --
Net unrealized gain (loss)....................... -- -- --
---------- ------------ -----------
Net increase (decrease) in net assets from
operations..................................... 55,991 200,503 144,014
---------- ------------ -----------
FROM POLICY TRANSACTIONS:
Net premiums..................................... 6,325,820 1,928,083 30,656,799
Terminations..................................... (69,826) (47,901) (31)
Insurance and other charges...................... (709,087) (830,359) (704,864)
Transfers between sub-accounts (including fixed
account), net.................................. (391,608) (29,510,393) (1,673,588)
Other transfers from (to) the General Account.... (10,636) (771) 35
Net increase (decrease) in investment by
Sponsor........................................ -- -- --
---------- ------------ -----------
Net increase (decrease) in net assets from policy
transactions................................... 5,144,663 (28,461,341) 28,278,351
---------- ------------ -----------
Net increase (decrease) in net assets............ 5,200,654 (28,260,838) 28,422,365
NET ASSETS:
Beginning of year.................................. 239,626 28,500,464 78,099
---------- ------------ -----------
End of year........................................ $5,440,280 $ 239,626 $28,500,464
========== ============ ===========
<CAPTION>
EQUITY INDEX
YEAR ENDED
DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..................... $ 32,923 $ 217,752 $ 50,699
Net realized gain (loss)......................... 11,662,155 1,404,970 289,590
Net unrealized gain (loss)....................... (7,166,459) 5,974,791 1,759,333
------------ ----------- ----------
Net increase (decrease) in net assets from
operations..................................... 4,528,619 7,597,513 2,099,622
------------ ----------- ----------
FROM POLICY TRANSACTIONS:
Net premiums..................................... 2,363,320 17,533,507 6,793,979
Terminations..................................... (172,583) (86,149) (198)
Insurance and other charges...................... (587,637) (998,917) (364,580)
Transfers between sub-accounts (including fixed
account), net.................................. (49,801,441) 13,535,625 8,426
Other transfers from (to) the General Account.... (2,377) 5,188 (34)
Net increase (decrease) in investment by
Sponsor........................................ -- -- --
------------ ----------- ----------
Net increase (decrease) in net assets from policy
transactions................................... (48,200,718) 29,989,254 6,437,593
------------ ----------- ----------
Net increase (decrease) in net assets............ (43,672,099) 37,586,767 8,537,215
NET ASSETS:
Beginning of year.................................. 46,130,667 8,543,900 6,685
------------ ----------- ----------
End of year........................................ $ 2,458,568 $46,130,667 $8,543,900
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ 1,334 $ 808 $ 818 $ (5,695) $ (3,950) $ (706)
Net realized gain (loss)................. (153) 926 1 16,919 (3,058) 18,664
Net unrealized gain (loss)............... (596) 83 (88) 356,020 42,784 3,863
-------- -------- ------- ---------- -------- --------
Net increase (decrease) in net assets
from
operations............................. 585 1,817 731 367,244 35,776 21,821
-------- -------- ------- ---------- -------- --------
FROM POLICY TRANSACTIONS:
Net premiums............................. 12,424 13,471 5,649 298,089 448,702 98,882
Terminations............................. (12,517) (81) (713) (29,100) (76,946) (3,662)
Insurance and other charges.............. (554) (216) (163) (29,164) (18,498) (3,465)
Transfers between sub-accounts (including
fixed
account), net.......................... 3,007 (30,874) 31,189 (17,644) 181,020 115,907
Other transfers from (to) the General
Account................................ (583) (389) -- (17,822) (3,910) 1,120
Net increase (decrease) in investment by
Sponsor................................ -- -- -- -- -- --
-------- -------- ------- ---------- -------- --------
Net increase (decrease) in net assets
from policy
transactions........................... 1,777 (18,089) 35,962 204,359 530,368 208,782
-------- -------- ------- ---------- -------- --------
Net increase (decrease) in net assets.... 2,362 (16,272) 36,693 571,603 566,144 230,603
NET ASSETS:
Beginning of year.......................... 23,338 39,610 2,917 805,199 239,055 8,452
-------- -------- ------- ---------- -------- --------
End of year................................ $ 25,700 $ 23,338 $39,610 $1,376,802 $805,199 $239,055
======== ======== ======= ========== ======== ========
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ (75,159) $ (51,150) $ (19,580) $ 1,639 $ 1,177 $ 769
Net realized gain (loss)................. 1,047,566 669,500 415,003 25,096 2,700 14,232
Net unrealized gain (loss)............... 3,239,541 2,339,939 1,431,596 22,927 25,056 (5,403)
----------- ----------- ---------- -------- -------- --------
Net increase (decrease) in net assets
from
operations............................. 4,211,948 2,958,289 1,827,019 49,662 28,933 9,598
----------- ----------- ---------- -------- -------- --------
FROM POLICY TRANSACTIONS:
Net premiums............................. 3,049,445 2,111,416 5,368,817 88,966 155,220 65,720
Terminations............................. (33,196) (97,238) (18) (7,618) (44,778) (4,379)
Insurance and other charges.............. (345,255) (281,352) (292,989) (5,494) (7,462) (3,633)
Transfers between sub-accounts (including
fixed
account), net.......................... 2,130,460 (952,256) 76,402 3,125 (70,127) 101,691
Other transfers from (to) the General
Account................................ (8,787) 4,794 1,070 (639) (1,320) 800
Net increase (decrease) in investment by
Sponsor................................ -- -- -- -- -- --
----------- ----------- ---------- -------- -------- --------
Net increase (decrease) in net assets
from policy
transactions........................... 4,792,667 785,364 5,153,282 78,340 31,533 160,199
----------- ----------- ---------- -------- -------- --------
Net increase (decrease) in net assets.... 9,004,615 3,743,653 6,980,301 128,002 60,466 169,797
NET ASSETS:
Beginning of year.......................... 10,725,760 6,982,107 1,806 232,628 172,162 2,365
----------- ----------- ---------- -------- -------- --------
End of year................................ $19,730,375 $10,725,760 $6,982,107 $360,630 $232,628 $172,162
=========== =========== ========== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY SELECT INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
----------- -------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ (64,365) $ 2,774 $ 656 $ (42,211) $ 63,839 $ 95,806
Net realized gain (loss)...... 1,115,252 (2,095) 31,600 803,256 77,352 193,412
Net unrealized gain (loss).... (2,332,303) 16,497 (5,610) 900,525 1,085,145 (15,069)
----------- -------- -------- ----------- ---------- ----------
Net increase (decrease) in net
assets from
operations.................. (1,281,416) 17,176 26,646 1,661,570 1,226,336 274,149
----------- -------- -------- ----------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums.................. 7,573,904 245,642 151,059 1,382,581 1,910,773 5,449,561
Terminations.................. (10,156) (32,190) (3,904) (40,201) (85,614) (8)
Insurance and other charges... (504,046) (12,119) (4,266) (135,408) (257,943) (259,243)
Transfers between sub-accounts
(including fixed
account), net............... 14,728,048 182,286 59,070 (5,542,260) 655,125 108,744
Other transfers from (to) the
General Account............. 3,590 (2,227) 432 (5,159) (6,961) 947
Net increase (decrease) in
investment by
Sponsor..................... -- -- -- -- -- --
----------- -------- -------- ----------- ---------- ----------
Net increase (decrease) in net
assets from policy
transactions................ 21,791,340 381,392 202,391 (4,340,447) 2,215,380 5,300,001
----------- -------- -------- ----------- ---------- ----------
Net increase (decrease) in net
assets...................... 20,509,924 398,568 229,037 (2,678,877) 3,441,716 5,574,150
NET ASSETS:
Beginning of year............... 633,602 235,034 5,997 9,078,542 5,636,826 62,676
----------- -------- -------- ----------- ---------- ----------
End of year..................... $21,143,526 $633,602 $235,034 $ 6,399,665 $9,078,542 $5,636,826
=========== ======== ======== =========== ========== ==========
<CAPTION>
SELECT CAPITAL APPRECIATION SELECT EMERGING MARKETS
YEAR ENDED
DECEMBER 31, YEAR ENDED PERIOD
-------------------------------- DECEMBER 31, FROM 11/9/98*
1999 1998 1997 1999 TO 12/31/98
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ (1,681) $ (914) $ (204) $ 60 $--
Net realized gain (loss)...... 440 36,747 544 21 --
Net unrealized gain (loss).... 74,213 (13,375) 6,529 5,716 --
-------- -------- ------- ------- ---
Net increase (decrease) in net
assets from
operations.................. 72,972 22,458 6,869 5,797 --
-------- -------- ------- ------- ---
FROM POLICY TRANSACTIONS:
Net premiums.................. 118,843 105,063 53,911 21,690 11
Terminations.................. (14,254) (8,341) (3,829) -- --
Insurance and other charges... (9,399) (5,861) (1,570) (399) --
Transfers between sub-accounts
(including fixed
account), net............... 4,812 69,728 (4,978) 11,082 --
Other transfers from (to) the
General Account............. (4,275) (344) (16) 242 --
Net increase (decrease) in
investment by
Sponsor..................... -- -- -- -- --
-------- -------- ------- ------- ---
Net increase (decrease) in net
assets from policy
transactions................ 95,727 160,245 43,518 32,615 11
-------- -------- ------- ------- ---
Net increase (decrease) in net
assets...................... 168,699 182,703 50,387 38,412 11
NET ASSETS:
Beginning of year............... 248,088 65,385 14,998 11 --
-------- -------- ------- ------- ---
End of year..................... $416,787 $248,088 $65,385 $38,423 $11
======== ======== ======= ======= ===
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-14
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT STRATEGIC FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
GROWTH YEAR ENDED YEAR ENDED
PERIOD DECEMBER 31, DECEMBER 31,
FROM 3/5/99* -------------------------------- --------------------------------
TO 12/31/99 1999 1998 1997 1999 1998 1997
---------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 20 $ 7,488 $ 3,147 $ 232 $ 923 $ 329 $ (86)
Net realized gain (loss)....... (17) (2,553) 1,542 137 8,434 3,999 699
Net unrealized gain (loss)..... 918 2,236 (8,346) 2,892 (277) 5,752 5,483
------- -------- ------- ------- -------- -------- -------
Net increase (decrease) in net
assets from
operations................... 921 7,171 (3,657) 3,261 9,080 10,080 6,096
------- -------- ------- ------- -------- -------- -------
FROM POLICY TRANSACTIONS:
Net premiums................... 12,853 180,207 36,812 37,542 187,400 116,536 49,237
Terminations................... -- (21,248) (4,930) (1,972) (33,829) (23,881) (817)
Insurance and other charges.... (1,346) (15,258) (3,521) (1,317) (15,364) (6,484) (1,985)
Transfers between sub-accounts
(including fixed
account), net................ 1,952 (6,975) 21,213 1,849 92,974 4,066 1,915
Other transfers from (to) the
General Account.............. 45 (3,559) (252) 15 (7,403) 25 89
Net increase (decrease) in
investment by
Sponsor...................... -- -- -- -- -- -- --
------- -------- ------- ------- -------- -------- -------
Net increase (decrease) in net
assets from policy
transactions................. 13,504 133,167 49,322 36,117 223,778 90,262 48,439
------- -------- ------- ------- -------- -------- -------
Net increase (decrease) in net
assets....................... 14,425 140,338 45,665 39,378 232,858 100,342 54,535
NET ASSETS:
Beginning of year................ -- 89,094 43,429 4,051 159,323 58,981 4,446
------- -------- ------- ------- -------- -------- -------
End of year...................... $14,425 $229,432 $89,094 $43,429 $392,181 $159,323 $58,981
======= ======== ======= ======= ======== ======== =======
<CAPTION>
FIDELITY VIP GROWTH
YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (4,548) $ (493) $ 913
Net realized gain (loss)....... 254,630 85,494 26,454
Net unrealized gain (loss)..... 242,219 115,549 43,944
---------- ---------- --------
Net increase (decrease) in net
assets from
operations................... 492,301 200,550 71,311
---------- ---------- --------
FROM POLICY TRANSACTIONS:
Net premiums................... 444,886 267,715 137,061
Terminations................... (337,035) (25,480) (17,376)
Insurance and other charges.... (37,954) (8,916) (4,065)
Transfers between sub-accounts
(including fixed
account), net................ 266,957 375,715 (169,900)
Other transfers from (to) the
General Account.............. 30,447 (3,680) 199
Net increase (decrease) in
investment by
Sponsor...................... -- -- --
---------- ---------- --------
Net increase (decrease) in net
assets from policy
transactions................. 367,301 605,354 (54,081)
---------- ---------- --------
Net increase (decrease) in net
assets....................... 859,602 805,904 17,230
NET ASSETS:
Beginning of year................ 1,151,463 345,559 328,329
---------- ---------- --------
End of year...................... $2,011,065 $1,151,463 $345,559
========== ========== ========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-15
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
YEAR ENDED YEAR ENDED FIDELITY VIP II
DECEMBER 31, DECEMBER 31, INDEX 500
-------------------------------- -------------------------------- PERIOD FROM 5/4/99*
1999 1998 1997 1999 1998 1997 TO 12/31/99
-------- -------- -------- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 552 $ 718 $ 139 $ 19,322 $ 9,309 $ 5,745 $ (56,677)
Net realized gain (loss)....... 3,420 3,277 1,566 27,839 41,181 17,404 1,274
Net unrealized gain (loss)..... 30,111 1,086 285 12,862 15,917 28,899 4,566,606
-------- -------- ------- -------- -------- -------- -----------
Net increase (decrease) in net
assets from
operations................... 34,083 5,081 1,990 60,023 66,407 52,048 4,511,203
-------- -------- ------- -------- -------- -------- -----------
FROM POLICY TRANSACTIONS:
Net premiums................... 33,875 38,586 31,760 333,909 216,035 142,926 16,597,260
Terminations................... (2,242) (1,996) (184) (84,288) (219) (172) --
Insurance and other charges.... (4,895) (3,619) (1,796) (4,448) (759) (455) (418,198)
Transfers between sub-accounts
(including fixed
account), net................ 475 (20,410) 685 (34,218) (2,565) (14,401) 32,276,822
Other transfers from (to) the
General Account.............. (7,437) (832) 2 23,270 (1,965) (194) 45
Net increase (decrease) in
investment by
Sponsor...................... -- -- -- -- -- -- --
-------- -------- ------- -------- -------- -------- -----------
Net increase (decrease) in net
assets from policy
transactions................. 19,776 11,729 30,467 234,225 210,527 127,704 48,455,929
-------- -------- ------- -------- -------- -------- -----------
Net increase (decrease) in net
assets....................... 53,859 16,810 32,457 294,248 276,934 179,752 52,967,132
NET ASSETS:
Beginning of year................ 67,581 50,771 18,314 648,373 371,439 191,687 --
-------- -------- ------- -------- -------- -------- -----------
End of year...................... $121,440 $ 67,581 $50,771 $942,621 $648,373 $371,439 $52,967,132
======== ======== ======= ======== ======== ======== ===========
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK
YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (151) $ 2,935 $ 338
Net realized gain (loss)....... 8,873 1,826 1,455
Net unrealized gain (loss)..... 144,131 23,676 (326)
-------- -------- -------
Net increase (decrease) in net
assets from
operations................... 152,853 28,437 1,467
-------- -------- -------
FROM POLICY TRANSACTIONS:
Net premiums................... 152,351 104,206 36,785
Terminations................... (4,759) (2,000) --
Insurance and other charges.... (12,033) (5,246) (1,021)
Transfers between sub-accounts
(including fixed
account), net................ 10,736 148,557 533
Other transfers from (to) the
General Account.............. (323) 360 (1)
Net increase (decrease) in
investment by
Sponsor...................... -- -- --
-------- -------- -------
Net increase (decrease) in net
assets from policy
transactions................. 145,972 245,877 36,296
-------- -------- -------
Net increase (decrease) in net
assets....................... 298,825 274,314 37,763
NET ASSETS:
Beginning of year................ 372,143 97,829 60,066
-------- -------- -------
End of year...................... $670,968 $372,143 $97,829
======== ======== =======
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-16
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DGPF INTERNATIONAL EQUITY INVESCO VIF EQUITY INCOME**
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
----------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ 133,115 $ (5,197) $ (133) $ 84 $ 112 $ 89
Net realized gain (loss)...... 34,290 7,893 164 289 712 423
Net unrealized gain (loss).... 2,827,542 442,761 (695) 947 312 752
----------- ---------- ------- ------- ------- ------
Net increase (decrease) in net
assets from
operations.................. 2,994,947 445,457 (664) 1,320 1,136 1,264
----------- ---------- ------- ------- ------- ------
FROM POLICY TRANSACTIONS:
Net premiums.................. 33,755,687 3,720,116 82,362 2,113 6,284 2,869
Terminations.................. (3,114) (370) (1,381) (149) (916) --
Insurance and other charges... (501,577) (204,104) (1,510) (1,958) (4,494) (242)
Transfers between sub-accounts
(including fixed
account), net............... (1,808) 4,507,084 1,085 -- -- --
Other transfers from (to) the
General Account............. (354) 244 11 -- 8 3
Net increase (decrease) in
investment by
Sponsor..................... -- -- -- -- -- --
----------- ---------- ------- ------- ------- ------
Net increase (decrease) in net
assets from policy
transactions................ 33,248,834 8,022,970 80,567 6 882 2,630
----------- ---------- ------- ------- ------- ------
Net increase (decrease) in net
assets...................... 36,243,781 8,468,427 79,903 1,326 2,018 3,894
NET ASSETS:
Beginning of year............... 8,551,060 82,633 2,730 9,229 7,211 3,317
----------- ---------- ------- ------- ------- ------
End of year..................... $44,794,841 $8,551,060 $82,633 $10,555 $ 9,229 $7,211
=========== ========== ======= ======= ======= ======
<CAPTION>
INVESCO VIF TOTAL RETURN MORGAN STANLEY FIXED INCOME
YEAR ENDED
DECEMBER 31, YEAR ENDED PERIOD
-------------------------------- DECEMBER 31, FROM 2/17/98*
1999 1998 1997 1999 TO 12/31/98
-------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ 493 $ 1,019 $ 908 $ 1,277,690 $ 612,562
Net realized gain (loss)...... 4,115 1,878 276 (8,242) 265,086
Net unrealized gain (loss).... (5,835) 2,122 5,287 (1,680,097) (179,067)
-------- ------- ------- ----------- -----------
Net increase (decrease) in net
assets from
operations.................. (1,227) 5,019 6,471 (410,649) 698,581
-------- ------- ------- ----------- -----------
FROM POLICY TRANSACTIONS:
Net premiums.................. 1,559 7,489 26,884 7,703,567 9,708,358
Terminations.................. (32,859) (8) -- -- --
Insurance and other charges... (1,694) (860) (764) (522,326) (446,219)
Transfers between sub-accounts
(including fixed
account), net............... -- -- -- 3,300,001 9,881,316
Other transfers from (to) the
General Account............. (1) 42 32 19 (185)
Net increase (decrease) in
investment by
Sponsor..................... -- -- -- -- --
-------- ------- ------- ----------- -----------
Net increase (decrease) in net
assets from policy
transactions................ (32,995) 6,663 26,152 10,481,261 19,143,270
-------- ------- ------- ----------- -----------
Net increase (decrease) in net
assets...................... (34,222) 11,682 32,623 10,070,612 19,841,851
NET ASSETS:
Beginning of year............... 61,907 50,225 17,602 19,841,851 --
-------- ------- ------- ----------- -----------
End of year..................... $ 27,685 $61,907 $50,225 $29,912,463 $19,841,851
======== ======= ======= =========== ===========
</TABLE>
* Date of initial investment.
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-17
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Group VEL Account (Group VEL) is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company (the Company) established
on May 1, 1995 for the purpose of separating from the general assets of the
Company, those assets used to fund the variable portion of certain flexible
premium variable life insurance policies issued by the Company. The Company is a
wholly-owned subsidiary of First Allmerica Financial Life Insurance Company
(First Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Group VEL are clearly identified and distinguished from the other
assets and liabilities of the Company. Group VEL cannot be charged with
liabilities arising out of any other business of the Company.
Group VEL is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). Group VEL currently offers
forty-four Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio of the Allmerica Investment Trust (the Trust) managed by
Allmerica Financial Investment Management Services, Inc. (AFIMS), a wholly-owned
subsidiary of the Company; or of the Variable Insurance Products Fund (Fidelity
VIP) or the Variable Insurance Products Fund II (Fidelity VIP II), managed by
Fidelity Management & Research Company (FMR); or of the T. Rowe Price
International Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming
International, Inc.; or of the Delaware Group Premium Fund (DGPF) managed by
Delaware Management Company or Delaware International Advisers Ltd.; or of the
INVESCO Variable Investment Funds, Inc. (INVESCO VIF) managed by INVESCO Funds
Group, Inc.; or of the Morgan Stanley Universal Funds, Inc. (Morgan Stanley)
managed by Miller Anderson & Sherrerd, LLP; or of the Mutual Fund Variable
Annuity Trust (MFVAT) managed by Chase Manhattan Bank, N.A.. The Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO, Morgan Stanley and MFVAT
(the Funds) are open-end, management investment companies registered under the
1940 Act. INVESCO is available only to employees of INVESCO VIF and its
affiliates. Morgan Stanley is available only to employees of Duke Energy
Corporation and its affiliates.
Effective May 1, 1999, Decatur Total Return Fund was renamed Growth and
Income Fund and Delaware Fund was renamed Delaware Balanced Fund. Effective
September 1, 1999, INVESCO VIF Industrial Income Fund was renamed Equity Income.
Effective May 1, 2000, AIT Investment Grade Income Fund will be renamed Select
Investment Grade Income Fund and AIT Growth Fund will be renamed Core Equity
Fund.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Realized gains and losses
on securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of the
Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of Group VEL.
Therefore, no provision for income taxes has been charged against Group VEL.
SA-18
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- -------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Growth............................................... 1,410,003 $ 3,972,164 $ 3.311
Investment Grade Income.............................. 23,266,205 25,575,861 1.051
Money Market......................................... 5,440,130 5,440,130 1.000
Equity Index......................................... 605,611 1,891,214 4.060
Government Bond...................................... 25,424 26,300 1.011
Select Aggressive Growth............................. 403,637 974,516 3.411
Select Growth........................................ 6,471,181 12,719,748 3.049
Select Growth and Income............................. 186,565 318,146 1.933
Select Value Opportunity............................. 13,901,118 23,464,808 1.521
Select International Equity.......................... 3,150,993 4,425,284 2.031
Select Capital Appreciation.......................... 203,014 349,493 2.053
Select Emerging Markets.............................. 29,741 32,710 1.292
Select Strategic Growth.............................. 12,811 13,507 1.126
Fidelity VIP High Income............................. 20,286 232,562 11.310
Fidelity VIP Equity-Income........................... 15,254 381,097 25.710
Fidelity VIP Growth.................................. 36,612 1,607,076 54.930
Fidelity VIP Overseas................................ 4,426 88,722 27.440
Fidelity VIP II Asset Manager........................ 50,489 877,472 18.670
Fidelity VIP II Index 500............................ 316,392 48,400,649 167.410
T. Rowe Price International Stock.................... 35,240 500,046 19.040
DGPF Growth & Income*................................ -- -- --
DGPF Delchester...................................... -- -- --
DGPF Capital Reserves................................ -- -- --
DGPF Cash Reserves................................... -- -- --
DGPF DelCap.......................................... -- -- --
DGPF Delaware Balanced*.............................. -- -- --
DGPF International Equity............................ 2,404,447 41,525,167 18.630
DGPF Small Cap Value................................. -- -- --
DGPF Trend........................................... -- -- --
DGPF Strategic Income................................ -- -- --
DGPF Devon........................................... -- -- --
DGPF Emerging Markets................................ -- -- --
DGPF Social Awareness................................ -- -- --
DGPF REIT............................................ -- -- --
DGPF Aggressive Growth............................... -- -- --
DGPF U.S. Growth..................................... -- -- --
INVESCO VIF Equity Income*........................... 502 8,685 21.010
INVESCO VIF Total Return Fund........................ 1,777 26,149 15.580
Morgan Stanley Fixed Income.......................... 2,976,363 31,771,615 10.050
MFVAT U.S. Government Income......................... -- -- --
MFVAT Asset Allocation............................... -- -- --
MFVAT Growth & Income................................ -- -- --
MFVAT Capital Growth................................. -- -- --
MFVAT International Equity........................... -- -- --
</TABLE>
* Name changed. See Note 1.
SA-19
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, the cost of any additional benefits
provided by rider, and a monthly administrative charge. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value.
The Company makes a charge of up to 0.90% per annum based on the average
daily net asset value of each certificate (certificate value) in each
Sub-Account for mortality and expense risks. This charge may be different
between groups and increased or decreased within a group, subject to compliance
with applicable state and federal requirements, but the total charge may not
exceed 0.90% per annum. During the first 10 policy years, the Company may charge
up to 0.25% per annum of the certificate value in each Sub-Account for
administrative expenses.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Group VEL, and does not receive any compensation for sales of Group VEL
policies. Commissions are paid to registered representatives of Allmerica
Investments and to independent broker-dealers by the Company. The current series
of policies have a surrender charge and no deduction is made for sales charges
at the time of the sale.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life
insurance policy, other than a policy issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance policy
for federal income tax purposes for any period for which the investments of the
segregated asset account on which the policy is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Group VEL satisfies the current requirements
of the regulations, and it intends that Group VEL will continue to meet such
requirements.
SA-20
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Group
VEL during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- -------------------- ------------ -----------
<S> <C> <C>
Growth...................................................... $ 6,209,905 $ 4,726,086
Investment Grade Income..................................... 13,304,771 2,590,083
Money Market................................................ 6,728,412 1,527,775
Equity Index................................................ 2,778,482 50,942,818
Government Bond............................................. 100,147 97,033
Select Aggressive Growth.................................... 367,494 168,825
Select Growth............................................... 7,082,831 1,835,886
Select Growth and Income.................................... 118,228 15,002
Select Value Opportunity.................................... 23,459,039 558,021
Select International Equity................................. 1,547,678 5,930,335
Select Capital Appreciation................................. 136,005 41,547
Select Emerging Markets..................................... 33,137 459
Select Strategic Growth..................................... 13,989 465
Fidelity VIP High Income.................................... 196,679 55,715
Fidelity VIP Equity-Income.................................. 279,813 49,803
Fidelity VIP Growth......................................... 1,740,132 1,236,973
Fidelity VIP Overseas....................................... 37,059 15,032
Fidelity VIP II Asset Manager............................... 1,715,193 1,435,587
Fidelity VIP II Index 500................................... 48,857,756 458,381
T. Rowe Price International Stock........................... 172,083 18,921
DGPF Growth & Income*....................................... -- --
DGPF Delchester............................................. -- --
DGPF Capital Reserves....................................... -- --
DGPF Cash Reserves.......................................... -- --
DGPF DelCap................................................. -- --
DGPF Delaware Balanced*..................................... -- --
DGPF International Equity................................... 33,669,161 273,795
DGPF Small Cap Value........................................ -- --
DGPF Trend.................................................. -- --
DGPF Strategic Income....................................... -- --
DGPF Devon.................................................. -- --
DGPF Emerging Markets....................................... -- --
DGPF Social Awareness....................................... -- --
DGPF REIT................................................... -- --
DGPF Aggressive Growth...................................... -- --
DGPF U.S. Growth............................................ -- --
INVESCO VIF Equity Income*.................................. 1,693 1,548
INVESCO VIF Total Return Fund............................... 2,251 34,646
Morgan Stanley Fixed Income................................. 12,363,038 600,667
MFVAT U.S. Government Income................................ -- --
MFVAT Asset Allocation...................................... -- --
MFVAT Growth & Income....................................... -- --
MFVAT Capital Growth........................................ -- --
MFVAT International Equity.................................. -- --
------------ -----------
Totals...................................................... $160,914,976 $72,615,403
============ ===========
</TABLE>
* Name changed. See Note 1.
SA-21
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
GROUP FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
This Prospectus provides important information about ExecutiveSolutions
policies, a group flexible premium variable life insurance policy offered by
Allmerica Financial Life Insurance and Annuity Company. Certificates under the
Policy are available to eligible applicants who are members of a non-qualified
benefit plan having a minimum of five or more members, depending on the group,
and who are Age 80 years old and under. PLEASE READ THIS PROSPECTUS CAREFULLY
BEFORE INVESTING AND KEEP IT FOR FUTURE REFERENCE.
The Certificates are funded through the Group VEL Account, a separate investment
account of the Company that is referred to as the Separate Account and a fixed
interest account of the Company referred to as the General Account. The Separate
Account is subdivided into Sub-Accounts. Each Sub-Account invests exclusively in
shares of one of the following Funds (certain Funds may not be available in all
states):
<TABLE>
<S> <C>
DELAWARE GROUP PREMIUM FUND ALLMERICA INVESTMENT TRUST
DGPF Growth & Income Series Money Market Fund
DGPF Devon Series
DGPF Growth Opportunities Series AIM VARIABLE INSURANCE FUNDS
DGPF U.S. Growth Series AIM V.I. Growth Fund
DGPF Select Growth Series AIM V.I. High Yield Fund
DGPF Social Awareness Series AIM V.I. Value Fund
DGPF REIT Series
DGPF Small Cap Value Series THE ALGER AMERICAN FUND PORTFOLIOS
DGPF Trend Series Alger American Leveraged AllCap Portfolio
DGPF International Equity Series Alger American Small Capitalization Portfolio
DGPF Emerging Markets Series
DGPF Balanced Series ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
DGPF High Yield Series Alliance Growth and Income Portfolio (Class B)
DGPF Capital Reserves Series Alliance Technology Portfolio (Class B)
DGPF Strategic Income Series
DGPF Cash Reserve Series FRANKLIN TEMPLETON INSURANCE PRODUCTS TRUST (CLASS 2)
Templeton International Securities Fund
</TABLE>
THE PURPOSE OF THE POLICIES IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. NO CLAIM IS MADE THAT THE CERTIFICATE IS IN ANY WAY SIMILAR OR
COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE CERTIFICATE,
TOGETHER WITH ITS ATTACHED APPLICATION, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
YOU AND THE COMPANY.
THE CERTIFICATES ARE NOT SUITABLE FOR SHORT-TERM INVESTMENT. VARIABLE LIFE
POLICIES INVOLVE RISKS INCLUDING POSSIBLE LOSS OF PRINCIPAL. IT MAY NOT BE
ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH THE CERTIFICATE. THIS LIFE
CERTIFICATE IS NOT: A BANK DEPOSIT OR OBLIGATION; OR FEDERALLY INSURED; OR
ENDORSED BY ANY BANK OR GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus can also be obtained from the Securities and Exchange
Commission's website (http://www.sec.gov).
<TABLE>
<S> <C>
CORRESPONDENCE MAY BE MAILED TO: DATED MAY 1, 2000
ALLMERICA LIFE 440 LINCOLN STREET
P.O. BOX 8179 WORCESTER, MASSACHUSETTS 01653
BOSTON, MA 02266-8179 (508) 855-1000
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND CHARGES................................. 7
SUMMARY OF CERTIFICATE FEATURES............................. 12
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE
UNDERLYING FUNDS........................................... 18
INVESTMENT OBJECTIVES AND POLICIES.......................... 21
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 23
VOTING RIGHTS............................................... 24
THE CERTIFICATE............................................. 25
Enrollment Form for a Certificate......................... 25
Free-Look Period.......................................... 25
Conversion Privileges..................................... 26
Premium Payments.......................................... 26
Allocation of Net Premiums................................ 27
Transfer Privilege........................................ 27
Election of Death Benefit Options......................... 28
Guideline Premium Test and Cash Value Accumulation Test... 28
Death Proceeds............................................ 29
Change in Death Benefit Option............................ 31
Change in Face Amount..................................... 32
Certificate Value and Surrender Value..................... 33
Payment Options........................................... 34
Optional Insurance Benefits............................... 35
Surrender................................................. 35
Paid-Up Insurance Option.................................. 35
Partial Withdrawal........................................ 36
CHARGES AND DEDUCTIONS...................................... 36
Premium Expense Charge.................................... 37
Monthly Deduction from Certificate Value.................. 37
Charges Reflected in the Assets of the Separate Account... 40
Surrender Charge.......................................... 40
Charges on Partial Withdrawal............................. 42
Transfer Charges.......................................... 42
Charge for Change in Face Amount.......................... 43
Other Administrative Charges.............................. 43
CERTIFICATE LOANS........................................... 44
CERTIFICATE TERMINATION AND REINSTATEMENT................... 45
OTHER CERTIFICATE PROVISIONS................................ 47
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY............. 48
DISTRIBUTION................................................ 49
REPORTS..................................................... 50
LEGAL PROCEEDINGS........................................... 50
FURTHER INFORMATION......................................... 50
INDEPENDENT ACCOUNTANTS..................................... 51
FEDERAL TAX CONSIDERATIONS.................................. 51
The Company and the Separate Account...................... 51
Taxation of the Certificates.............................. 51
Certificate Loans......................................... 52
Modified Endowment Contracts.............................. 52
MORE INFORMATION ABOUT THE GENERAL ACCOUNT.................. 53
FINANCIAL STATEMENTS........................................ 54
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
APPENDIX A -- OPTIONAL BENEFITS............................. A-1
APPENDIX B -- PAYMENT OPTIONS............................... B-1
APPENDIX C -- ILLUSTRATIONS OF SUM INSURED, CERTIFICATE
VALUES AND ACCUMULATED PREMIUMS............................ C-1
APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES...... D-1
APPENDIX E -- PERFORMANCE INFORMATION....................... E-1
FINANCIAL STATEMENTS........................................ FIN-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
AGE: The Insured's age as of the nearest birthday measured from a Certificate
anniversary.
BENEFICIARY: The person(s) designated by the owner of the Certificate to receive
the insurance proceeds upon the death of the Insured.
CERTIFICATE OWNERS: The person(s) or entity entitled to exercise the rights and
privileges under the Certificate.
CERTIFICATE CHANGE: Any change in the Face Amount, the addition or deletion of a
rider, or a change in the Death Benefit Option.
CERTIFICATE VALUE: The total amount available for investment under a Certificate
at any time. It is equal to the sum of (a) the value of the Units credited to a
Certificate in the Sub-Accounts, and (b) the accumulation in the General Account
credited to that Certificate.
COMPANY: Allmerica Financial Life Insurance and Annuity Company. "We," "our,"
"us," and "the Company" refer to Allmerica Financial.
DATE OF ISSUE: The date set forth in the Certificate used to determine the
Monthly Processing Date, Certificate months, Certificate years, and Certificate
anniversaries.
DEATH BENEFIT: The amount payable upon the death of the Insured, before the
Final Premium Payment Date, prior to deductions for Debt outstanding at the time
of the Insured's death, partial withdrawals and partial withdrawal charges, if
any, and any due and unpaid Monthly Deductions. The amount of the Death Benefit
will depend on the Death Benefit Option chosen, but will always be at least
equal to the Face Amount.
DEATH PROCEEDS: Prior to the Final Premium Payment Date, the Death Proceeds
equal the amount calculated under the applicable Death Benefit Option, less Debt
outstanding at the time of the Insured's death, partial withdrawals, if any,
partial withdrawal charges, and any due and unpaid Monthly Deductions. After the
Final Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate.
DEBT: All unpaid Certificate loans plus interest due or accrued on such loans.
DELIVERY RECEIPT: An acknowledgment, signed by the Certificate Owner and
returned to the Principal Office, that the Certificate Owner has received the
Certificate and the Notice of Withdrawal Rights.
EVIDENCE OF INSURABILITY: Information, satisfactory to the Company, that is used
to determine the Insured's Underwriting Class.
FACE AMOUNT: The amount of insurance coverage applied for. The Face Amount of
each Certificate is set forth in the specifications pages of the Certificate.
FINAL PREMIUM PAYMENT DATE: The Certificate anniversary nearest the Insured's
95th birthday. The Final Premium Payment Date is the latest date on which a
premium payment may be made. After this date, the Death Proceeds equal the
Surrender Value of the Certificate. The Net Death Benefit may be different
before and after the Final Payment Date. See DEATH PROCEEDS.
GENERAL ACCOUNT: All the assets of the Company other than those held in a
Separate Account.
GUIDELINE ANNUAL PREMIUM: The annual amount of premium that would be payable
through the Final Premium Payment Date for the specified Death Benefit, if
premiums were fixed by the Company as to both
4
<PAGE>
timing and amount, and monthly cost of insurance charges were based on the 1980
Commissioners Standard Ordinary Mortality Tables, Smoker or Non-Smoker
(Mortality Table B for unisex Certificates), net investment earnings at an
annual effective rate of 5%, and fees and charges as set forth in the
Certificate and any Certificate riders. The Death Benefit Option 1 Guideline
Annual Premium is used when calculating the maximum surrender charge.
GUIDELINE MINIMUM DEATH BENEFIT: The Guideline Minimum Death Benefit required to
qualify the Certificate as "life insurance" under federal tax laws. The
Guideline Minimum Death Benefit varies by Age. It is calculated by multiplying
the Certificate Value by a percentage determined by the Insured's Age.
The percentage factor is a percentage that, when multiplied by the Certificate
Value, determines the Guideline Minimum Death Benefit required under federal tax
laws. If Option 3 is in effect, the percentage factor on the Insured's attained
age, sex, risk classification, as set forth in the Certificate. For both the
Option 1 and the Option 2, the percentage factor is based on the Insured's
attained age, as set forth in GUIDELINE MINIMUM DEATH BENEFIT TABLE in DEATH
PROCEEDS -- "GUIDELINE MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2."
INSURANCE AMOUNT AT RISK: The Death Benefit less the Certificate Value.
ISSUANCE AND ACCEPTANCE: The date the Company mails the Certificate if the
enrollment form is approved with no changes requiring your consent; otherwise,
the date the Company receives your written consent to any changes.
LOAN VALUE: The maximum amount that may be borrowed under the Certificate.
MONTHLY DEDUCTION: Charges deducted monthly from the Certificate Value prior to
the Final Premium Payment Date. The charges include the monthly cost of
insurance, the monthly cost of any benefits provided by rider, the monthly
Certificate administrative charge, the monthly Separate Account administrative
charge and the monthly mortality and expense risk charge.
MONTHLY DEDUCTION SUB-ACCOUNT: A Sub-Account of the Separate Account to which
the payor that you name under the Payor Option may allocate Net Premiums to pay
all or a portion of the insurance charges and administrative charges. The
Monthly Deduction Sub-Account is currently the Sub-Account which invests in the
Money Market Fund of Allmerica Investment Trust.
MONTHLY PROCESSING DATE: The date on which the Monthly Deduction is deducted
from Certificate Value.
NET PREMIUM: An amount equal to the premium less any premium expense charge.
PAID-UP INSURANCE: Life insurance coverage for the life of the Insured, with no
further premiums due.
PRINCIPAL OFFICE: The Company's office, located at 440 Lincoln Street,
Worcester, Massachusetts 01653.
PRO-RATA ALLOCATION: In certain circumstances, you may specify from which
Sub-Account certain deductions will be made or to which Sub-Account Certificate
Value will be allocated. If you do not, the Company will allocate the deduction
or Certificate Value among the General Account and the Sub-Accounts, excluding
the Monthly Deduction Sub-Account, in the same proportion that the Certificate
Value in the General Account and the Certificate Value in each Sub-Account bear
to the total Certificate Value on the date of deduction or allocation.
SEPARATE ACCOUNT: A separate account consists of assets segregated from the
Company's other assets. The investment performance of the assets of each
separate account is determined separately from the other assets
5
<PAGE>
of the Company. The assets of a separate account which are equal to the reserves
and other contract liabilities are not chargeable with liabilities arising out
of any other business which the Company may conduct.
SUB-ACCOUNT: A subdivision of the Separate Account. Each Sub-Account invests
exclusively in the shares of a corresponding Series of Delaware Group Premium
Fund ("DGPF"), AIM Variable Insurance Funds ("AVIF"), The Alger American Fund
("Alger"), Alliance Variable Products Series Fund, Inc., Franklin Templeton
Variable Insurance Products Trust ("FT VIP"), and the Allmerica Investment Trust
("Trust").
SURRENDER VALUE: The amount payable upon a full surrender of the Certificate. It
is the Certificate Value, less any Debt and any surrender charges.
UNDERLYING FUNDS (FUNDS): an investment portfolio of DGPF, AVIF, Alger,
Alliance, and FT VIP in which a Sub-Account invests.
UNDERWRITING CLASS: The risk classification that the Company assigns the Insured
based on the information in the enrollment form and any other Evidence of
Insurability considered by the Company. The Insured's Underwriting Class will
affect the cost of insurance charge and the amount of premium required to keep
the Certificate in force.
UNIT: A measure of your interest in a Sub-Account.
VALUATION DATE: A day on which the net asset value of the shares of any of the
Underlying Funds is determined and Unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, partial withdrawal, or surrender of a Certificate is
received) when there is a sufficient degree of trading in an Underlying Fund's
securities such that the current net asset value of the Sub-Accounts may be
materially affected.
VALUATION PERIOD: The interval between two consecutive Valuation Dates.
WRITTEN REQUEST: A request by the Certificate Owner in writing, satisfactory to
the Company.
YOU OR YOUR: The Certificate Owner, as shown in the enrollment form or the
latest change filed with the Company.
6
<PAGE>
SUMMARY OF FEES AND CHARGES
SURRENDER CHARGES
At any time that a Certificate is in effect, a Certificate Owner may elect to
surrender the Certificate and receive its Surrender Value. A surrender charge
may be calculated upon issuance of the Certificate and upon each increase in the
Face Amount. The surrender charge may be imposed, depending on the group to
which the Policy is issued, for up to 15 years from the Date of Issue or any
increase in the Face Amount and you request a full surrender or a decrease in
the Face Amount.
SURRENDER CHARGES FOR THE INITIAL FACE AMOUNT
The maximum surrender charge calculated upon issuance of the Certificate is
equal to the sum of (a) plus (b), where (a) is a deferred administrative charge
of up to $8.50 per thousand dollars of the initial Face Amount, and (b) is a
deferred sales charge of up to 50% (less any premium expense charge not
associated with state and local premium taxes) of premiums received up to the
Guideline Annual Premium, depending on the group to which the Policy is issued.
In accordance with limitations under state insurance regulations, the amount of
the maximum surrender charge will not exceed a specified amount per thousand
dollars of initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF
MAXIMUM SURRENDER CHARGES. The maximum surrender charge remains level for up to
24 Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. If you surrender the
Certificate during the first two years following the Date of Issue before making
premium payments associated with the initial Face Amount which are at least
equal to one Guideline Annual Premium, the actual surrender charge imposed may
be less than the maximum. See THE CERTIFICATE -- "Surrender" and CHARGES AND
DEDUCTIONS -- "Surrender Charge."
SURRENDER CHARGES FOR AN INCREASE IN FACE AMOUNT
A separate surrender charge may apply to and be calculated for each increase in
Face Amount. The maximum surrender charge for the increase is equal to the sum
of (a) plus (b), where (a) is a deferred administrative charge of up to $8.50
per thousand dollars of increase, and (b) is a deferred sales charge of up to
50% (less any premium expense charge not associated with state and local premium
taxes) of premiums associated with the increase, up to the Guideline Annual
Premium for the increase. In accordance with limitations under state insurance
regulations, the amount of the surrender charge will not exceed a specified
amount per thousand dollars of increase, as indicated in APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
This maximum surrender charge with respect to an increase remains level for up
to 24 Certificate months following the increase, reduces uniformly each month
for the balance of the surrender charge period, and is zero thereafter. During
the first two Certificate years following an increase in Face Amount, before
making premium payments associated with the increase in Face Amount which are at
least equal to one Guideline Annual Premium, the actual surrender charge with
respect to the increase may be less than the maximum. See THE CERTIFICATE --
"Surrender" and CHARGES AND DEDUCTIONS -- "Surrender Charge."
In the event of a decrease in the Face Amount, any surrender charge imposed is a
fraction of the charge that would apply to a full surrender of the Certificate.
See THE CERTIFICATE -- "Surrender" and CHARGES AND DEDUCTIONS -- "Surrender
Charge" and APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company, to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes, and for sales expenses related to
the Certificates. State premium taxes generally range from 0.75% to 5%, while
local premium taxes (if any) vary by jurisdiction within a state. The DAC tax
deduction may range from
7
<PAGE>
zero to 1% of premiums, depending on the group to which the Policy is issued.
The charge for distribution expenses may range from zero to 10%. See CHARGES AND
DEDUCTIONS -- "Premium Expense Charge."
MONTHLY DEDUCTIONS FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deductions") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider, and a charge for administrative expenses that may be up to $10, depending
on the group to which the Policy is issued. The Monthly Deduction may also
include a charge for Separate Account administrative expenses and a charge for
mortality and expense risks. The Separate Account administrative charge may
continue for up to 10 Certificate years and may be up to 0.25% of Certificate
Value in each Sub-Account, depending on the group to which the Policy was
issued. The mortality and expense risk charge may be up to 0.90% of Certificate
Value in each Sub-Account.
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses, the mortality and expense risk charge,
and the charge for the cost of additional benefits provided by rider will be
deducted. If the Payor Provision is in force, all cost of insurance charges and
administrative charges will be deducted from the Monthly Deduction Sub-Account.
If no allocation is specified, the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the unpaid balance will be totaled and the
Company will make a Pro-Rata Allocation.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value."
TRANSACTION CHARGES
Each of the charges listed below is designed to reimburse the Company for
administrative costs incurred in the applicable transaction.
TRANSACTION CHARGE ON PARTIAL WITHDRAWALS
A transaction charge, which is up to the smaller of 2% of the amount withdrawn,
or $25, is assessed at the time of each partial withdrawal to reimburse the
Company for the cost of processing the withdrawal. In addition to the
transaction charge, a partial withdrawal charge may also be made under certain
circumstances. See CHARGES AND DEDUCTIONS -- "Charges on Partial Withdrawal."
The transaction fee applies to all partial withdrawals, including a Withdrawal
without a surrender charge.
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount, a charge of $2.50 per $1,000
of increase or decrease up to $40, may be deducted from the Certificate Value.
This charge is designed to reimburse the Company for underwriting and
administrative costs associated with the change. See THE CERTIFICATE -- "Change
in Face Amount" and CHARGES AND DEDUCTIONS -- "Charge for Change in Face
Amount."
8
<PAGE>
TRANSFER CHARGE
The first twelve transfers of Certificate Value in a Certificate year will be
free of charge. Thereafter, with certain exceptions, a transfer charge of $10
will be imposed for each transfer request to reimburse the Company for the costs
of processing the transfer. See THE CERTIFICATE -- "Transfer Privilege" and
CHARGES AND DEDUCTIONS -- "Transfer Charges."
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge for the administrative costs
associated with changing the Net Premium allocation instructions, for changing
the allocation of any Monthly Deductions among the various Sub-Accounts, or for
a projection of values. See CHARGES AND DEDUCTIONS -- "Other Administrative
Charges."
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. See CHARGES AND DEDUCTIONS --
"Charges Reflected in the Assets of the Separate Account." The levels of fees
and expenses vary among the Underlying Funds.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment under a
Certificate at any time. It is the sum of the value of all Units in the
Sub-Accounts of the Separate Account and all accumulations in the General
Account of the Company credited to the Certificate. The Certificate Value
reflects the amount and frequency of Net Premiums paid, charges and deductions
imposed under the Certificate, interest credited to accumulations in the General
Account, investment performance of the Sub-Accounts to which Certificate Value
has been allocated, and partial withdrawals. The Certificate Value may be
relevant to the computation of the Death Proceeds. You bear the entire
investment risk for amounts allocated to the Separate Account. The Company does
not guarantee a minimum Certificate Value.
The Surrender Value will be the Certificate Value, less any Debt and surrender
charges. The Surrender Value is relevant, for example, in the computation of the
amounts available upon partial withdrawals, Certificate loans or surrender.
9
<PAGE>
CHARGES OF THE UNDERLYING FUNDS
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1999.
<TABLE>
<CAPTION>
OTHER EXPENSES
MANAGEMENT FEE (AFTER ANY TOTAL FUND EXPENSES
(AFTER ANY 12B-1 APPLICABLE (AFTER ANY WAIVERS/
UNDERLYING FUND VOLUNTARY WAIVERS) FEES REIMBURSEMENTS) REIMBURSEMENTS)
- --------------- ------------------ -------- --------------- -------------------
<S> <C> <C> <C> <C>
DGPF Growth & Income Series......... 0.60% 0.00% 0.11% 0.71%(2)
DGPF Devon Series................... 0.65% 0.00% 0.12% 0.77%(2)
DGPF Growth Opportunities Series.... 0.75% 0.00% 0.07% 0.82%(2)
DGPF U.S. Growth Series*............ 0.61% 0.00% 0.14% 0.75%(1)(2)
DGPF Select Growth Series........... 0.74% 0.00% 0.06% 0.80%(1)(2)
DGPF Social Awareness Series........ 0.70% 0.00% 0.15% 0.85%(1)(2)
DGPF REIT Series.................... 0.64% 0.00% 0.21% 0.85%(1)(2)
DGPF Small Cap Value Series......... 0.75% 0.00% 0.10% 0.85%(2)
DGPF Trend Series................... 0.75% 0.00% 0.07% 0.82%(2)
DGPF International Equity Series.... 0.83% 0.00% 0.12% 0.95%(1)(2)
DGPF Emerging Markets Series........ 1.19% 0.00% 0.28% 1.47%(1)(2)
DGPF Balanced Series................ 0.65% 0.00% 0.11% 0.76%(2)
DGPF High Yield Series.............. 0.65% 0.00% 0.09% 0.74%(2)
DGPF Capital Reserves Series........ 0.50% 0.00% 0.26% 0.76%(2)
DGPF Strategic Income Series........ 0.65% 0.00% 0.15% 0.80%(2)
DGPF Cash Reserve Series............ 0.45% 0.00% 0.10% 0.55%(2)
AIM V.I. Growth Fund................ 0.63% 0.00% 0.10% 0.73%
AIM V.I. High Yield Fund............ 0.35%(4) 0.00% 0.79%(4) 1.14%(4)
AIM V.I. Value Fund................. 0.61% 0.00% 0.15% 0.76%
AIT Money Market Fund............... 0.24% 0.00% 0.05% 0.29%(3)
Alger American Leveraged AllCap
Portfolio.......................... 0.85% 0.00% 0.08%(5) 0.93%
Alger American Small Capitalization
Portfolio.......................... 0.85% 0.00% 0.05% 0.90%
Alliance Growth and Income Portfolio
(Class B).......................... 0.63% 0.25% 0.09% 0.97%
Alliance Technology Portfolio
(Class B).......................... 1.00% 0.25% 0.27% 1.52%(6)
Templeton International Securities
Fund (Class 2)..................... 0.69% 0.25% 0.19% 1.13%(7)(8)
</TABLE>
* The DGPF U.S. Growth Series commenced operations on November 15, 1999.
Expenses shown are based on annualized amounts.
(1) For the fiscal year ended December 31, 1999, before waiver and/or
reimbursement by the investment adviser, total Series expenses as a percentage
of average daily net assets were 0.81% for DGPF Select Growth Series, 0.90% for
DGPF Social Awareness Series, 0.96% for DGPF REIT Series, 1.53% for DGPF
Emerging Markets Series, 0.97% for DGPF International Equity Series and 0.79%
for DGPF U.S. Growth Series.
(2) The investment adviser for the DGPF Growth & Income Series, DGPF Devon
Series, DGPF Growth Opportunities Series (formerly known as "DelCap Series"),
DGPF U.S. Growth Series, DGPF Select Growth Series (formerly known as
"Aggressive Growth Series"), DGPF Social Awareness Series, DGPF REIT Series,
DGPF Small Cap Value Series, DGPF Trend Series, DGPF Balanced Series (formerly
known as "Delaware Balanced Series"), DGPF High Yield Series (formerly known as
"Delchester Series"), DGPF Capital Reserves Series, DGPF Strategic Income
Series, and DGPF Cash Reserve Series is Delaware Management Company, a series of
Delaware Management Business Trust ("Delaware Management"). The investment
adviser for the DGPF International Equity Series, and the DGPF Emerging Markets
is Delaware International Advisers Ltd. ("Delaware International"). Effective
May 1, 2000 through October 31, 2000, the investment
10
<PAGE>
advisers for the Series of DGPF have agreed voluntarily to waive their
management fees and reimburse each Series for expenses to the extent that total
expenses will not exceed 1.50% for the DGPF Emerging Markets Series; 0.95% for
the DGPF International Equity Series; 0.85% for DGPF Growth Opportunities
Series, DGPF Select Growth Series, DGPF Social Awareness Series, DGPF REIT
Series, DGPF Small Cap Value Series, DGPF Trend Series, and 0.75% for DGPF U.S.
Growth Series, and 0.80% for all other Series. The fee ratios shown above have
been restated, if necessary, to reflect the new voluntary limitations which took
effect on May 1, 2000. The declaration of a voluntary expense limitation does
not bind the investment advisers to declare future expense limitations with
respect to these Funds.
(3) Until further notice, AFIMS has declared a voluntary expense limitation of
0.60% for the Money Market Fund. The total operating expenses of this Fund was
less than its expense limitation throughout 1999.
(4) Had there been no fee waivers or expense reimbursements, the Management Fee,
Other Expenses and Total Fund Expenses would have been 0.63%, 0.79% and 1.42%,
respectively.
(5) Included in "Other Expenses" of Alger American Leveraged AllCap is 0.01% of
interest expense.
(6) From time to time, the Alliance Technology Portfolio's investment adviser,
in its own discretion, may voluntarily waive all or part of its fees and/or
voluntarily assume certain portfolio expenses. An expense cap of 1.20% which was
in effect during 1999, is no longer in effect as of May 1, 2000. Therefore, the
expenses shown in the above table have been restated to reflect current fees
without the cap.
(7) The fund's class 2 distribution plan or "rule 12b-1 plan" is described in
the fund's prospectus.
(8) On 2/8/00, shareholders approved a merger and reorganization that combined
the Templeton International Securities Fund with the Templeton International
Equity Fund, effective 5/1/00. The shareholders of the fund had approved new
management fees, which apply to the combined fund effective 5/1/00. The table
shows restated total expenses based on the new fees and the assets of the fund
as of 12/31/99, and not the assets of the combined fund. However, if the table
reflected both the new fees and the combined assets, the fund's expenses after
5/1/00 would be estimated as: Management Fees 0.65%, 12b-1 Fees 0.25%, Other
Expenses 0.20%, and Total Fund Expenses 1.10%.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
11
<PAGE>
SUMMARY OF CERTIFICATE FEATURES
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Certificate. If you are considering the purchase of
this product, you should read the remainder of this Prospectus carefully before
making a decision. It offers a more complete presentation of the topics
presented here, and will help you better understand the product. However, the
Certificate, together with its attached application, constitutes the entire
agreement between you and the Company.
Within limits, you may choose the amount of initial premium desired and the
initial Death Benefit. You have the flexibility to vary the frequency and amount
of premium payments, subject to certain restrictions and conditions. You may
withdraw a portion of the Certificate's Surrender Value, or the Certificate may
be fully surrendered at any time, subject to certain limitations.
There is no guaranteed minimum Certificate Value. The value of a Certificate
will vary up or down to reflect the investment experience of allocations to the
Sub-Accounts and the fixed rates of interest earned by allocations to the
General Account. The Certificate Value will also be adjusted for other factors,
including the amount of charges imposed. The Certificate will remain in effect
so long as the Certificate Value less any outstanding Debt is sufficient to pay
certain monthly charges imposed in connection with the Certificate. The
Certificate Value may decrease to the point where the Certificate will lapse and
provide no further death benefit without additional premium payments.
If the Certificate is in effect at the death of the Insured, the Company will
pay a Death Benefit (the "Death Proceeds") to the Beneficiary. Prior to the
Final Premium Payment Date, the Death Proceeds equal the Death Benefit, less any
Debt, partial withdrawals, and any due and unpaid charges. After the Final
Premium Payment Date, the Death Proceeds equal the Surrender Value of the
Certificate. If the Guideline Premium Test is in effect (see "Election of Death
Benefit Options"), you may choose either Death Benefit Option 1 (the Death
Benefit is fixed in amount) or Death Benefit Option 2 (the Death Benefit
includes the Certificate Value in addition to a fixed insurance amount) and may
change between Death Benefit Option 1 and Option 2, subject to certain
conditions. If the Cash Value Accumulation Test is in effect, Death Benefit
Option 3 (the Death Benefit is fixed in amount) will apply. A Minimum Death
Benefit, equivalent to a percentage of the Certificate Value, will apply if
greater than the Death Benefit otherwise payable under Option 1, Option 2 or
Option 3.
In certain circumstances, a Certificate may be considered a "modified endowment
contract." Under the Internal Revenue Code ("Code"), any Certificate loan,
partial withdrawal or surrender from a modified endowment contract may be
subject to tax and tax penalties. See FEDERAL TAX CONSIDERATIONS -- "Modified
Endowment Contracts."
THE CERTIFICATE
The Certificate issued under a group flexible premium variable life policy
offered by this Prospectus allows you, subject to certain limitations, to make
premium payments in any amount and frequency. As long as the Certificate remains
in force, it will provide for:
- life insurance coverage on the named Insured;
- Certificate Value;
- surrender rights and partial withdrawal rights;
- loan privileges; and
- in some cases, additional insurance benefits available by rider for an
additional charge.
12
<PAGE>
The Certificates provide Death Benefits, Certificate Values, and other features
traditionally associated with life insurance policies. The Certificates are
"variable" because, unlike the fixed benefits of ordinary whole life insurance,
the Certificate Value will, and under certain circumstances the Death Proceeds
may, increase or decrease depending on the investment experience of the
Sub-Accounts of the Separate Account. They are "flexible premium" Certificates,
because, unlike traditional insurance policies, there is no fixed schedule for
premium payments. However, you may be required to provide evidence of
insurability as a condition to our accepting any payment that would increase the
Insurance Amount at Risk (the Death Benefit less the Certificate Value). If
evidence of insurability is required, the Company will return the payment to you
and if your payment exceeds our maximum limit (defined below) the Company may
not accept any additional payments which would increase the Insurance Amount at
Risk and shall not provide any additional death benefit until (1) evidence of
insurability for the Insured has been received by the Company and (2) the
Company has notified you that the Insured is in a satisfactory underwriting
class. You may then make payments that increase the Insurance Amount at Risk for
60 days (but not later than the Final Payment Date) following the date of such
notification by the Company.
Although you may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause a Certificate to lapse, nor will making the planned premium payments
guarantee that a Certificate will remain in force. Thus, you may, but are not
required to, pay additional premiums. The Company may limit the maximum payment
received in any certificate year but in no event will the limit be less than the
maximum Level Premium shown in the certificate.
The Certificate will remain in force until the Surrender Value is insufficient
to cover the next Monthly Deduction and loan interest accrued, if any, and a
grace period of 62 days has expired without adequate payment being made by you.
ALLOCATION OF NET PREMIUMS
Net Premiums are the premiums paid less any premium expense charge. The
Certificate, together with its attached enrollment form, constitutes the entire
agreement between you and the Company. Net Premiums may be allocated to one or
more Sub-Accounts of the Separate Account, to the General Account, or to any
combination of Accounts. You bear the investment risk of Net Premiums allocated
to the Sub-Accounts. Allocations may be made to no more than 20 Sub-Accounts at
any one time. The minimum allocation is 1% of Net Premium. All allocations must
be in whole numbers and must total 100%. See THE CERTIFICATE -- "Allocation of
Net Premiums."
Premiums allocated to the General Account will earn a fixed rate of interest.
Net Premiums and minimum interest are guaranteed by the Company. For more
information, see MORE INFORMATION ABOUT THE GENERAL ACCOUNT.
CERTIFICATE ISSUANCE
At the time of enrollment, the proposed Insured will complete an enrollment form
which lists the proposed amount of insurance and indicates how much of that
insurance is considered eligible for simplified underwriting. If the eligibility
questions on the enrollment form are answered "No," the Company will provide
immediate coverage equal to the simplified underwriting amount. If the proposed
insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examination, if any, are completed. If the proposed Insured cannot
answer the eligibility questions "No," and if the proposed Insured is not a
standard risk, insurance coverage will begin only after the Company
(1) approves the enrollment form, (2) the Certificate is delivered and accepted,
and (3) the first premium is paid.
13
<PAGE>
If any premiums are paid prior to the issuance of the Certificate, such premiums
will be held in the General Account. If your enrollment form is approved and the
Certificate is issued and accepted, the initial premiums held in the General
Account will be credited with interest at a specified rate beginning not later
than the date of receipt of the premiums at the Company's Principal Office. IF A
CERTIFICATE IS NOT ISSUED AND ACCEPTED, THE INITIAL PREMIUMS WILL BE RETURNED TO
YOU WITHOUT INTEREST.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days after you receive the Certificate, or
(c) 10 days (20 or 30 days if required in your state) after the Company mails or
personally delivers a Notice of Withdrawal Rights to you.
When you return the Certificate, the Company will mail a refund to you within
seven days. The refund of any premium paid by check may be delayed until the
check has cleared your bank. If your Certificate provides for a full refund of
the initial premium under its "Right-to-Examine Certificate" provision as
required in your state, your refund will be the greater of (a) your entire
premium, or (b) the Certificate Value plus deductions under the Certificate, or
by the Underlying Funds for taxes, charges or fees. If your Certificate does not
provide for a full refund of the initial premium, you will receive the
Certificate Value in the Separate Account, plus premiums paid (including fees
and charges), minus the amounts allocated to the Separate Account, plus the fees
and charges imposed on amounts in the Separate Account. After an increase in The
Face Amount, a right to cancel the increase also applies. See THE
CERTIFICATE -- "Free-Look Period."
CONVERSION PRIVILEGES
During the first 24 Certificate months after the Date of Issue, subject to
certain restrictions, you may convert this Certificate to a flexible premium
fixed adjustable life insurance Certificate by simultaneously transferring all
accumulated value in the Sub-Accounts to the General Account and instructing the
Company to allocate all future premiums to the General Account. A similar
conversion privilege is in effect for 24 Certificate months after the date of an
increase in the Face Amount. Where required by state law, and at your request,
the Company will issue a flexible premium adjustable life insurance Certificate
to you. The new Certificate will have the same face amount, issue Age, Date of
Issue, and risk classifications as the original Certificate. See THE
CERTIFICATE -- "Conversion Privileges."
PARTIAL WITHDRAWAL
After the first Certificate year, you may make partial withdrawals in a minimum
amount of $500 from the Certificate Value. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is described in CHARGES AND DEDUCTIONS -- "Charges on
Partial Withdrawal," will be assessed to reimburse the Company for the cost of
processing each partial withdrawal. A partial withdrawal charge may also be
imposed upon a partial withdrawal. Generally, amounts withdrawn during each
Certificate year in excess of 10% of the Certificate Value ("excess withdrawal")
are subject to the partial withdrawal charge. The partial withdrawal charge is
equal to 5% of the excess withdrawal up to the surrender charge on the date of
withdrawal. If no surrender charge is applicable at the time of withdrawal, no
partial withdrawal charge will be deducted. The Certificate's outstanding
surrender charge will be reduced by the amount of the partial withdrawal charge
deducted. See THE CERTIFICATE -- "Partial Withdrawal" and CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawal."
14
<PAGE>
LOAN PRIVILEGE
You may borrow against the Certificate Value. The total amount you may borrow is
the Loan Value. Loan Value in the first Certificate year is 75% of an amount
equal to the Certificate Value less surrender charge, Monthly Deductions, and
interest on the Certificate loan to the end of the Certificate year. Thereafter,
Loan Value is 90% of an amount equal to Certificate Value less the surrender
charge.
Certificate loans will be allocated among the General Account and the
Sub-Accounts in accordance with your instructions. If no allocation is made by
you, the Company will make a Pro-Rata Allocation among the Accounts. In either
case, Certificate Value equal to the Certificate loan will be transferred from
the appropriate Sub-Accounts to the General Account, and will earn monthly
interest at an effective annual rate of at least 6%. Therefore, a Certificate
loan may have a permanent impact on the Certificate Value even though it is
eventually repaid. Although the loan amount is a part of the Certificate Value,
the Death Proceeds will be reduced by the amount of outstanding Debt at the time
of death.
Certificate loans will bear interest at a fixed rate of 8% per year, due and
payable in arrears at the end of each Certificate year. If interest is not paid
when due, it will be added to the loan balance. Certificate loans may be repaid
at any time. You must notify the Company if a payment is a loan repayment;
otherwise, it will be considered a premium payment. Any partial or full
repayment of Debt by you will be allocated to the General Account or
Sub-Accounts in accordance with your instructions. If you do not specify an
allocation, the Company will allocate the loan repayment in accordance with your
most recent premium allocation instructions. See CERTIFICATE LOANS.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificates. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. If this option has been selected, after the tenth certificate anniversary
Certificate Value in the General Account equal to the loan amount will be
credited with interest at an effective annual yield of at least 7.5%. Our
current practice is to credit a rate of interest equal to the rate being charged
for the preferred loan.
There is some uncertainty as to the tax treatment of a preferred loan, which may
be treated as a taxable withdrawal from the Certificate. See FEDERAL TAX
CONSIDERATIONS -- "Certificate Loans." Consult a qualified tax adviser (and see
FEDERAL TAX CONSIDERATIONS). THE PREFERRED LOAN OPTION IS NOT AVAILABLE IN ALL
STATES.
CERTIFICATE LAPSE AND REINSTATEMENT
Failure to make premium payments will not cause a Certificate to lapse unless:
(a) the Surrender Value is insufficient to cover the next Monthly Deduction plus
loan interest accrued, if any, or (b) Debt exceeds the Certificate Value. A
62-day grace period applies to each situation. Subject to certain conditions
(including Evidence of Insurability showing that the Insured is insurable
according to the Company's underwriting rules and the payment of sufficient
premium), the Certificate may be reinstated at any time within three years after
the expiration of the grace period and prior to the Final Premium Payment Date.
See CERTIFICATE TERMINATION AND REINSTATEMENT.
DEATH PROCEEDS
The Certificate provides for the payment of certain Death Proceeds to the named
Beneficiary upon the death of the Insured. Prior to the Final Premium Payment
Date, the Death Proceeds will be equal to the Death Benefit, reduced by any
outstanding Debt, partial withdrawals, partial withdrawal charges, and any
Monthly Deductions due and not yet deducted through the Certificate month in
which the Insured dies. Three Death Benefit Options are available. Under Option
1 and Option 3, the Death Benefit is the greater of the Face Amount or the
applicable Minimum Death Benefit. Under Option 2, the Death Benefit is the
greater of the
15
<PAGE>
Face Amount plus the Certificate Value or the Minimum Death Benefit. The
Guideline Minimum Death Benefit is equivalent to a percentage (determined each
month based on the Insured's Age) of the Certificate Value. On or after the
Final Premium Payment Date, the Death Proceeds will equal the Surrender Value.
See THE CERTIFICATE -- "Death Proceeds."
The Death Proceeds under the Certificate may be received in a lump sum or under
one of the Payment Options the Company offers. See APPENDIX B -- PAYMENT
OPTIONS.
FLEXIBILITY TO ADJUST DEATH BENEFIT
Subject to certain limitations, you may adjust the Death Benefit, and thus the
Death Proceeds, at any time prior to the Final Premium Payment Date, by
increasing or decreasing the Face Amount of the Certificate. Any change in the
Face Amount will affect the monthly cost of insurance charges and the amount of
the surrender charge. If the Face Amount is decreased, a pro-rata surrender
charge may be imposed. The Certificate Value is reduced by the amount of the
charge. See THE CERTIFICATE -- "Change in Face Amount."
The minimum increase in the Face Amount will vary by group, but will in no event
exceed $10,000. Any increase may also require additional Evidence of
Insurability. The increase is subject to a "free-look period" and, during the
first 24 months after the increase, to a conversion privilege. See THE
CERTIFICATE -- "Free-Look Period" and "Conversion Privileges."
You may, depending on the group to which the Policy is issued, have the
flexibility to add additional insurance benefits by rider. These may include the
Waiver of Premium Rider, Other Insured Rider, Children's Insurance Rider,
Accidental Death Benefit Rider, Option to Accelerate Benefits Rider, Refund of
Sales Load Rider, and Exchange Option Rider. See APPENDIX A -- OPTIONAL
BENEFITS.
The cost of these optional insurance benefits will be deducted from the
Certificate Value as part of the Monthly Deduction. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value."
INVESTMENT OPTIONS
The Certificates permit Net Premiums to be allocated either to the General
Account or to the Separate Account. The Separate Account is currently comprised
of 47 Sub-Accounts. Of these 47 Sub-Accounts, 25 are available to the
Certificates. Each Sub-Account invests exclusively in a corresponding Underlying
Fund of the Delaware Group Premium Fund ("DGPF") managed by Delaware
International Advisers Ltd. ("Delaware International"); and Delaware Management
Company, a series of Delaware Management Business Trust ("Delaware Management"),
the Allmerica Investment Trust managed by Allmerica Financial Investment
Management Services, Inc. ("AFIMS"), the AIM Variable Insurance Funds ("AVIF")
managed by A I M Advisors, Inc. ("AIM"), The Alger American Fund ("Alger")
managed by Fred Alger Management, Inc., the Alliance Variable Products
Series Fund, Inc. managed by Alliance Capital Management, L.P. ("Alliance
Capital"), the Franklin Templeton Variable Insurance Products Trust ("FT VIP")
managed by Templeton Investment Counsel, Inc. ("TICI"). In some states,
insurance regulations may restrict the availability of particular Underlying
Funds. The Certificates permit you to transfer Certificate Value among the
available Sub-Accounts and between the Sub-Accounts and the General Account,
subject to certain limitations described under THE CERTIFICATE -- "Transfer
Privilege."
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved. For more information, see
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, AND THE UNDERLYING FUNDS.
16
<PAGE>
TAX TREATMENT
The Certificate is generally subject to the same federal income tax treatment as
a conventional fixed benefit life insurance policy. Under current tax law, to
the extent there is no change in benefits, you will be taxed on the Certificate
Value withdrawn from the Certificate only to the extent that the amount
withdrawn exceeds the total premiums paid. Withdrawals in excess of premiums
paid will be treated as ordinary income. During the first 15 Certificate years,
however, an "interest-first" rule applies to any distribution of cash that is
required under Section 7702 of the Code because of a reduction in benefits under
the Certificate. Death Proceeds under the Certificate are excludable from the
gross income of the Beneficiary, but in some circumstances the Death Proceeds or
the Certificate Value may be subject to federal estate tax. See FEDERAL TAX
CONSIDERATIONS -- "Taxation of the Certificates."
The Certificate offered by this Prospectus may be considered a "modified
endowment contract" if it fails a "seven-pay" test. A Certificate fails to
satisfy the seven-pay test if the cumulative premiums paid under the Certificate
at any time during the first seven Certificate years, or within seven years of a
material change in the Certificate, exceed the sum of the net level premiums
that would have been paid, had the Certificate provided for paid-up future
benefits after the payment of seven level annual premiums. If the Certificate is
considered a modified endowment contract, all distributions (including
Certificate loans, partial withdrawals, surrenders or assignments) will be taxed
on an "income-first" basis. With certain exceptions, an additional 10% penalty
will be imposed on the portion of any distribution that is includible in income.
For more information, see FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
------------------------
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Certificate. The Prospectus and the Certificate
provide further detail. The Certificate provides insurance protection for the
named beneficiary. The Certificate and its attached application or enrollment
form are the entire agreement between you and the Company.
THE PURPOSE OF THE CERTIFICATE IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE, OR IF YOU
ALREADY OWN A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CERTIFICATE.
NO CLAIM IS MADE THAT THE CERTIFICATE IS IN ANY WAY SIMILAR OR COMPARABLE TO A
SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND.
17
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
July 1974. Its Principal Office is located at 440 Lincoln Street, Worcester,
Massachusetts 01653, telephone 508-855-1000 ("Principal Office"). Prior to
October 1, 1995, the Company was known as SMA Life Assurance Company. As of
December 31, 1999, the Company had over $17 billion in assets and over
$26 billion of life insurance in force. The Company is subject to the laws of
the State of Delaware governing insurance companies and to regulation by the
Commissioner of Insurance of Delaware. In addition, the Company is subject to
the insurance laws and regulations of other states and jurisdictions in which it
is licensed to operate. The Company is an indirectly wholly owned subsidiary of
First Allmerica Financial Life Insurance Company ("First Allmerica"), formerly
State Mutual Life Assurance Company of America, 440 Lincoln Street, Worcester,
Massachusetts. First Allmerica, organized under the laws of Massachusetts in
1844, is the fifth oldest life insurance company in America.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT
The Separate Account was authorized by vote of the Board of Directors of the
Company on November 22, 1993. The Separate Account is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940 ("1940 Act"). Such registration does not involve
the supervision of its management or investment practices or policies of the
Separate Account or the Company by the SEC.
The assets used to fund the variable portion of the Certificates are set aside
in the Separate Account and are kept separate and apart from the general assets
of the Company. Under Delaware law, assets equal to the reserves and other
liabilities of the Separate Account may not be charged with any liabilities
arising out of any other business of the Company. The Separate Account currently
has 47 Sub-Accounts, 25 are available to the Certificates. Each Sub-Account is
administered and accounted for as part of the general business of the Company,
but the income, capital gains, or capital losses of each Sub-Account are
allocated to such Sub-Account, without regard to other income, capital gains, or
capital losses of the Company or the other Sub-Accounts. Each Sub-Account
invests exclusively in a corresponding investment portfolio ("Underlying Fund")
of the Delaware Group Premium Fund, the Money Market Fund of Allmerica
Investment Trust, AIM Variable Insurance Funds, The Alger American Fund,
Alliance Variable Products Series Fund, Inc., and Franklin Templeton Variable
Insurance Products Trust.
THE UNDERLYING FUNDS
Each Underlying Fund pays a management fee to an investment manager or adviser
for managing and providing services to the Underlying Fund. However, management
fee waivers and/or reimbursements may be in effect for certain or all of the
Underlying Funds. For specific information regarding the existence and effect of
any waiver/reimbursements see "CHARGES OF THE UNDERLYING FUNDS" under the
SUMMARY OF FEES AND CHARGES section. The prospectuses of the Underlying Funds
also contain information regarding fees for advisory services and should be read
in conjunction with this prospectus.
18
<PAGE>
DELAWARE GROUP PREMIUM FUND
Delaware Group Premium Fund ("DGPF") is an open-end, diversified, management
investment company registered with the SEC under the 1940 Act. DGPF was
established to provide a vehicle for the investment of assets of various
separate accounts supporting variable insurance policies. Sixteen investment
portfolios are available under the Certificates: DGPF Growth & Income, DGPF
Devon Series, DGPF Growth Opportunities Series, DGPF U.S. Growth Series, DGPF
Select Growth Series, DGPF Social Awareness Series, DGPF REIT Series, DGPF Small
Cap Value Series, DGPF Trend Series, DGPF International Equity Series, DGPF
Emerging Markets Series, DGPF Balanced Series, DGPF High Yield Series, DGPF
Capital Reserves Series, DGPF Strategic Income Series, and DGPF Cash Reserve
Series (collectively, the "Underlying Funds"). The assets of each Underlying
Fund are held separate from the assets of the other Underlying Funds. Each
Underlying Fund operates as a separate investment vehicle, and the income or
losses of one Underlying Fund have no effect on the investment performance of
another Underlying Fund. Shares of the Underlying Funds are not offered to the
general public but solely to separate accounts of life insurance companies.
The investment adviser for the DGPF Growth & Income Series, DGPF Devon Series,
DGPF Growth Opportunities Series, DGPF U.S. Growth Series, DGPF Select Growth
Series, DGPF Social Awareness Series, DGPF REIT Series, DGPF Small Cap Value
Series, DGPF Trend Series, DGPF Balanced Series, DGPF High Yield Series, DGPF
Capital Reserves Series, DGPF Strategic Income Series, and DGPF Cash Reserve
Series is Delaware Management Company, a series of Delaware Management Business
Trust ("Delaware Management"). The investment adviser for the DGPF International
Equity Series, and the DGPF Emerging Markets Series is Delaware International
Advisers Ltd. ("Delaware International").
ALLMERICA INVESTMENT TRUST
Allmerica Investment Trust ("Trust") is an open-end, diversified management
investment company registered with the SEC under the 1940 Act. Such registration
does not involve supervision by the SEC of the investments or investment policy
of the Trust or its separate investment funds. The Trust was established as a
Massachusetts business trust on October 11, 1984 for the purpose of providing a
vehicle for the investment of assets of various separate accounts established by
First Allmerica, the Company, or other insurance companies. One investment
portfolio of the Trust ("Fund") is available under the Certificates, issuing a
series of shares: the Money Market Fund. Shares of the Trust are not offered to
the general public but solely to the separate account. AFIMS serves as
investment adviser for the Money Market Fund.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
investment manager of the Trust. AFIMS, which is a wholly-owned subsidiary of
Allmerica Financial, has entered into agreements with other investment managers
("Sub-Advisers"), who manage the investments of the Funds. The Trustees have
responsibility for the supervision of the affairs of the Trust. The Trustees
have entered into a management agreement with AFIMS.
AFIMS, subject to Trustee review, is responsible for the daily affairs of the
Trust and the general management of the Funds. AFIMS performs administrative and
management services for the Trust, furnishes to the Trust all necessary office
space, facilities and equipment, and pays the compensation, if any, of officers
and Trustees who are affiliated with AFIMS.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- Costs to register and qualify the Trust's shares under the Securities Act
of 1933 ("1933 Act"),
- Other fees payable to the SEC,
- Independent public accountant, legal and custodian fees,
- Association membership dues, taxes, interest, insurance payments and
brokerage commissions,
19
<PAGE>
- Fees and expenses of the Trustees who are not affiliated with AFIMS,
- Expenses for proxies, prospectuses, reports to shareholders and other
expenses.
Under the Management Agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and Trustees in
consultation with BARRA RogersCasey, Inc. Under each Sub-Adviser Agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
Fund, subject to the Trustee's instructions. The Sub-Advisers (other than
Allmerica Asset Management, Inc.) are not affiliated with the Company or the
Trust.
AIM VARIABLE INSURANCE FUNDS
AIM Variable Insurance Funds ("AVIF") was organized as a Maryland corporation on
January 22, 1993 and changed to a Delaware business trust on May 1, 2000. The
investment adviser for the AIM V.I. Growth Fund, AIM V.I. High Yield Fund, and
AIM V.I. Value Fund is A I M Advisors, Inc. ("AIM"). AIM was organized in 1976,
and, together with its subsidiaries, manages or advises over 120 investment
company portfolios encompassing a broad range of investment objectives. AIM is
located at 11 Greenway Plaza, Suite 100, Houston, TX 77046.
THE ALGER AMERICAN FUND
The Alger American Fund ("Alger") was established as a Massachusetts business
trust on April 6, 1988. Fred Alger Management, Inc. is the investment manager of
Alger. Fred Alger Management, Inc. is the investment adviser for the Alger
American Leveraged AllCap and Alger American Small Capitalization Portfolios.
Fred Alger Management, Inc. is located at 1 World Trade Center, Suite 9333, New
York, NY 10048.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
Alliance Variable Products Series Fund, Inc. ("Alliance") is registered with the
SEC as an open-end, management investment company. One of its separate
investment portfolios is currently available under the Contract. Alliance
Capital Management, L.P. ("Alliance Capital"), with principal offices at 1345
Avenue of the Americas, New York, New York 10105 serves as the investment
adviser to Alliance. Alliance Capital Management Corporation, the sole general
partner of Alliance Capital, is an indirect wholly owned subsidiary of The
Equitable Life Assurance Society of the United States, which is in turn a wholly
owned subsidiary of the Equitable Companies Incorporated, a holding company
which is controlled by AXA, a French insurance holding company.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Franklin Templeton Variable Insurance Products Trust ("FT VIP") and the funds'
investment managers and their affiliates manage over $224 billion (as of
December 31, 1999) in assets. In 1992, Franklin joined forces with Templeton, a
pioneer in international investing. The Mutual Advisers organization became part
of the Franklin Templeton organization four years later. Today, Franklin
Templeton is one of the largest mutual fund organizations in the United States,
and offers money management expertise spanning a variety of investment
objectives. Templeton Investment Counsel, Inc. ("TICI") is adviser to Templeton
International Securities Fund.
20
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANY MAY BE FOUND IN THE
PROSPECTUSES WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ CAREFULLY BEFORE
INVESTING. The statements of additional information of the Underlying Funds are
available upon request. There can be no assurance that the investment objectives
of the Underlying Funds can be achieved.
DELAWARE GROUP PREMIUM FUND:
DGPF GROWTH & INCOME SERIES -- seeks the highest possible total rate of return
by selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This Fund formerly was known as
Decatur Total Return Series.
DGPF DEVON SERIES -- seeks current income and capital appreciation. It seeks to
achieve its objective by investing primarily in income-producing common stocks,
with a focus on common stocks that the investment manager believes exhibit the
potential for above-average dividend increases over time.
DGPF GROWTH OPPORTUNITIES SERIES -- seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. This Series formerly was known as the DelCap
Series.
DGPF U.S. GROWTH SERIES -- seeks to achieve maximum capital appreciation.
DGPF SELECT GROWTH SERIES -- seeks to provide long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies which the investment manager believes have the potential for high
earnings growth. This Series formerly was known as the Aggressive Growth Series.
DGPF SOCIAL AWARENESS SERIES -- seeks to achieve long-term capital appreciation.
It seeks to achieve its objective by investing primarily in equity securities of
medium- to large-sized companies expected to grow over time that meet the
Series' "Social Criteria" strategy.
DGPF REIT SERIES -- seeks to achieve maximum long-term total return. Capital
appreciation is a secondary objective. It seeks to achieve its objective by
investing in securities of companies primarily engaged in the real estate
industry.
DGPF SMALL CAP VALUE SERIES -- seeks capital appreciation by investing in small-
to mid-cap common stocks whose market value appears low relative to their
underlying value or future earnings and growth potential. Emphasis also will be
placed on securities of companies that temporarily may be out of favor or whose
value is not yet recognized by the market.
DGPF TREND SERIES -- seeks long-term capital appreciation by investing primarily
in small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective.
DGPF INTERNATIONAL EQUITY SERIES -- seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers
providing the potential for capital appreciation and income.
DGPF EMERGING MARKETS SERIES -- seeks to achieve long-term capital appreciation.
It seeks to achieve its objective by investing primarily in equity securities of
issuers located or operating in emerging countries. The Series is an
international fund. As such, under normal market conditions, at least 65% of the
Series' assets will
21
<PAGE>
be invested in equity securities of issuers organized or having a majority of
their assets or deriving a majority of their operating income in at least three
countries that are considered to be emerging or developing.
DGPF BALANCED SERIES -- seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. This Fund formerly was
known as Delaware Balanced Series.
DGPF HIGH YIELD SERIES -- seeks total return and, as a secondary objective, high
current income. This Series invests in rated and unrated corporate bonds
(including high-yield bonds commonly known as "junk bonds"), foreign bonds, U.S.
government securities and commercial paper. Please read the Fund's prospectus
disclosure regarding the risk factors before investing in this Series. This
Series formerly was known as Delchester Series.
DGPF CAPITAL RESERVES SERIES -- seeks a high, stable level of current income
while minimizing fluctuations in principal by investing in a diversified
portfolio of short- and intermediate-term securities.
DGPF STRATEGIC INCOME SERIES -- seeks high current income and total return. It
seeks to achieve its objective by using a multi-sector investment approach,
investing primarily in three sectors of the fixed-income securities market: high
yield, higher-risk securities; investment grade fixed-income securities; and
foreign government and other foreign fixed-income securities. The Fund also may
invest in U.S. equity securities.
DGPF CASH RESERVE SERIES -- a money market fund which seeks the highest level of
income consistent with the preservation of capital and liquidity through
investments in short-term money market instruments.
ALLMERICA INVESTMENT TRUST:
MONEY MARKET FUND -- The Money Market Fund is invested in a diversified
portfolio of high-quality, short-term money market instruments with the
objective of obtaining maximum current income consistent with the preservation
of capital and liquidity.
AIM VARIABLE INSURANCE FUNDS:
AIM V.I. GROWTH FUND -- seeks to provide growth of capital primarily by
investing in seasoned and better capitalized companies considered to have strong
earnings momentum.
AIM V.I. HIGH YIELD FUND -- seeks to achieve a high level of current income by
investing at least 65% of the value of its assets in publicly traded,
lower-quality debt securities, i.e., "junk bonds".
AIM V.I. VALUE FUND -- seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by the fund's investment advisor to be
undervalued relative to the investment advisor's appraisal of the current or
projected earnings of the companies issuing the securities, or relative to
current market values of assets owned by the companies issuing the securities or
relative to the equity market generally. Income is a secondary objective.
THE ALGER AMERICAN FUND:
The Alger American Small Capitalization Portfolio seeks long-term capital
appreciation.
It focuses on small, fast-growing companies that offer innovative products,
services or technologies to a rapidly expanding marketplace. Under normal
circumstances, the portfolio invests primarily in the equity securities of small
capitalization companies. A small capitalization company is one that has a
market capitalization within the range of the Russell 2000 Growth Index or the
S&P SmallCap 600 Index.
22
<PAGE>
The Alger American Leveraged AllCap Portfolio seeks long-term capital
appreciation.
Under normal circumstances, the portfolio invests in the equity securities of
companies of any size which demonstrate promising growth potential. The
portfolio can leverage, that is, borrow money, up to one-third of its total
assets to buy additional securities. By borrowing money, the portfolio has the
potential to increase its returns if the increase in the value of the securities
purchased exceeds the cost of borrowing, including interest paid on the money
borrowed.
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.:
ALLIANCE GROWTH AND INCOME PORTFOLIO (CLASS B) -- seeks reasonable current
income and reasonable appreciation through investments primarily in
dividend-paying common stocks of good quality.
ALLIANCE TECHNOLOGY PORTFOLIO (CLASS B) -- emphasizes growth of capital and
invests for capital appreciation. Current income is only an incidental
consideration.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (FT VIP):
TEMPLETON INTERNATIONAL SECURITIES FUND (CLASS 2) -- seeks long-term capital
growth. The Fund invests primarily in stocks of companies located outside the
United States, including emerging markets.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF CERTAIN OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS
WHICH WILL BEST MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES
OF THE UNDERLYING FUNDS ALONG WITH THIS PROSPECTUS. IN SOME STATES, INSURANCE
REGULATIONS MAY RESTRICT THE AVAILABILITY OF PARTICULAR SUB-ACCOUNTS.
If required in your state, in the event of a material change in the investment
policy of a Sub-Account or the Underlying Fund in which it invests, you will be
notified of the change. If you have Certificate Value in that Sub-Account, the
Company will transfer it without charge on written request by you to another
Sub-Account or to the General Account. The Company must receive your Written
Request within sixty (60) days of the later of (1) the effective date of such
change in the investment policy, or (2) the receipt of the notice of your right
to transfer. You may then change your premium and deduction allocation
percentages.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Certificate interest in a Sub-Account without
notice to the Certificate Owner and prior approval of the SEC and state
insurance authorities, to the extent required by the 1940 Act or other
applicable law. The Separate Account may, to the extent permitted by law,
purchase other securities for other certificates or permit a conversion between
certificates upon request by a Certificate Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Fund, or in shares of another investment company having a specified
investment objective.
23
<PAGE>
Subject to applicable law and any required SEC approval, the Company may, in its
sole discretion, establish new Sub-Accounts or eliminate one or more
Sub-Accounts if marketing needs, tax considerations or investment conditions
warrant. Any new Sub-Accounts may be made available to existing Certificate
Owners on a basis to be determined by the Company.
Shares of the Series of DGPF are also issued to variable annuity and variable
life separate accounts of other unaffiliated insurance companies ("mixed and
shared funding"). Shares of the Underlying Funds are also issued to separate
accounts of the Company and its affiliates which issue variable annuity and
variable life contracts ("mixed funding"). It is conceivable that in the future
such mixed funding or shared funding may be disadvantageous for variable life
contract owners or variable annuity contract owners. Although the Company, DGPF
and the Trust do not currently foresee any such disadvantages to either variable
life insurance contract owners or variable annuity contract owners, the Company
and the respective Trustees intend to monitor events in order to identify any
material conflicts between such contract owners and to determine what action, if
any, should be taken in response thereto. If the Trustees were to conclude that
separate funds should be established for variable life and variable annuity
separate accounts, the Company will bear the attendant expenses.
If any of these substitutions or changes are made, the Company may, by
appropriate endorsement change, the Certificate to reflect the substitution or
change and will notify Certificate Owners of all such changes. If the Company
deems it to be in the best interest of Certificate Owners, and subject to any
approvals that may be required under applicable law, the Separate Account or any
Sub-Accounts may be operated as a management company under the 1940 Act, may be
deregistered under the 1940 Act if registration is no longer required, or may be
combined with other Sub-Accounts or other separate accounts of the Company.
VOTING RIGHTS
To the extent required by law, the Company will vote Underlying Fund shares held
by each Sub-Account in accordance with instructions received from Certificate
Owners with Certificate Value in such Sub-Account. If the 1940 Act or any rules
thereunder should be amended, or if the present interpretation of the 1940 Act
or such rules should change, and as a result the Company determines that it is
permitted to vote shares in its own right, whether or not such shares are
attributable to the Certificates, the Company reserves the right to do so.
Each person having a voting interest will be provided with proxy materials of
the respective Underlying Fund, together with an appropriate form with which to
give voting instructions to the Company. Shares held in each Sub-Account for
which no timely instructions are received will be voted in proportion to the
instructions received from all persons with an interest in such Sub-Account
furnishing instructions to the Company. The Company will also vote shares held
in the Separate Account that it owns and which are not attributable to
Certificates in the same proportion.
The number of votes which a Certificate Owner has the right to instruct will be
determined by the Company as of the record date established for the Underlying
Fund. This number is determined by dividing each Certificate Owner's Certificate
Value in the Sub-Account, if any, by the net asset value of one share in the
corresponding Underlying Fund in which the assets of the Sub-Account are
invested.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the Fund shares be voted so
as (1) to cause a change in the subclassification or investment objective of one
or more of the Underlying Funds, or (2) to approve or disapprove an investment
advisory contract for the Funds. In addition, we may disregard voting
instructions that are in favor of any change in the investment policies or in
any investment adviser or principal underwriter if the change has been initiated
by Certificate Owners or the Trustees. Our disapproval of any such change must
be reasonable and, in the case of a change in investment policies or investment
adviser, based on a good faith determination that such change would be contrary
to state law or otherwise is inappropriate in light of the objectives and
purposes of the Funds. In the event we do disregard voting instructions, a
summary of and the reasons for that action will be included in the next periodic
report to Certificate Owners.
24
<PAGE>
THE CERTIFICATE
ENROLLMENT FORM FOR A CERTIFICATE
Upon receipt at its Principal Office of a completed enrollment form from a
prospective Certificate Owner, the Company will follow certain insurance
underwriting procedures designed to determine whether the proposed Insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed Certificate Owner before a determination of insurability can be made. A
Certificate cannot be issued until this underwriting procedure has been
completed. The Company reserves the right to reject an enrollment form which
does not meet the Company's underwriting guidelines, but in underwriting
insurance, the Company shall comply with all applicable federal and state
prohibitions concerning unfair discrimination.
At the time of enrollment, the proposed insured will complete an enrollment
form, which lists the proposed amount of insurance and indicates how much of
that insurance is considered eligible for simplified underwriting. If the
eligibility questions on the enrollment form are answered "No," the Company will
provide immediate coverage equal to the simplified underwriting amount. If the
proposed insured is in a standard premium class, any insurance in excess of the
simplified underwriting amount will begin on the date the enrollment form and
medical examinations, if any, are completed. If the proposed insured cannot
answer the eligibility questions "No," and if the proposed insured is not a
standard risk, insurance coverage will begin only after the Company
(1) approves the enrollment form, (2) the Certificate is delivered and accepted,
and (3) the first premium is paid.
Pending completion of insurance underwriting and Certificate issuance
procedures, any initial premiums will be held in the General Account. If the
enrollment form is approved and the Certificate is issued and accepted, the
initial premium held in the General Account will be credited with interest not
later than the date of receipt of the premium at the Principal Office. IF THE
CERTIFICATE IS NOT ISSUED, THE PREMIUMS WILL BE RETURNED TO YOU WITHOUT
INTEREST.
FREE-LOOK PERIOD
The Certificate provides for an initial Free-Look Period. You may cancel the
Certificate by mailing or delivering it to the Principal Office or to an agent
of the Company on or before the latest of (a) 45 days after the enrollment form
for the Certificate is signed, (b) 10 days (20 or 30 days if required in your
state) after you receive the Certificate, or (c) 10 days after the Company mails
or personally delivers a Notice of Withdrawal Rights to you.
When you return the Certificate, the Company will, within seven days, mail a
refund. The refund of any premium paid by check may be delayed until the check
has cleared your bank. If the Certificate provides for a full refund of the
initial premium under its "Right-to-Examine Certificate" provision as required
in your state, your refund will be the greater of (a) your entire premium, or
(b) the Certificate Value plus deductions under the Certificate or by the
Underlying Funds for taxes, charges or fees. If the Certificate does not provide
for a full refund of the initial premium, you will receive the Certificate Value
in the Separate Account, plus premiums paid (including fees and charges), minus
the amounts allocated to the Separate Account, plus the fees and charges imposed
on amounts in the Separate Account.
After an increase in the Face Amount, a right to cancel the increase also
applies. The Company will mail or personally deliver a notice of a "Free Look"
with respect to the increase. You will have the right to cancel the increase
before the latest of (a) 45 days after the enrollment form for the increase is
signed, (b) 10 days after you receive the new specifications pages issued for
the increase, or (c) 10 days (20 or 30 days if required in your state) after the
Company mails or delivers a Notice of Withdrawal Rights to you. Upon canceling
the increase, you will receive a credit to the Certificate Value of charges
which would not have been deducted but
25
<PAGE>
for the increase. The amount to be credited will be refunded if you so request.
The Company will also waive any surrender charge calculated for the increase.
CONVERSION PRIVILEGES
Once during the first 24 months after the Date of Issue or after the effective
date of an increase in Face Amount, while the Certificate is in force, you may
convert your Certificate without Evidence of Insurability to a flexible premium
adjustable life insurance policy with fixed and guaranteed minimum benefits.
Assuming that there have been no increases in the initial Face Amount, you can
accomplish this within 24 months after the Date of Issue by transferring,
without charge, the Certificate Value in the Separate Account to the General
Account and by simultaneously changing your premium allocation instructions to
allocate future premium payments to the General Account. Within 24 months after
the effective date of each increase, you can transfer, without charge, all or
part of the Certificate Value in the Separate Account to the General Account and
simultaneously change your premium allocation instructions to allocate all or
part of future premium payments to the General Account.
Where required by state law, and at your request, the Company will issue a
flexible premium adjustable life insurance policy to you. The new policy will
have the same face amount, issue age, date of issue, and risk classification as
the original Certificate.
PREMIUM PAYMENTS
Premium payments are payable to the Company, and may be mailed to the Principal
Office or paid through an authorized agent of the Company. All premium payments
after the initial premium payment are credited to the Separate Account or
General Account as of date of receipt at the Principal Office.
You may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Failure to pay planned premiums, however, will not
itself cause the Certificate to lapse. You may also make unscheduled premium
payments at any time prior to the Final Premium Payment Date or skip planned
premium payments, subject to the maximum and minimum premium limitations
described below. Therefore, unlike conventional insurance policies, a
Certificate does not obligate you to pay premiums in accordance with a rigid and
inflexible premium schedule.
You may also elect to pay premiums by means of a monthly automatic payment
("MAP") procedure. Under a MAP procedure, amounts will be deducted from your
checking account each month, generally on the Monthly
Processing Date, and applied as a premium under the Certificate. The minimum
payment permitted under MAP is $50.
Premiums are not limited as to frequency and number. However, you may be
required to provide evidence of insurability as a condition to our accepting any
payment that would increase the Insurance Amount at Risk (the Death Benefit less
the Certificate Value). If evidence of insurability is required, the Company
will return the payment to you and if your payment exceeds our maximum limit
(defined below) the Company may not accept any additional payments which would
increase the Insurance Amount at Risk and shall not provide any additional death
benefit until (1) evidence of insurability for the Insured has been received by
the Company and (2) the Company has notified you that the Insured is in a
satisfactory underwriting class. You may then make payments that increase the
Insurance Amount at Risk for 60 days (but not later than the Final Payment Date)
following the date of such notification by the Company.
However, no premium payment may be less than $100 without the Company's consent.
Moreover, premium payments must be sufficient to cover the next Monthly
Deduction plus loan interest accrued, or the Certificate may lapse. See
CERTIFICATE TERMINATION AND REINSTATEMENT.
26
<PAGE>
The Company may limit the maximum payment received in any certificate year but
in no event will the limit be less than the maximum Level Premium shown in the
certificate. In no event may the total of all premiums paid exceed the current
maximum premium limitations set forth in the Certificate, if required by federal
tax laws. These maximum premium limitations will change whenever there is any
change in the Face Amount, the addition or deletion of a rider, or a change in
the Death Benefit Option. If a premium is paid which would result in total
premiums exceeding the current maximum premium limitations, the Company will
only accept that portion of the premiums which shall make total premiums equal
the maximum. Any part of the premiums in excess of that amount will be returned
and no further premiums will be accepted until allowed by the current maximum
premium limitation prescribed by Internal Revenue Service ("IRS") rules.
Notwithstanding the current maximum premium limitations, however, the Company
will accept a premium which is needed in order to prevent a lapse of the
Certificate during a Certificate year. See CERTIFICATE TERMINATION AND
REINSTATEMENT.
ALLOCATION OF NET PREMIUMS
The Net Premium equals the premium paid less any premium expense charge. In the
enrollment form for the Certificate, you indicate the initial allocation of Net
Premiums among the General Account and the Sub-Accounts of the Separate Account.
You may allocate premiums to one or more Sub-Accounts, but may not have
Certificate Value in more than twenty Sub-Accounts at any one time. The minimum
amount which may be allocated to a Sub-Account is 1% of Net Premium paid.
Allocation percentages must be in whole numbers (for example, 33 1/3% may not be
chosen) and must total 100%. You may change the allocation of future Net
Premiums at any time pursuant to written or telephone request. If allocation
changes by telephone are elected by the Certificate Owner, a properly completed
authorization form must be on file before telephone requests will be honored.
The policy of the Company and its agents and affiliates is that they will not be
responsible for losses resulting from acting upon telephone requests reasonably
believed to be genuine. The Company will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine; otherwise, the Company
may be liable for any losses due to unauthorized or fraudulent instructions.
Such procedures may include, among other things, requiring some form of personal
identification prior to acting upon instructions received by telephone. All
transfer instructions by telephone are tape recorded. An allocation change will
be effective as of the date of receipt of the notice at the Principal Office. No
charge is currently imposed for changing premium allocation instructions. The
Company reserves the right to impose such a charge in the future, but guarantees
that the charge will not exceed $25.
The Certificate Value in the Sub-Accounts will vary with their investment
experience; you bear this investment risk. The investment performance may affect
the Death Proceeds as well. Certificate Owners should periodically review their
allocations of premiums and Certificate Value in light of market conditions and
overall financial planning requirements.
TRANSFER PRIVILEGE
Subject to the Company's then current rules, you may at any time transfer the
Certificate Value among the Sub-Accounts or between a Sub-Account and the
General Account. However, the Certificate Value held in the General Account to
secure a Certificate loan may not be transferred.
All requests for transfers must be made to the Principal Office. The amount
transferred will be based on the Certificate Value in the Accounts next computed
after receipt of the transfer order. The Company will make transfers pursuant to
written or telephone requests. As discussed in THE CERTIFICATE -- "Allocation of
Net Premiums," a properly completed authorization form must be on file at the
Principal Office before telephone requests will be honored.
Transfers to and from the General Account are currently permitted only if:
(a) There has been at least a ninety (90) day period since the last transfer
from the General Account; and
27
<PAGE>
(b) The amount transferred from the General Account in each transfer does not
exceed the lesser of $100,000 or 25% of the Accumulated Value under the
Certificate.
These rules are subject to change by the Company.
DOLLAR COST AVERAGING AND AUTOMATIC REBALANCING OPTIONS
You may have automatic transfers of at least $100 each made on a periodic basis
(a) from the Sub-Account which invests in the Cash Reserve Series to one or more
of the other Sub-Accounts ("Dollar Cost Averaging Option"), or (b) to
automatically reallocate Certificate Value among the Sub-Accounts ("Automatic
Rebalancing Option"). Automatic transfers may be made on a monthly, bimonthly,
quarterly, semiannual or annual schedule. Generally, all transfers will be
processed on the 15th of each scheduled month. However, if the 15th is not a
business day or is the Monthly Processing Date, the automatic transfer will be
processed on the next business day. The Dollar Cost Averaging Option and the
Automatic Rebalancing Option may not be in effect at the same time.
TRANSFER PRIVILEGE SUBJECT TO POSSIBLE LIMITATIONS
The transfer privilege is subject to the consent of the Company. The Company
reserves the right to impose limitations on transfers including, but not limited
to: (1) the minimum amount that may be transferred, (2) the minimum amount that
may remain in a Sub-Account following a transfer from that Sub-Account, (3) the
minimum period of time between transfers involving the General Account, and
(4) the maximum amount that may be transferred each time from the General
Account.
The first twelve transfers in a Certificate year will be free of any charge.
Thereafter, a $10 transfer charge will be deducted from the amount transferred
for each transfer in that Certificate year. The Company may increase or decrease
this charge, but it is guaranteed never to exceed $25. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year; each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made free of
charge. Any transfers made with respect to a conversion privilege, Certificate
loan or material change in investment policy will not count towards the twelve
free transfers.
ELECTION OF DEATH BENEFIT OPTIONS
Federal tax law requires a Guideline Minimum Death Benefit in relation to cash
value for a Certificate to qualify as life insurance. Under current federal tax
law, either the Guideline Premium test or the Cash Value Accumulation test can
be used to determine if the Certificate complies with the definition of "life
insurance" in Section 7702 of the Code. At the time of application, the Employer
may elect either of the tests.
The Guideline Premium test limits the amount of premiums payable under a
Certificate to a certain amount for an insured of a particular age and sex.
Under the Guideline Premium test, the Certificate Owner may choose between Death
Benefit Option 1 and Option 2, as described below. After issuance of the
Certificate, the Certificate Owner may change the selection from Option 1 to
Option 2 or vice versa. The Cash Value Accumulation test requires that the Death
Benefit must be sufficient so that the cash Surrender Value, as defined in
Section 7702, does not at any time exceed the net single premium required to
fund the future benefits under the Certificate. In the event the maximum premium
limit applies, we reserve the right to obtain evidence of insurability which is
satisfactory to us as a condition to accepting excess premium. If the Cash Value
Accumulation test is chosen by the employer, ONLY Death Benefit Option 3 will
apply. Death Benefits Option 1 and Option 2 are NOT available under the Cash
Value Accumulation test.
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST
There are two main differences between the Guideline Premium test and the Cash
Value Accumulation test. First, the Guideline Premium test limits the amount of
premium that may be paid into a Certificate, while no such limits apply under
the Cash Value Accumulation test. Second, the factors that determine the
Guideline
28
<PAGE>
Minimum Death Benefit relative to the Certificate Value are different. Required
increases in the Guideline Minimum Death Benefit due to growth in Certificate
Value will generally be greater under the Cash Value Accumulation test than
under the Guideline Premium test. APPLICANTS FOR A POLICY SHOULD CONSULT A
QUALIFIED TAX ADVISER IN CHOOSING A DEATH BENEFIT ELECTION.
OPTION 1 -- LEVEL DEATH BENEFIT
Under Option 1, the Death Benefit is equal to the greater of the Face Amount or
the Guideline Minimum Death Benefit, as set forth in the table below. Under
Option 1, the Death Benefit will remain level unless the Guideline Minimum Death
Benefit is greater than the Face Amount, in which case the Death Benefit will
vary as the Certificate Value varies. Option 1 will offer the best opportunity
for the Certificate Value under a Certificate to increase without increasing the
Death Benefit as quickly as it might under the other options. The Death Benefit
will never go below the Face Amount.
OPTION 2 -- ADJUSTABLE DEATH BENEFIT
Under Option 2, the Death Benefit is equal to the greater of the Face Amount
plus the Certificate Value or the Guideline Minimum Death Benefit, as set forth
in the table below. The Death Benefit will, therefore, vary as the Certificate
Value changes, but will never be less than the Face Amount. Option 2 will offer
the best opportunity for the Certificate Owner who would like to have an
increasing Death Benefit as early as possible. The Death Benefit will increase
whenever there is an increase in the Certificate Value, and will decrease
whenever there is a decrease in the Certificate Value, but will never go below
the Face Amount.
OPTION 3 -- LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION TEST
Under Option 3, the Death Benefit will equal the Face Amount, unless the
Certificate Value, multiplied by the applicable Option 3 Death Benefit Factor,
results in a higher Death Benefit. A complete list of Option 3 Death Benefit
Factors is set forth in the Certificate. The applicable Death Benefit Factor
depends upon the sex, risk classification, and then-attained age of the Insured.
The Death Benefit Factor decreases slightly from year to year as the attained
age of the Insured increases. Option 3 will offer the best opportunity for the
Certificate Owner who is looking for an increasing death benefit in later
Certificate years and/or would like to fund the Certificate at the "seven-pay"
limit for the full seven years. When the Certificate Value multiplied by the
applicable Death Benefit Factor exceeds the Face Amount, the Death Benefit will
increase whenever there is an increase in the Certificate Value, and will
decrease whenever there is a decrease in the Certificate Value, but will never
go below the Face Amount. OPTION 3 MAY NOT BE AVAILABLE IN ALL STATES.
DEATH PROCEEDS
As long as the Certificate remains in force (see CERTIFICATE TERMINATION AND
REINSTATEMENT), the Company will, upon due proof of the Insured's death, pay the
Death Proceeds of the Certificate to the named Beneficiary. The Company will
normally pay the Death Proceeds within seven days of receiving due proof of the
Insured's death, but the Company may delay payments under certain circumstances.
See OTHER CERTIFICATE PROVISIONS -- "Postponement of Payments." The Death
Proceeds may be received by the Beneficiary in a lump sum or under one or more
of the payment options the Company offers. See APPENDIX B -- PAYMENT OPTIONS.
The Death Proceeds payable depend on the current Face Amount and the Death
Benefit Option that is in effect on the date of death. Prior to the Final
Premium Payment Date, the Death Proceeds are: (a) the Death Benefit provided
under Option 1, Option 2, or Option 3, whichever is in effect on the date of
death; plus (b) any additional insurance on the Insured's life that is provided
by rider; minus (c) any outstanding Debt, any partial withdrawals and partial
withdrawal charges, and any Monthly Deductions due and unpaid through the
Certificate month in which the Insured dies. After the Final Premium Payment
Date, the Death Proceeds equal the Surrender Value of the Certificate. The
amount of Death Proceeds payable will be determined as of the date the Company
receives due proof of the Insured's death for Option 2 and date of death for
Options 1 and 3.
29
<PAGE>
MORE INFORMATION ABOUT DEATH BENEFIT OPTIONS 1 AND 2
If the Guideline Premium Test is chosen by the Employer, the Certificate Owner
may choose between Death Benefit Option 1 or Option 2. The Certificate Owner may
designate the desired Death Benefit Option in the enrollment form, and may
change the option once per Certificate year by Written Request. There is no
charge for a change in option.
GUIDELINE MINIMUM DEATH BENEFIT UNDER OPTION 1 AND OPTION 2
The Guideline Minimum Death Benefit under Option 1 or Option 2 is equal to a
percentage of the Certificate Value as set forth below. The Guideline Minimum
Death Benefit is determined in accordance with the Code regulations to ensure
that the Certificate qualifies as a life insurance contract and that the
insurance proceeds may be excluded from the gross income of the Beneficiary.
GUIDELINE MINIMUM DEATH BENEFIT TABLE
(Option 1 and Option 2)
<TABLE>
<CAPTION>
Age of Insured Percentage of
on Date of Death Certificate Value
- ---------------- -----------------
<S> <C>
40 and under........................................... 250%
45..................................................... 215%
50..................................................... 185%
55..................................................... 150%
60..................................................... 130%
65..................................................... 120%
70..................................................... 115%
75..................................................... 105%
80..................................................... 105%
85..................................................... 105%
90..................................................... 105%
95 and above........................................... 100%
</TABLE>
For the Ages not listed, the progression between the listed Ages is linear.
For any Face Amount, the amount of the Death Benefit and thus the Death Proceeds
will be greater under Option 2 than under Option 1, since the Certificate Value
is added to the specified Face Amount and included in the Death Proceeds only
under Option 2. However, the cost of insurance included in the Monthly Deduction
will be greater, and thus the rate at which Certificate Value will accumulate
will be slower, under Option 2 than under Option 1. See CHARGES AND
DEDUCTIONS -- "Monthly Deduction from Certificate Value."
If you desire to have premium payments and investment performance reflected in
the amount of the Death Benefit, you should choose Option 2. If you desire
premium payments and investment performance reflected to the maximum extent in
the Certificate Value, you should select Option 1.
ILLUSTRATION OF OPTION 1
For purposes of this illustration, assume that the Insured is under the Age of
40, and that there is no outstanding Debt.
Under Option 1, a Certificate with a $50,000 Face Amount will generally have a
Death Benefit equal to $50,000. However, because the Death Benefit must be equal
to or greater than 250% of Certificate Value, if at any time the Certificate
Value exceeds $20,000, the Death Benefit will exceed the $50,000 Face Amount. In
this example, each additional dollar of Certificate Value above $20,000 will
increase the Death Benefit by $2.50. For example, a Certificate with a
Certificate Value of $35,000 will have a Guideline Minimum Death Benefit of
$87,500 ($35,000 X 2.50); Certificate Value of $40,000 will produce a Guideline
Minimum Death
30
<PAGE>
Benefit of $100,000 ($40,000 X 2.50); and Certificate Value of $50,000 will
produce a Guideline Minimum Death Benefit of $125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $20,000, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $25,000 to $20,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $62,500 to $50,000. If at any time, however, the Certificate
Value multiplied by the applicable percentage is less than the Face Amount, the
Death Benefit will equal the Face Amount of the Certificate.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were, for example, 50 (rather than between 0
and 40), the applicable percentage would be 185%. The Death Benefit would not
exceed the $50,000 Face Amount unless the Certificate Value exceeded $27,027
(rather than $20,000), and each dollar then added to or taken from Certificate
Value would change the Death Benefit by $1.85.
ILLUSTRATION OF OPTION 2
For purposes of this illustration, assume that the Insured is under the Age of
40 and that there is no outstanding Debt.
Under Option 2, a Certificate with a Face Amount of $50,000 will generally
produce a Death Benefit of $50,000 plus Certificate Value. For example, a
Certificate with Certificate Value of $5,000 will produce a Death Benefit of
$55,000 ($50,000 + $5,000); Certificate Value of $10,000 will produce a Death
Benefit of $60,000 ($50,000 + $10,000); Certificate Value of $25,000 will
produce a Death Benefit of $75,000 ($50,000 + $25,000). However, the Death
Benefit must be at least 250% of the Certificate Value. Therefore, if the
Certificate Value is greater than $33,333, 250% of that amount will be the Death
Benefit, which will be greater than the Face Amount plus Certificate Value. In
this example, each additional dollar of Certificate Value above $33,333 will
increase the Death Benefit by $2.50. For example, if the Certificate Value is
$35,000, the Guideline Minimum Death Benefit will be $87,500 ($35,000 X 2.50);
Certificate Value of $40,000 will produce a Guideline Minimum Death Benefit of
$100,000 ($40,000 X 2.50); and Certificate Value of $50,000 will produce a
Guideline Minimum Death Benefit of $125,000 ($50,000 X 2.50).
Similarly, if Certificate Value exceeds $33,333, each dollar taken out of
Certificate Value will reduce the Death Benefit by $2.50. If, for example, the
Certificate Value is reduced from $45,000 to $40,000 because of partial
withdrawals, charges or negative investment performance, the Death Benefit will
be reduced from $112,500 to $100,000. If at any time, however, Certificate Value
multiplied by the applicable percentage is less than the Face Amount plus
Certificate Value, then the Death Benefit will be the current Face Amount plus
Certificate Value.
The applicable percentage becomes lower as the Insured's Age increases. If the
Insured's Age in the above example were 50, the Death Benefit must be at least
1.85 times the Certificate Value. The amount of the Death Benefit would be the
sum of the Certificate Value plus $50,000 unless the Certificate Value exceeded
$58,824 (rather than $33,333). Each dollar added to or subtracted from the
Certificate would change the Death Benefit by $1.85.
The Death Benefit under Option 2 will always be the greater of the Face Amount
plus Certificate Value or the Certificate Value multiplied by the applicable
percentage.
CHANGE IN DEATH BENEFIT OPTION
Generally, if Death Benefit Option 1 or Option 2 is in effect, the Death Benefit
Option in effect may be changed once each Certificate year by sending a Written
Request for change to the Principal Office. The effective date of any such
change will be the Monthly Processing Date on or following the date of receipt
of
31
<PAGE>
the request. No charges will be imposed on changes in Death Benefit Options. IF
OPTION 3 IS IN EFFECT, YOU MAY NOT CHANGE TO EITHER OPTION 1 OR OPTION 2.
If the Death Benefit Option is changed from Option 2 to Option 1, the Face
Amount will be increased to equal the Death Benefit which would have been
payable under Option 2 on the effective date of the change (i.e., the Face
Amount immediately prior to the change plus the Certificate Value on the date of
the change). The amount of the Death Benefit will not be altered at the time of
the change. However, the change in option will affect the determination of the
Death Benefit from that point on, since the Certificate Value will no longer be
added to the Face Amount in determining the Death Benefit. The Death Benefit
will equal the new Face Amount (or, if higher, the Guideline Minimum Death
Benefit). The cost of insurance may be higher or lower than it otherwise would
have been since any increases or decreases in Certificate Value will,
respectively, reduce or increase the Insurance Amount at Risk under Option 1.
Assuming a positive net investment return with respect to any amounts in the
Separate Account, changing the Death Benefit Option from Option 2 to Option 1
will reduce the Insurance Amount at Risk and, therefore, the cost of insurance
charge for all subsequent Monthly Deductions, compared to what such charge would
have been if no such change were made. If the Death Benefit Option is changed
from Option 1 to Option 2, the Face Amount will be decreased to equal the Death
Benefit less the Certificate Value on the effective date of the change. This
change may not be made if it would result in a Face Amount less than $40,000. A
change from Option 1 to Option 2 will not alter the amount of the Death Benefit
at the time of the change, but will affect the determination of the Death
Benefit from that point on. Because the Certificate Value will be added to the
new specified Face Amount, the Death Benefit will vary with the Certificate
Value. Thus, under Option 2, the Insurance Amount at Risk will always equal the
Face Amount unless the Guideline Minimum Death Benefit is in effect. The cost of
insurance may also be higher or lower than it otherwise would have been without
the change in Death Benefit Option. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value."
A change in Death Benefit Option may result in total premiums paid exceeding the
then current maximum premium limitation determined by Internal Revenue Service
Rules. In such event, the Company will pay the excess to the Certificate Owner.
See THE CERTIFICATE -- "Premium Payments."
CHANGE IN FACE AMOUNT
Subject to certain limitations, you may increase or decrease the specified Face
Amount of a Certificate at any time by submitting a Written Request to the
Company. Any increase or decrease in the specified Face Amount requested by you
will become effective on the Monthly Processing Date on or next following the
date of receipt of the request at the Principal Office or, if Evidence of
Insurability is required, the date of approval of the request.
INCREASES
Along with the Written Request for an increase, you must submit satisfactory
Evidence of Insurability. The consent of the Insured may also be required
whenever the Face Amount is increased. A request for an increase in the Face
Amount may not be less than an amount determined by the Company. This amount
varies by group but in no event will this amount exceed $10,000. You may not
increase the Face Amount after the Insured reaches Age 80. An increase must be
accompanied by an additional premium if the Certificate Value is less than $50
plus an amount equal to the sum of two Monthly Deductions. On the effective date
of each increase in the Face Amount, a transaction charge of $2.50 per $1,000 of
increase up to $40, will be deducted from the Certificate Value for
administrative costs. The effective date of the increase will be the first
Monthly Processing Date on or following the date all of the conditions for the
increase are met.
An increase in the Face Amount will generally affect the Insurance Amount at
Risk, and may affect the portion of the Insurance Amount at Risk included in
various Underwriting Classes (if more than one Underwriting Class applies), both
of which may affect the monthly cost of insurance charges. A surrender charge
will also be calculated for the increase. See CHARGES AND DEDUCTIONS -- "Monthly
Deduction from Certificate Value" and "Surrender Charge."
32
<PAGE>
After increasing the Face Amount, you will have the right (1) during a Free-Look
Period, to have the increase cancelled and the charges which would not have been
deducted but for the increase will be credited to the Certificate, and
(2) during the first 24 months following the increase, to transfer any or all
Certificate Value to the General Account free of charge. See THE CERTIFICATE --
"Free-Look Period" and "Conversion Privileges." A refund of charges which would
not have been deducted but for the increase will be made at your request.
DECREASES
The minimum amount for a decrease in the Face Amount is $10,000. By current
Company practice, the Face Amount in force after any decrease may not be less
than $50,000. If, following a decrease in the Face Amount, the Certificate would
not comply with the maximum premium limitation applicable under the IRS rules,
the decrease may be limited or Certificate Value may be returned to the
Certificate Owner (at your election) to the extent necessary to meet the
requirements. A return of Certificate Value may result in tax liability to you.
A decrease in the Face Amount will affect the total Insurance Amount at Risk and
the portion of the Insurance Amount at Risk covered by various Underwriting
Classes, both of which may affect a Certificate Owner's monthly cost of
insurance charges. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
For purposes of determining the cost of insurance charge, any decrease in the
Face Amount will reduce the Face Amount in the following order: (a) the Face
Amount provided by the most recent increase; (b) the next most recent increases
successively; and (c) the initial Face Amount. This order will also be used to
determine whether a surrender charge will be deducted and in what amount. If the
Face Amount is decreased while the Payor Provisions apply (see CERTIFICATE
TERMINATION AND REINSTATEMENT -- "Termination"), the above order may be modified
to determine the cost of insurance charge. You may then reduce or eliminate any
Face Amount for which you are paying the insurance charges, on a
last-in/first-out basis, before you reduce or eliminate amounts of insurance
which are paid by the Payor.
If you request a decrease in the Face Amount, the amount of any surrender charge
deducted will reduce the current Certificate Value. On the effective date of
each decrease in the Face Amount, a transaction charge of $2.50 per $1,000 of
decrease, up to a maximum of $40, will be deducted from the Certificate Value
for administrative costs. You may specify one Sub-Account from which the
transaction charge and, if applicable, any surrender charge will be deducted. If
you do not specify a Sub-Account, the Company will make a Pro-Rata Allocation.
The current surrender charge will be reduced by the amount of any surrender
charge deducted. See CHARGES AND DEDUCTIONS -- "Surrender Charge" and APPENDIX
D -- CALCULATION OF MAXIMUM SURRENDER CHARGES.
CERTIFICATE VALUE AND SURRENDER VALUE
The Certificate Value is the total amount available for investment and is equal
to the sum of the accumulation in the General Account and the value of the Units
in the Sub-Accounts. The Certificate Value is used in determining the Surrender
Value (the Certificate Value less any Debt and any surrender charge). See THE
CERTIFICATE -- "Surrender." There is no guaranteed minimum Certificate Value.
Because Certificate Value on any date depends upon a number of variables, it
cannot be predetermined.
Certificate Value and Surrender Value will reflect frequency and amount of Net
Premiums paid, interest credited to accumulations in the General Account, the
investment performance of the chosen Sub-Accounts, any partial withdrawals, any
loans, any loan repayments, any loan interest paid or credited, and any charges
assessed in connection with the Certificate.
CALCULATION OF CERTIFICATE VALUE
The Certificate Value is determined on the Date of Issue and on each Valuation
Date. On the Date of Issue, the Certificate Value will be the Net Premiums
received, plus any interest earned during the period when
33
<PAGE>
premiums are held in the General Account (before being transferred to the
Separate Account; see THE CERTIFICATE -- "Enrollment Form for a Certificate")
less any Monthly Deductions due. On each Valuation Date after the Date of Issue
the Certificate Value will be:
(1) the sum of the values in each of the Sub-Accounts on the Valuation Date,
determined for each Sub-Account by multiplying the value of a Unit in that
Sub-Account on that date by the number of such Units allocated to the
Certificate; PLUS
(2) the value in the General Account (including any amounts transferred to the
General Account with respect to a loan).
Thus, the Certificate Value is determined by multiplying the number of Units in
each Sub-Account by their value on the particular Valuation Date, adding the
products, and adding accumulations in the General Account, if any.
THE UNIT
You allocate the Net Premiums among the Sub-Accounts. Allocations to the
Sub-Accounts are credited to the Certificate in the form of Units. Units are
credited separately for each Sub-Account.
The number of Units of each Sub-Account credited to the Certificate is equal to
the portion of the Net Premium allocated to the Sub-Account, divided by the
dollar value of the applicable Unit as of the Valuation Date the payment is
received at the Principal Office. The number of Units will remain fixed unless
changed by a subsequent split of Unit value, transfer, partial withdrawal or
surrender. In addition, if the Company is deducting the Monthly Deduction or
other charges from a Sub-Account, each such deduction will result in
cancellation of a number of Units equal in value to the amount deducted.
The dollar value of a Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account. That
experience, in turn, will reflect the investment performance, expenses and
charges of the respective Underlying Fund. The value of a Unit was set at $1.00
on the first Valuation Date for each Sub-Account. The dollar value of a Unit on
a given Valuation Date is determined by multiplying the dollar value of the
corresponding Unit as of the immediately preceding Valuation Date by the
appropriate net investment factor.
NET INVESTMENT FACTOR
The net investment factor measures the investment performance of a Sub-Account
of the Separate Account during the Valuation Period just ended. The net
investment factor for each Sub-Account is equal to 1.0000 plus the number
arrived at by dividing (a) by (b), where
(a) is the investment income of that Sub-Account for the Valuation Period, plus
capital gains, realized or unrealized, credited during the Valuation Period;
minus capital losses, realized or unrealized, charged during the Valuation
Period; adjusted for provisions made for taxes, if any; and
(b) is the value of that Sub-Account's assets at the beginning of the Valuation
Period.
The net investment factor may be greater or less than one. Therefore, the value
of a Unit may increase or decrease. You bear the investment risk. Subject to
applicable state and federal laws, the Company reserves the right to change the
methodology used to determine the net investment factor.
Allocations to the General Account are not converted into Units, but are
credited interest at a rate periodically set by the Company. See MORE
INFORMATION ABOUT THE GENERAL ACCOUNT.
PAYMENT OPTIONS
During the Insured's lifetime, you may arrange for the Death Proceeds to be paid
in a single sum or under one or more of the payment options then offered by the
Company. These payment options are also available at the
34
<PAGE>
Final Premium Payment Date and if the Certificate is surrendered. If no election
is made, the Company will pay the Death Proceeds in a single sum. See
APPENDIX B -- PAYMENT OPTIONS.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the optional insurance benefits
described in APPENDIX A -- OPTIONAL BENEFITS may be added to a Certificate by
rider. The cost of any optional insurance benefits will be deducted as part of
the Monthly Deduction. See CHARGES AND DEDUCTIONS -- "Monthly Deduction from
Certificate Value."
SURRENDER
You may at any time surrender the Certificate and receive its Surrender Value.
The Surrender Value is the Certificate Value, less Debt and applicable surrender
charges. The Surrender Value will be calculated as of the Valuation Date on
which a Written Request for surrender and the Certificate are received at the
Principal Office. A surrender charge may be deducted when a Certificate is
surrendered if less than 15 full Certificate years have elapsed from the Date of
Issue of the Certificate or from the effective date of any increase in the Face
Amount. See CHARGES AND DEDUCTIONS -- "Surrender Charge."
The proceeds on surrender may be paid in a lump sum or under one of the payment
options the Company offers. See APPENDIX B -- PAYMENT OPTIONS. The Company will
normally pay the Surrender Value within seven days following the Company's
receipt of the surrender request, but the Company may delay payment under the
circumstances described in OTHER CERTIFICATE PROVISIONS -- "Postponement of
Payments."
For important tax considerations which may result from surrender see FEDERAL TAX
CONSIDERATIONS.
PAID-UP INSURANCE OPTION
On Written Request, you may elect life insurance coverage, usually for a reduced
amount, for the life of the Insured with no further premiums due. The Paid-Up
Insurance will be the amount that the Surrender Value can purchase for a net
single premium at the Insured's Age and Underwriting Class on the date this
option is elected. If the Surrender Value exceeds the net single premium, we
will pay the excess to you. The net single premium is based on the Commissioners
1980 Standard Ordinary Mortality Tables, Smoker or Non-Smoker (Table B for
unisex certificates) with increases in the tables for non-standard risks.
Interest will not be less than 4.5%.
IF THE PAID-UP INSURANCE OPTION IS ELECTED, THE FOLLOWING
CERTIFICATE OWNER RIGHTS AND BENEFITS WILL BE AFFECTED:
- As described above, the Paid-Up Insurance benefit will be computed
differently from the net Death Benefit and the Death Benefit options will
not apply.
- We will not allow transfers of Certificate Value from the General Account
back to the Separate Account.
- You may not make further payments.
- You may not increase or decrease the Face Amount or make partial
withdrawals.
- Riders will continue only with our consent.
35
<PAGE>
You may, after electing Paid-Up Insurance, surrender the Certificate for its net
cash value. The guaranteed cash value is the net single premium for the Paid-Up
Insurance at the Insured's attained Age. The net cash value is the cash value
less any outstanding Debt. We will transfer the Certificate Value in the
Separate Account to the General Account on the date we receive Written Request
to elect the option.
On election of Paid-Up Insurance, the Certificate often will become a modified
endowment contract. If a Certificate becomes a modified endowment contract,
Certificate loans, partial withdrawals or surrender will receive unfavorable
federal tax treatment. See FEDERAL TAX CONSIDERATIONS -- "Modified Endowment
Contracts."
PARTIAL WITHDRAWAL
Any time after the first Certificate year, you may withdraw a portion of the
Surrender Value of the Certificate, subject to the limits stated below, upon
Written Request filed at the Principal Office. The Written Request must indicate
the dollar amount you wish to receive and the Accounts from which such amount is
to be withdrawn. You may allocate the amount withdrawn among the Sub-Accounts
and the General Account. If you do not provide allocation instructions, the
Company will make a Pro-Rata Allocation. Each partial withdrawal must be in a
minimum amount of $500. Under Option 1 or Option 3, the Face Amount is reduced
by the amount of the partial withdrawal, and a partial withdrawal will not be
allowed if it would reduce the Face Amount below $40,000.
A partial withdrawal from a Sub-Account will result in the cancellation of the
number of Units equivalent in value to the amount withdrawn. The amount
withdrawn equals the amount requested by you plus the transaction charge and any
applicable partial withdrawal charge as described under CHARGES AND
DEDUCTIONS -- "Charges on Partial Withdrawal." The Company will normally pay the
amount of the partial withdrawal within seven days following the Company's
receipt of the partial withdrawal request, but the Company may delay payment
under certain circumstances described in OTHER CERTIFICATE PROVISIONS --
"Postponement of Payments." For important tax consequences which may result from
partial withdrawals, see FEDERAL TAX CONSIDERATIONS.
CHARGES AND DEDUCTIONS
Charges will be deducted to compensate the Company for providing the insurance
benefits set forth in the Certificate and any additional benefits added by
rider, providing servicing, incurring distribution expenses, and assuming
certain risks in connection with the Certificates. Certain of the charges
described below may be reduced for Certificates issued in connection with a
specific group under a non-qualified benefit plan. Charges and deductions may
vary based on criteria, for example, such as the purpose for which the
Certificates are purchased, the size of the benefit plan and the expected number
of participants, the underwriting characteristics of the group, the levels and
types of administrative services provided to the benefit plan and participants,
and anticipated aggregate premium payments. From time to time the Company may
modify both the amounts and criteria for reductions, which will not be unfairly
discriminatory against any person.
Upon full surrender of the Certificate within the first three policy years, in
certain situations the Company will, upon written request, refund a percentage
of the portion of the previously paid Premium Expense Charge that exceeded our
local, state and federal tax expenses. The following conditions apply:
- The original owner of the Certificate and certificates thereunder is a
corporation, a corporate grantor trust, or an individual or trust under a
corporate sponsored collateral assignment split dollar agreement, and the
ownership has not been changed;
- The request to surrender the Certificate and all certificates thereunder
must be received prior to the end of the third Certificate year; and
36
<PAGE>
- The Certificate and certificates have not been exchanged to another
carrier.
PREMIUM EXPENSE CHARGE
A charge may be deducted from each premium payment for state and local premium
taxes paid by the Company. State premium taxes generally range from 0.75% to 5%,
while local premium taxes (if any) vary by jurisdiction within a state. The
Company guarantees that the charge for premium taxes will not exceed 10%. Upon
request, the Company may permit all or part of the Premium Expense Charge to be
deducted as part of the Monthly Deductions. The premium tax charge may change
when either the applicable jurisdiction changes or the tax rate within the
applicable jurisdiction changes. The Company should be notified of any change in
address of the Insured as soon as possible.
Additional charges are made to compensate the Company for federal taxes imposed
for deferred acquisition cost ("DAC") taxes and for distribution expenses
related to the Certificates. The DAC tax deduction may range from zero to 1% of
premiums, depending on the group to which the Policy is issued. The charge for
distribution expenses may range from zero to 10%. The distribution charge may
vary, depending upon such factors, for example, as the type of the benefit plan,
average number of participants, average Face Amount of the Certificates,
anticipated average annual premiums, and the actual distribution expenses
incurred by the Company.
MONTHLY DEDUCTION FROM CERTIFICATE VALUE
On the Date of Issue and each Monthly Processing Date thereafter prior to the
Final Premium Payment Date, certain charges ("Monthly Deduction") will be
deducted from the Certificate Value. The Monthly Deduction includes a charge for
cost of insurance, a charge for the cost of any additional benefits provided by
rider and a charge for Certificate administrative expenses that may be up to
$10, depending on the group to which the Policy is issued. The Monthly Deduction
may also include a charge for Separate Account administrative expenses and a
charge for mortality and expense risks. The Separate Account administrative
charge may continue for up to 10 Certificate years and may be up to 0.25% of
Certificate Value in each Sub-Account, depending on the group to which the
Policy was issued. The mortality and expense risk charge may be up to 0.90% of
Certificate Value in each Sub-Account. The Monthly Deduction on or following the
effective date of a requested change in the Face Amount will also include a
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, for
administrative costs associated with the change. See THE CERTIFICATE -- "Charge
for Change in Face Amount."
You may specify from which Sub-Account the cost of insurance charge, the charge
for Certificate administrative expenses, the mortality and expense risk charge,
and the charge for the cost of additional benefits provided by rider will be
deducted. If the Payor Provision is in force, all cost of insurance charges and
administrative charges will be deducted from the Monthly Deduction Sub-Account.
If no allocation is specified, the Company will make a Pro-Rata Allocation.
The Separate Account administrative charge and the mortality and expense risk
charge are assessed against each Sub-Account that generates a charge. In the
event that a charge is greater than the value of the Sub-Account to which it
relates on a Monthly Processing Date, the Company will make a Pro-Rata
Allocation of the unpaid balance.
Monthly Deductions are made on the Date of Issue and on each Monthly Processing
Date until the Final Premium Payment Date. No Monthly Deductions will be made on
or after the Final Premium Payment Date.
COST OF INSURANCE
This charge is designed to compensate the Company for the anticipated cost of
providing Death Proceeds to Beneficiaries of those Insureds who die prior to the
Final Premium Payment Date. The cost of insurance is determined on a monthly
basis, and is determined separately for the initial Face Amount and for each
37
<PAGE>
subsequent increase in the Face Amount. Because the cost of insurance depends
upon a number of variables, it can vary from month to month and from group to
group.
CALCULATION OF THE CHARGE
If Death Benefit Option 2 is in effect, the monthly cost of insurance charge for
the initial Face Amount will equal the applicable cost of insurance rate
multiplied by the initial Face Amount. If Death Benefit Option 1 or Option 3 is
in effect, however, the applicable cost of insurance rate will be multiplied by
the initial Face Amount less the Certificate Value (minus charges for rider
benefits) at the beginning of the Certificate month. Thus, the cost of insurance
charge may be greater if Death Benefit Option 2 is in effect than if Death
Benefit Option 1 or Option 3 is in effect, assuming the same Face Amount in each
case and assuming that the Guideline Minimum Death Benefit is not in effect.
In other words, since the Death Benefit under Option 1 or Option 3 remains
constant while the Death Benefit under Option 2 varies with the Certificate
Value, any Certificate Value increases will reduce the insurance charge under
Option 1 or Option 3, but not under Option 2.
If Death Benefit Option 2 is in effect, the monthly insurance charge for each
increase in the Face Amount (other than an increase caused by a change in Death
Benefit Option) will be equal to the cost of insurance rate applicable to that
increase multiplied by the increase in the Face Amount. If Death Benefit
Option 1 or Option 3 is in effect, the applicable cost of insurance rate will be
multiplied by the increase in the Face Amount reduced by any Certificate Value
(minus rider charges) in excess of the initial Face Amount at the beginning of
the Certificate month.
If the Guideline Minimum Death Benefit is in effect under any Option, a monthly
cost of insurance charge will also be calculated for that portion of the Death
Benefit which exceeds the current Face Amount. This charge will be calculated
by:
- multiplying the cost of insurance rate applicable to the initial Face
Amount times the Guideline Minimum Death Benefit (Certificate Value times
the applicable percentage), MINUS
- the greater of the Face Amount or the Certificate Value under Death
Benefit Option 1 or Option 3,
OR
- the Face Amount plus the Certificate Value under Death Benefit Option 2.
When the Guideline Minimum Death Benefit is in effect, the cost of insurance
charge for the initial Face Amount and for any increases will be calculated as
set forth in the preceding two paragraphs.
The monthly cost of insurance charge will also be adjusted for any decreases in
the Face Amount. See THE CERTIFICATE -- "Change in Face Amount: DECREASES."
COST OF INSURANCE RATES
This Certificate is sold to eligible individuals who are members of a
non-qualified benefit plan having a minimum, depending on the group, of five or
more members. A portion of the initial Face Amount may be issued on a preferred,
standard, guaranteed or simplified underwriting basis. The amount of this
portion will be determined for each group, and may vary based on characteristics
within the group.
The determination of the Underwriting Class for the guaranteed or simplified
issue portion will, in part, be based on the type of group; purpose for which
the Certificates are purchased; the number of persons eligible to participate in
the plan; expected percentage of eligible persons participating in the plan;
aggregate premiums paid and the amount of guaranteed or simplified underwriting
insurance to be issued. Larger
38
<PAGE>
groups, higher participation rates and occupations with historically favorable
mortality rates will generally result in the individuals within that group being
placed in a more favorable Underwriting Class.
Cost of insurance rates are based on a blended unisex rate table, Age and
Underwriting Class of the Insured at the Date of Issue, the effective date of an
increase or date of rider, as applicable, the amount of premiums paid less any
debt and any partial withdrawals and withdrawal charges. For those Certificates
issued on a unisex basis, sex-distinct rates do not apply. The cost of insurance
rates are determined at the beginning of each Certificate year for the initial
Face Amount. The cost of insurance rates for an increase in the Face Amount or
rider are determined annually on the anniversary of the effective date of each
increase or rider. The cost of insurance rates generally increase as the
Insured's Age increases. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Certificate. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Tables (Mortality Table B, Smoker, Non-smoker or
Uni-smoker, for unisex Certificates) and the Insured's Age. The tables used for
this purpose may set forth different mortality estimates for smokers and
non-smokers. Any change in the cost of insurance rates will apply to all persons
in the group of the same insuring Age and Underwriting Class whose Certificates
have been in force for the same length of time.
The Underwriting Class of an Insured will affect the cost of insurance rates.
The Company currently places Insureds into preferred Underwriting Classes,
standard Underwriting Classes and substandard Underwriting Classes. In an
otherwise identical Certificate, an Insured in the preferred Underwriting
Class will generally have a lower cost of insurance than an Insured in a
standard Underwriting Class who, in turn, will have a lower cost of insurance
than an Insured in a substandard Underwriting Class with a higher mortality
risk. The Underwriting Classes may be divided into two categories or aggregated:
smokers and non-smokers. Non-smoking Insureds will incur lower cost of insurance
rates than Insureds who are classified as smokers but who are otherwise in the
same Underwriting Class. Any Insured with an Age at issuance under 18 will be
classified initially as regular, unless substandard. The Insured then will be
classified as a smoker at Age 18 unless the Insured provides satisfactory
evidence that the Insured is a non-smoker. The Company will provide notice to
you of the opportunity for the Insured to be classified as a non-smoker when the
Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount you request, at a time when the Insured is in a less favorable
Underwriting Class than previously, a correspondingly higher cost of insurance
rate will apply only to that portion of the Insurance Amount at Risk for the
increase. For the initial Face Amount and any prior increases, the Company will
use the Underwriting Class previously applicable. On the other hand, if the
Insured's Underwriting Class improves on an increase, the lower cost of
insurance rate generally will apply to the entire Insurance Amount at Risk.
MONTHLY CERTIFICATE ADMINISTRATIVE CHARGE
Prior to the Final Premium Payment Date, a monthly Certificate administrative
charge of up to $10 per month, depending on the group to which the Policy was
issued, will be deducted from the Certificate Value. This charge will be used to
compensate the Company for expenses incurred in the administration of the
Certificate, and will compensate the Company for first-year underwriting and
other start-up expenses incurred in connection with the Certificate. These
expenses include the cost of processing enrollment forms, conducting medical
examinations, determining insurability and the Insured's Underwriting Class, and
establishing Certificate records. The Company does not expect to derive a profit
from these charges.
MONTHLY SEPARATE ACCOUNT ADMINISTRATIVE CHARGE
The Company can make an administrative charge on an annual basis of up to 0.25%
of the Certificate Value in each Sub-Account. The duration of this charge can be
for up to 10 years. This charge is designed to reimburse the Company for the
costs of administering the Separate Account and Sub-Accounts. The charge is not
expected to be a source of profit. The administrative expenses assumed by the
Company in connection with the Separate Account and Sub-Accounts include, but
are not limited to, clerical, accounting, actuarial and
39
<PAGE>
legal services, rent, postage, telephone, office equipment and supplies,
expenses of preparing and printing registration statements, expenses of
preparing and typesetting prospectuses and the cost of printing prospectuses not
allocable to sales expense, filing and other fees.
MONTHLY MORTALITY AND EXPENSE RISK CHARGE
The Company can make a mortality and expense risk charge on an annual basis of
up to 0.90% of the Certificate Value in each Sub-Account. This charge is for the
mortality risk and expense risk which the Company assumes in relation to the
variable portion of the Certificates. The total charges may be different between
groups and increased or decreased within a group, subject to compliance with
applicable state and federal requirements, but may not exceed 0.90% on an annual
basis.
The mortality risk assumed by the Company is that Insureds may live for a
shorter time than anticipated, and that the Company will, therefore, pay an
aggregate amount of Death Proceeds greater than anticipated. The expense risk
assumed is that the expenses incurred in issuing and administering the
Certificates will exceed the amounts realized from the administrative charges
provided in the Certificates. If the charge for mortality and expense risks is
not sufficient to cover actual mortality experience and expenses, the Company
will absorb the losses. If costs are less than the amounts provided, the
difference will be a profit to the Company. To the extent this charge results in
a current profit to the Company, such profit will be available for use by the
Company for, among other things, the payment of distribution, sales and other
expenses. Since mortality and expense risks involve future contingencies which
are not subject to precise determination in advance, it is not feasible to
identify specifically the portion of the charge which is applicable to each.
CHARGES REFLECTED IN THE ASSETS OF THE SEPARATE ACCOUNT
Because the Sub-Accounts purchase shares of the Underlying Funds, the value of
the Units of the Sub-Accounts will reflect the investment advisory fee and other
expenses incurred by the Underlying Funds. The prospectuses and Statements of
Additional Information of DGPF and the Trust have additional information
concerning such fees and expenses.
No charges are currently made against the Sub-Accounts for federal or state
income taxes. Should the Company determine that taxes will be imposed, the
Company may make deductions from the Sub-Account to pay such taxes. See FEDERAL
TAX CONSIDERATIONS. The imposition of such taxes would result in a reduction of
the Certificate Value in the Sub-Accounts.
SURRENDER CHARGE
The Certificate may provide for a contingent surrender charge. A separate
surrender charge, described in more detail below, may be calculated upon the
issuance of the Certificate and for each increase in the Face Amount. The
surrender charge is comprised of a contingent deferred administrative charge and
a contingent deferred sales charge. The contingent deferred administrative
charge compensates the Company for expenses incurred in administering the
Certificate. The contingent deferred sales charge compensates the Company for
expenses relating to the distribution of the Certificate, including agents'
commissions, advertising and the printing of the prospectus and sales
literature.
A surrender charge may be deducted if you request a full surrender of the
Certificate or a decrease in the Face Amount. The duration of the surrender
charge may be up to 15 years from the Date of Issue or from the effective date
of any increase in the Face Amount. The maximum surrender charge calculated upon
issuance of the Certificate is an amount up to the sum of (a) plus (b), where
(a) is a deferred administrative charge equal to $8.50 per thousand dollars of
the initial Face Amount, and (b) is a deferred sales charge of up to 50% (less
any premium expense charge not associated with state and local premium taxes) of
premiums received up to the Guideline Annual Premium. In accordance with
limitations under state insurance regulations, the amount of the maximum
surrender charge will not exceed a specified amount per thousand dollars of
initial Face Amount, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES.
40
<PAGE>
The maximum surrender charge remains level for up to 24 Certificate months,
reduces uniformly each month for the balance of the surrender charge period, and
is zero thereafter. This reduction in the maximum surrender charge will reduce
the deferred sales charge and the deferred administrative charge
proportionately.
If you surrender the Certificate during the first two years following the Date
of Issue before making premium payments associated with the initial Face Amount
which are at least equal to one Guideline Annual Premium, the deferred
administrative charge will be $8.50 per thousand dollars of initial Face Amount,
as described above, but the deferred sales charge will not exceed 30% (less any
premium expense charge not associated with state and local premium taxes) of
premiums received, up to one Guideline Annual Premium, plus 9% of premiums
received in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
A separate surrender charge may apply to and is calculated for each increase in
the Face Amount. The surrender charge for the increase is in addition to that
for the initial Face Amount. The maximum surrender charge for the increase is up
to the sum of (a) plus (b), where (a) is up to $8.50 per thousand dollars of
increase, and (b) is a deferred sales charge of up to 50% (less any premium
expense charge not associated with state and local premium taxes) of premiums
associated with the increase, up to the Guideline Annual Premium for the
increase. In accordance with limitations under state insurance regulations, the
amount of the surrender charge will not exceed a specified amount per thousand
dollars of increase, as indicated in APPENDIX D -- CALCULATION OF MAXIMUM
SURRENDER CHARGES. As is true for the initial Face Amount, (a) is a deferred
administrative charge, and (b) is a deferred sales charge.
The maximum surrender charge for the increase remains level for up to 24
Certificate months, reduces uniformly each month for the balance of the
surrender charge period, and is zero thereafter. During the first two
Certificate years following an increase in the Face Amount before making premium
payments associated with the increase in the Face Amount which are at least
equal to one Guideline Annual Premium, the deferred administrative charge will
be $8.50 per thousand dollars of increase in the Face Amount, as described
above, but the deferred sales charge imposed will be less than the maximum
described above. Upon such a surrender, the deferred sales charge will not
exceed 30% (less any premium expense charge not associated with state and local
premium taxes) of premiums associated with the increase, up to one Guideline
Annual Premium (for the increase), plus 9% of premiums associated with the
increase in excess of one Guideline Annual Premium. See APPENDIX D --
CALCULATION OF MAXIMUM SURRENDER CHARGES. The premiums associated with the
increase are determined as described below. Additional premium payments may not
be required to fund a requested increase in the Face Amount.
Therefore, a special rule, which is based on relative Guideline Annual Premium
payments, applies whereby the Certificate Value will be allocated between the
initial Face Amount and the increase. Subsequent premium payments are allocated
between the initial Certificate and the increase. For example, suppose the
Guideline Annual Premium is equal to $1,500 before an increase and is equal to
$2,000 as a result of the increase. The Certificate Value on the effective date
of the increase would be allocated 75% ($1,500/$2,000) to the initial Face
Amount and 25% to the increase. All future premiums would also be allocated 75%
to the initial Face Amount and 25% to the increase. Thus, existing Certificate
Value associated with the increase will equal the portion of Certificate Value
allocated to the increase on the effective date of the increase, before any
deductions are made. Premiums associated with the increase will equal the
portion of the premium payments actually made on or after the effective date of
the increase which are allocated to the increase.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES, for examples
illustrating the calculation of the maximum surrender charge for the initial
Face Amount and for any increases, as well as for the surrender charge based on
actual premiums paid or associated with any increases.
A surrender charge may be deducted on a decrease in the Face Amount. In the
event of a decrease, the surrender charge deducted is a fraction of the charge
that would apply to a full surrender of the Certificate. The fraction will be
determined by dividing the amount of the decrease by the current Face Amount and
41
<PAGE>
multiplying the result by the surrender charge. If more than one surrender
charge is in effect (i.e., pursuant to one or more increases in the Face Amount
of a Certificate), the surrender charge will be applied in the following order:
(1) the most recent increase; (2) the next most recent increases successively;
and (3) the initial Face Amount. Where a decrease causes a partial reduction in
an increase or in the initial Face Amount, a proportionate share of the
surrender charge for that increase or for the initial Face Amount will be
deducted.
CHARGES ON PARTIAL WITHDRAWAL
After the first Certificate year, partial withdrawals of Surrender Value may be
made. The minimum withdrawal is $500. Under Option 1 or Option 3, the Face
Amount is reduced by the amount of the partial withdrawal, and a partial
withdrawal will not be allowed if it would reduce the Face Amount below $40,000.
A transaction charge which is the smaller of 2% of the amount withdrawn, or $25,
will be assessed on each partial withdrawal to reimburse the Company for the
cost of processing the withdrawal. The Company does not expect to make a profit
on this charge. The transaction fee applies to all partial withdrawals,
including a Withdrawal without a surrender charge.
A partial withdrawal charge may also be deducted from Certificate Value. For
each partial withdrawal you may withdraw an amount equal to 10% of the
Certificate Value on the date the written withdrawal request is received by the
Company less the total of any prior withdrawals in that Certificate year which
were not subject to the partial withdrawal charge, without incurring a partial
withdrawal charge. Any partial withdrawal in excess of this amount ("excess
withdrawal") will be subject to the partial withdrawal charge. The partial
withdrawal charge is equal to 5% of the excess withdrawal up to the amount of
the surrender charge(s) on the date of withdrawal. There will be no partial
withdrawal charge if there is no surrender charge on the date of withdrawal
(i.e., 15 years have passed from the Date of Issue and from the effective date
of any increase in the Face Amount).
This right is not cumulative from Certificate year to Certificate year. For
example, if only 8% of Certificate Value was withdrawn in Certificate year two,
the amount you could withdraw in subsequent Certificate years would not be
increased by the amount you did not withdraw in the second Certificate year.
The Certificate's outstanding surrender charge will be reduced by the amount of
the partial withdrawal charge deducted, by proportionately reducing the deferred
sales charge component and the deferred administrative charge component. The
partial withdrawal charge deducted will decrease existing surrender charges in
the following order:
- first, the surrender charge for the most recent increase in the Face
Amount;
- second, the surrender charge for the next most recent increases
successively;
- last, the surrender charge for the initial Face Amount.
See APPENDIX D -- CALCULATION OF MAXIMUM SURRENDER CHARGES for an example
illustrating the calculation of the charges on partial withdrawal and their
impact on the surrender charges.
TRANSFER CHARGES
The first twelve transfers in a Certificate year will be free of charge.
Thereafter, a transfer charge of $10 will be imposed for each transfer request
to reimburse the Company for the administrative costs incurred in processing the
transfer request. The Company reserves the right to increase the charge, but it
will never exceed $25. The Company also reserves the right to change the number
of free transfers allowed in a Certificate year. See THE CERTIFICATE --
"Transfer Privilege."
42
<PAGE>
You may have automatic transfers of at least $100 made on a periodic basis,
every 1, 2 or 3 months (a) from the Sub-Accounts which invest in the Money
Market Fund of the Trust to one or more of the other Sub-Accounts, or (b) to
reallocate Certificate Value among the Sub-Accounts. The first automatic
transfer counts as one transfer towards the twelve free transfers allowed in
each Certificate year. Each subsequent automatic transfer is without charge and
does not reduce the remaining number of transfers which may be made without
charge.
If you utilize the Conversion Privilege, Loan Privilege, or reallocate
Certificate Value within 20 days of the Date of Issue of the Certificate, any
resulting transfer of Certificate Value from the Sub-Accounts to the General
Account will be free of charge, and in addition to the twelve free transfers in
a Certificate year. See THE CERTIFICATE -- "Conversion Privileges" and
CERTIFICATE LOANS.
CHARGE FOR CHANGE IN FACE AMOUNT
For each increase or decrease in the Face Amount you request, a transaction
charge of $2.50 per $1,000 of increase or decrease, to a maximum of $40, may be
deducted from the Certificate Value to reimburse the Company for administrative
costs associated with the change. This charge is guaranteed not to increase, and
the Company does not expect to make a profit on this charge.
OTHER ADMINISTRATIVE CHARGES
The Company reserves the right to impose a charge (not to exceed $25) for the
administrative costs incurred for changing the Net Premium allocation
instructions, for changing the allocation of any Monthly Deductions among the
various Sub-Accounts, or for a projection of values.
43
<PAGE>
CERTIFICATE LOANS
Loans may be obtained by request to the Company on the sole security of the
Certificate. The total amount which may be borrowed is the Loan Value. In the
first Certificate year, the Loan Value is 75% of Certificate Value reduced by
applicable surrender charges, as well as Monthly Deductions and interest on the
loan to the end of the Certificate year. The Loan Value in the second
Certificate year and thereafter is 90% of an amount equal to Certificate Value
reduced by applicable surrender charges. There is no minimum limit on the amount
of the loan. The loan amount will normally be paid within seven days after the
Company receives the loan request at its Principal Office, but the Company may
delay payments under certain circumstances. See OTHER CERTIFICATE PROVISIONS --
"Postponement of Payments."
A Certificate loan may be allocated among the General Account and one or more
Sub-Accounts. If you do not make an allocation, the Company will make a Pro-Rata
Allocation based on the amounts in the Accounts on the date the Company receives
the loan request. Certificate Value in each Sub-Account equal to the Certificate
loan allocated to such Sub-Account will be transferred to the General Account,
and the number of Units equal to the Certificate Value so transferred will be
cancelled. This will reduce the Certificate Value in these Sub-Accounts. These
transactions are not treated as transfers for purposes of the transfer charge.
LOAN AMOUNT EARNS INTEREST IN THE GENERAL ACCOUNT
As long as the Certificate is in force, Certificate Value in the General Account
equal to the loan amount will be credited with interest at an effective annual
yield of at least 6.00% per year (7.5% for preferred loans). The current
credited rate is 7.1% (8% for preferred loans). NO ADDITIONAL INTEREST WILL BE
CREDITED TO SUCH CERTIFICATE VALUE.
PREFERRED LOAN OPTION
A preferred loan option is available under the Certificate. The preferred loan
option will be available upon Written Request. It may be revoked by you at any
time. You may change a preferred loan to a non-preferred loan at any time upon
written request. If this option has been selected, after the tenth Certificate
anniversary Certificate Value in the General Account equal to the loan amount
will be credited with interest at an effective annual yield of at least 7.5%.
The Company's current practice is to credit a rate of interest equal to the rate
being charged for the preferred loan.
There is some uncertainty as to the tax treatment of a preferred loan, which may
be treated as a taxable withdrawal from the Certificate. Consult a qualified tax
adviser (and see FEDERAL TAX CONSIDERATIONS). The preferred loan option is not
available in all states.
LOAN INTEREST CHARGED
Interest accrues daily, and is payable in arrears at the annual rate of 8%.
Interest is due and payable at the end of each Certificate year or on a pro-rata
basis for such shorter period as the loan may exist. Interest not paid when due
will be added to the loan amount and bear interest at the same rate. After the
due and unpaid interest is added to the loan amount, if the new loan amount
exceeds the Certificate Value in the General Account, the Company will transfer
Certificate Value equal to that excess loan amount from the Certificate Value in
each Sub-Account to the General Account as security for the excess loan amount.
The Company will allocate the amount transferred among the Sub-Accounts in the
same proportion that the Certificate Value in each Sub-Account bears to the
total Certificate Value in all Sub-Accounts.
REPAYMENT OF DEBT
Loans may be repaid at any time prior to the lapse of the Certificate. Upon
repayment of Debt, the portion of the Certificate Value that is in the General
Account securing the Debt repaid will be allocated to the various Accounts and
increase the Certificate Value in such Accounts in accordance with your
instructions. If you do not make a repayment allocation, the Company will
allocate Certificate Value in accordance with your most recent premium
allocation instructions; provided, however, that loan repayments allocated to
the Separate
44
<PAGE>
Account cannot exceed Certificate Value previously transferred from the Separate
Account to secure the Debt.
If Debt exceeds the Certificate Value less the surrender charge, the Certificate
will terminate. A notice of such pending termination will be mailed to the last
known address of you and any assignee. If you do not make sufficient payment
within 62 days after this notice is mailed, the Certificate will terminate with
no value. See CERTIFICATE TERMINATION AND REINSTATEMENT.
EFFECT OF CERTIFICATE LOANS
Although Certificate loans may be repaid at any time prior to the lapse of the
Certificate, Certificate loans will permanently affect the Certificate Value and
Surrender Value, and may permanently affect the Death Proceeds. The effect could
be favorable or unfavorable, depending upon whether the investment performance
of the Sub-Accounts is less than or greater than the interest credited to the
Certificate Value in the General Account attributable to the loan.
Moreover, outstanding Certificate loans and the accrued interest will be
deducted from the proceeds payable upon surrender or the death of the Insured.
CERTIFICATE TERMINATION AND REINSTATEMENT
TERMINATION
The failure to make premium payments will not cause the Certificate to lapse
unless:
- the Surrender Value is insufficient to cover the next Monthly Deduction
plus loan interest accrued; or
- if Debt exceeds the Certificate Value.
If one of these situations occurs, the Certificate will be in default. You will
then have a grace period of 62 days, measured from the date of default, to make
sufficient payments to prevent termination. On the date of default, the Company
will send a notice to you and to any assignee of record. The notice will state
the amount of premium due and the date on which it is due.
Failure to make a sufficient payment within the grace period will result in
termination of the Certificate. If the Insured dies during the grace period, the
Death Proceeds will still be payable, but any Monthly Deductions due and unpaid
through the Certificate month in which the Insured dies and any other overdue
charges will be deducted from the Death Proceeds.
PAYOR PROVISIONS
Subject to approval in the state in which the Certificate was issued, if you
name a "Payor" in your enrollment form supplement, the following "Payor
Provisions" will apply:
The Payor may designate what portion, if any, of each payment of a premium is
"excess premium." You may allocate the excess premium among the General Account
and Sub-Accounts. The remaining Payor's premium which is not excess premium
("Payor's premium") will automatically be allocated to the Monthly Deduction
Sub-Account, from which the Monthly Deduction charges will be made. Payor
premiums are initially held in the General Account, and will be transferred to
the Monthly Deduction Sub-Account not later than three days after underwriting
approval of the Certificate. No Certificate loans, partial withdrawals or
transfers may be made from the amount in the Monthly Deduction Sub-Account
attributable to Payor's premiums.
If the amount in the Monthly Deduction Sub-Account attributable to Payor's
premiums is insufficient to cover the next Monthly Deduction, the Company will
send to the Payor a notice of the due date and amount of premium which is due.
The premium may be paid during a grace period of 62 days, beginning on the
premium due date. If the necessary premium is not received by the Company within
31 days of the end of the grace
45
<PAGE>
period, a second notice will be sent to the Payor. A 31-day grace period notice
at this time will also be sent to you if the Certificate Value is insufficient
to cover the Monthly Deductions then due.
If the amount in the Monthly Deduction Sub-Account attributable to Payor
premiums is insufficient to cover the Monthly Deductions due at the end of the
grace period, the balance of such Monthly Deductions will be withdrawn on a
Pro-Rata Allocation from the Certificate Value, if any, in the General Account
and the Sub-Accounts.
A lapse occurs if the Certificate Value is insufficient, at the end of the grace
period, to pay the Monthly Deductions which are due. The Certificate terminates
on the date of lapse. Any Death Benefit payable during the grace period will be
reduced by any overdue charges.
The above Payor Provisions, if applicable, are in lieu of the grace-period
notice and default provisions applicable when the Surrender Value is
insufficient to cover the next Monthly Deduction plus loan interest accrued.
However, they do not apply if Debt exceeds the Certificate Value. See the
discussion under "Termination," above. You or the Payor may, upon Written
Request, discontinue the above Payor Provisions. If the Payor makes a written
request to discontinue the Payor Provisions, the Company will send you a notice
of the discontinuance to your last known address.
REINSTATEMENT
If the Certificate has not been surrendered and the Insured is alive, the
terminated Certificate may be reinstated anytime within three years after the
date of default and before the Final Premium Payment Date. The reinstatement
will be effective on the Monthly Processing Date following the date you submit
the following to the Company:
- a written enrollment form for reinstatement,
- Evidence of Insurability; and
- a premium that, after the deduction of the premium expense charge, is
large enough to cover the Monthly Deductions for the three-month period
beginning on the date of reinstatement.
SURRENDER CHARGE
The surrender charge on the date of reinstatement is the surrender charge which
should have been in effect had the Certificate remained in force from the Date
of Issue.
CERTIFICATE VALUE ON REINSTATEMENT
The Certificate Value on the date of reinstatement is:
- the Net Premium paid to reinstate the Certificate increased by interest
from the date the payment was received at the Principal Office; PLUS
- an amount equal to the Certificate Value less Debt on the date of default;
MINUS
- the Monthly Deduction due on the date of reinstatement. You may reinstate
any Debt outstanding on the date of default or foreclosure.
46
<PAGE>
OTHER CERTIFICATE PROVISIONS
The following Certificate provisions may vary in certain states in order to
comply with requirements of the insurance laws, regulations, and insurance
regulatory agencies in those states.
CERTIFICATE OWNER
The Certificate Owner is the Insured unless another Certificate Owner has been
named in the enrollment form or the Certificate. The Certificate Owner is
generally entitled to exercise all rights under the Certificate while the
Insured is alive, subject to the consent of any irrevocable Beneficiary (the
consent of a revocable Beneficiary is not required). The consent of the Insured
is required whenever the Face Amount of insurance is increased.
BENEFICIARY
The Beneficiary is the person or persons to whom the insurance proceeds are
payable upon the Insured's death. Unless otherwise stated in the Certificate,
the Beneficiary has no rights in the Certificate before the death of the
Insured. While the Insured is alive, you may change any Beneficiary unless you
have declared a Beneficiary to be irrevocable. If no Beneficiary is alive when
the Insured dies, the Certificate Owner (or the Certificate Owner's estate) will
be the Beneficiary. If more than one Beneficiary is alive when the Insured dies,
they will be paid in equal shares, unless you have chosen otherwise. Where there
is more than one Beneficiary, the interest of a Beneficiary who dies before the
Insured will pass to surviving Beneficiaries proportionately.
ASSIGNMENT
The Certificate Owner may assign a Certificate as collateral or make an absolute
assignment of the Certificate. All rights under the Certificate will be
transferred to the extent of the assignee's interest. The Consent of the
assignee may be required in order to make changes in premium allocations, to
make transfers, or to exercise other rights under the Certificate. The Company
is not bound by an assignment or release thereof, unless it is in writing and is
recorded at the Principal Office. When recorded, the assignment will take effect
as of the date the Written Request was signed. Any rights created by the
assignment will be subject to any payments made or actions taken by the Company
before the assignment is recorded. The Company is not responsible for
determining the validity of any assignment or release.
INCONTESTABILITY
The Company will not contest the validity of a Certificate after it has been in
force during the Insured's lifetime for two years from the Date of Issue. The
Company will not contest the validity of any rider or any increase in the Face
Amount after such rider or increase has been in force during the Insured's
lifetime for two years from its effective date.
SUICIDE
The Death Proceeds will not be paid if the Insured commits suicide within two
years from the Date of Issue. Instead, the Company will pay the Beneficiary an
amount equal to all premiums paid for the Certificate, without interest, less
any outstanding Debt and less any partial withdrawals. If the Insured commits
suicide within two years from the effective date of any increase in the Death
Benefit, the Company's liability with respect to such increase will be limited
to a refund of the cost thereof. The Beneficiary will receive the administrative
charges and insurance charges paid for such increase.
47
<PAGE>
AGE
If the Insured's Age as stated in the enrollment form for the Certificate is not
correct, benefits under the Certificate will be adjusted to reflect the correct
Age, if death occurs prior to the Final Premium Payment Date. The adjusted
benefit will be that which the most recent cost of insurance charge would have
purchased for the correct Age. In no event will the Death Benefit be reduced to
less than the Minimum Death Benefit.
POSTPONEMENT OF PAYMENTS
Payments of any amount due from the Separate Account upon surrender, partial
withdrawals, or death of the Insured, as well as payments of a Certificate loan
and transfers 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, or (2) an emergency
exists, as determined by the SEC, as a result of which disposal of securities is
not reasonably practicable or it is not reasonably practicable to determine the
value of the Separate Account's net assets. Payments under the Certificate of
any amounts derived from the premiums paid by check may be delayed until such
time as the check has cleared your bank.
The Company also reserves the right to defer payment of any amount due from the
General Account upon surrender, partial withdrawal, or death of the Insured, as
well as payments of Certificate loans and transfers from the General Account,
for a period not to exceed six months.
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984)
Director and Assistant Secretary (since 1992) of First
Allmerica
Warren E. Barnes
Vice President and Corporate Vice President (since 1996) and Corporate Controller
Controller (since 1998) of First Allmerica
Mark R. Colborn Director (since 2000) and Vice President (since 1992)
Director and Vice President of First Allmerica.
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary
Secretary (since 1999) of Allmerica Investments, Inc.; and
Secretary (since 1999) of Allmerica Financial
Investment Management Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First
Director, Vice President and Allmerica (since 2000); Vice President (1999) of
General Counsel Promos Hotel Corporation; Vice President & Deputy
General Counsel (1998-1999) of Legg Mason, Inc.; Vice
President and Deputy General Counsel (1995-1998) of
USF&G Corporation.
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and Chief and Vice President (since 1991) of First Allmerica;
Investment Officer Vice President (since 1998) of Allmerica Financial
Investment Management Services, Inc.; and President
(since 1995) and Director (since 1996) of Allmerica
Asset Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover Insurance
Company; and Vice President (1993 to 1996) of The
Hanover Insurance Company
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief
Executive Officer (since 1996) of Citizens Insurance
Company of America
Mark C. McGivney Vice President (since 1997) and Treasurer (since
Vice President and Treasurer 2000) of First Allmerica; Associate, Investment
Banking (1996-1997) of Merrill Lynch & Co.;
Associate, Investment Banking (1995) of Salomon
Brothers, Inc.; Treasurer (since 2000) of Allmerica
Investments, Inc., Allmerica Asset Management, Inc.
and Allmerica Financial Investment Management
Services, Inc.
John F. O'Brien Allmerica; director (since 1989) of Allmerica
Director and Chairman of the Board Investments, Inc. of the Board Director, President
and Chief Executive Officer (since 1989) of First
Allmerica
Edward J. Parry, III Director and Chief Financial Officer (since 1996),
Director, Vice President Chief Vice President (since 1993), and Treasurer
Financial Officer (1993-2000) of First Allmerica
Richard M. Reilly Director (since 1996) and Vice President (since 1990)
Director, President and Chief of First Allmerica; President (since 1995) of
Executive Officer Allmerica Financial Life Insurance and Annuity
Company; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since
1998) of Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Director (since 1998) of The Hanover
Insurance Company; Chief Executive Officer (1996 to
1998) of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990)
Director and Vice President of First Allmerica; Director (since 1991) of
Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management
Services, Inc.
</TABLE>
DISTRIBUTION
Allmerica Investments, Inc., an indirect subsidiary of First Allmerica, acts as
the principal underwriter of the Certificates pursuant to a Sales and
Administrative Services Agreement with the Company and the Separate Account.
Allmerica Investments, Inc. is registered with the SEC as a broker-dealer and is
a member of the National Association of Securities Dealers ("NASD"). The
Certificates are sold by agents of the Company who are registered
representatives of Allmerica Investments, Inc. or of independent broker-dealers.
The Company pays commissions to broker-dealers and registered representatives
which sell the Certificates based on a commission schedule. After issuance of a
Certificate or an increase in Face Amount, commissions may be up to 25% of the
first-year premiums up to a basic premium amount established by the Company.
Thereafter, commissions may be up to 10% of any additional premiums. Alternative
compensation schedules, which may include ongoing annual compensation of up to
0.50% of Certificate Value, are available based on premium payments and the
level of enrollment and ongoing administrative services provided to participants
and benefit plans by the broker-dealer or registered representative. Certain
registered representatives, including registered representatives enrolled in the
Company's training program for new agents, may receive additional first-year and
renewal commissions and training reimbursements. General Agents of the Company
and certain registered representatives may also be eligible to receive expense
reimbursements based on the
49
<PAGE>
amount of earned commissions. General Agents may also receive overriding
commissions, which will not exceed 2.5% of first-year, or 4% of renewal
premiums. To the extent permitted by NASD rules, promotional incentives or
payments may also be provided to broker-dealers based on sales volumes, the
assumption of wholesaling functions or other sales related criteria. Other
payments may be made for other services that do not directly involve the sales
of the Certificates. These services may include the recruitment and training of
personnel, production of promotional literature, and similar services.
The Company intends to recoup the commission and other sales expenses through a
combination of the deferred sales charge component of the anticipated surrender
and partial withdrawal charges through a portion of the premium expense charge,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to the Certificate Owners or to the Separate Account.
Any surrender charge assessed on a Certificate will be retained by the Company
except for amounts it may pay to Allmerica Investments, Inc. for services it
performs and expenses it may incur as principal underwriter and general
distributor.
REPORTS
The Company will maintain the records relating to the Separate Account. You will
be promptly sent statements of significant transactions such as premium payments
(other than payments made pursuant to the MAP procedure), changes in the
specified Face Amount, changes in the Death Benefit Option, transfers among
Sub-Accounts and the General Account, partial withdrawals, increases in loan
amount by you, loan repayments, lapse, termination for any reason, and
reinstatement. An annual statement will also be sent to you. The annual
statement will summarize all of the above transactions and deductions of charges
during the Certificate year. It will also set forth the status of the Death
Proceeds, Certificate Value, Surrender Value, amounts in the Sub-Accounts and
General Account, and any Certificate loan(s). The Owner should review the
information in all statements carefully. All errors or corrections must be
reported to the Company immediately to assure proper crediting to the
Certificate. The Company will assume that all transactions are accurately
reported on confirmation statements and quarterly/annual statements unless the
Owner notifies the Principal Office in writing within 30 days after receipt of
the statement.
In addition, you will be sent periodic reports containing financial statements
and other information for the Separate Account and the Underlying Funds as
required by the 1940 Act.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which the Separate Account is a party,
or to which the assets of the Separate Account are subject. The Company and
Allmerica Investments, Inc. are not involved in any litigation that is of
material importance in relation to their total assets or that relates to the
Separate Account.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted from this Prospectus pursuant to the rules and
regulations of the SEC. Statements contained in this Prospectus concerning the
Certificate and other legal documents are summaries. The complete documents and
omitted information may be obtained from the SEC's principal office in
Washington, DC, upon payment of the SEC's prescribed fees.
50
<PAGE>
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, and the financial
statements of Group VEL Account as of December 31, 1999 and for the periods
indicated, included in this Prospectus constituting part of this Registration
Statement, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Certificate.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Certificate, on loans,
withdrawals, or surrenders, on Death Benefit payments, and on the economic
benefit to you or the Beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of the present
federal income tax laws as they are currently interpreted. From time to time
legislation is proposed which, if passed, could significantly, adversely, and
possibly retroactively, affect the taxation of the Certificates. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
It should be recognized that the following summary of federal income tax aspects
of amounts received under the Certificates is not exhaustive, does not purport
to cover all situations, and is not intended as tax advice. Specifically, the
discussion below does not address certain tax provisions that may be applicable
if the Certificate Owner is a corporation or the trustee of an employee benefit
plan. A qualified tax adviser should always be consulted with regard to the
enrollment form of law to individual circumstances.
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code
of 1986, and files a consolidated tax return with its parent and affiliates. The
Company does not expect to incur any income tax upon the earnings or realized
capital gains attributable to the Separate Account. Based on these expectations,
no charge is made for federal income taxes which may be attributable to the
Separate Account.
The Company will review periodically the question of a charge to the Separate
Account for federal income taxes. Such a charge may be made in future years for
any federal income taxes incurred by the Company. This might become necessary if
the tax treatment of the Company is ultimately determined to be other than what
the Company believes it to be, if there are changes made in the federal income
tax treatment of variable life insurance at the Company level, or if there is a
change in the Company's tax status. Any such charge would be designed to cover
the federal income taxes attributable to the investment results of the Separate
Account.
Under current laws the Company may also incur state and local taxes (in addition
to premium taxes) in several states. At present these taxes are not significant.
If there is a material change in applicable state or local tax laws, charges may
be made for such taxes paid, or reserves for such taxes, attributable to the
Separate Account.
TAXATION OF THE CERTIFICATES
The Company believes that the Certificates described in this Prospectus will be
considered life insurance contracts under Section 7702 of the Code, which
generally provides for the taxation of life insurance policies and places
limitations on the relationship of the Certificate Value to the Insurance Amount
at Risk. As a result, the Death Proceeds payable are excludable from the gross
income of the Beneficiary. Moreover, any increase in Certificate Value is not
taxable until received by the Certificate Owner or the Certificate Owner's
designee. See "Modified Endowment Contracts."
51
<PAGE>
The Code also requires that the investment of each Sub-Account be adequately
diversified in accordance with Treasury regulations in order to be treated as a
life insurance Certificate for tax purposes. Although the Company does not have
control over the investments of the Underlying Funds, the Company believes that
the Underlying Funds currently meet the Treasury's diversification requirements,
and the Company will monitor continued compliance with these requirements. In
connection with the issuance of previous regulations relating to diversification
requirements, the Treasury Department announced that such regulations do not
provide guidance concerning the extent to which Certificate Owners may direct
their investments to particular divisions of a separate account. Regulations in
this regard may be issued in the future. It is possible that if and when
regulations are issued, the Certificates may need to be modified to comply with
such regulations. For these reasons, the Certificates or the Company's
administrative rules may be modified as necessary to prevent a Certificate Owner
from being considered the owner of the assets of the Separate Account.
Depending upon the circumstances, a surrender, partial withdrawal, change in the
Death Benefit Option, change in the Face Amount, lapse with Certificate loan
outstanding, or assignment of the Certificate may have tax consequences. In
particular, under specified conditions, a distribution under the Certificate
during the first 15 years from Date of Issue that reduces future benefits under
the Certificate will be taxed to the Certificate Owner as ordinary income to the
extent of any investment earnings in the Certificate. Federal, state and local
income, estate, inheritance, and other tax consequences of ownership or receipt
of Certificate proceeds depend on the circumstances of each Insured, Certificate
Owner, or Beneficiary.
CERTIFICATE LOANS
The Company believes that non-preferred loans received under a Certificate will
be treated as indebtedness of the Certificate Owner for federal income tax
purposes. Under current law, these loans will not constitute income for the
Certificate Owner while the Certificate is in force. See "Modified Endowment
Contracts." However, there is a risk that a preferred loan may be characterized
by the IRS as a withdrawal and taxed accordingly. At the present time, the IRS
has not issued any guidance on whether a loan with the attributes of a preferred
loan should be treated differently than a non-preferred loan. This lack of
specific guidance makes the tax treatment of preferred loans uncertain. In the
event pertinent IRS guidelines are issued in the future you may convert your
preferred loan to a non-preferred loan. However, it is possible that,
notwithstanding the conversion, some or all of the loan could be treated as a
taxable withdrawal from the Certificate.
Section 264 of the Code restricts the deduction of interest on policy or
certificate loans. Consumer interest paid on policy or certificate loans under
an individually owned policy or certificate is not tax deductible. Generally, no
tax deduction for interest is allowed on policy or certificate loans, if the
insured is an officer or employee of, or is financially interested in, any
business carried on by the taxpayer. There is an exception to this rule which
permits a deduction for interest on loans up to $50,000 related to any
business-owned policies or certificates covering officers or 20-percent owners,
up to a maximum equal to the greater of (1) five individuals, or (2) the lesser
of (a) 5% of the total number of officers and employees of the corporation, or
(b) 20 individuals.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, any life insurance certificate, including a
Certificate offered by this Prospectus, that fails to satisfy a "seven-pay" test
is considered a modified endowment contract. A certificate fails to satisfy the
seven-pay test if the cumulative premiums paid under the certificate at any time
during the first seven certificate years, or within seven years of a material
change in the certificate, exceed the sum of the net level premiums that would
have been paid, had the certificate provided for paid-up future benefits after
the payment of seven level annual premiums. In addition, if benefits are reduced
at anytime during the life of the Certificate, there may be adverse tax
consequences. Please consult your tax adviser.
52
<PAGE>
If the Certificate is considered a modified endowment contract, all
distributions under the Certificate will be taxed on an "income-first" basis.
Most distributions received by a Certificate Owner directly or indirectly
(including loans, withdrawals, partial surrenders, or the assignment or pledge
of any portion of the value of the Certificate) will be includible in gross
income to the extent that the cash Surrender Value of the Certificate exceeds
the Certificate Owner's investment in the contract. Any additional amounts will
be treated as a return of capital to the extent of the Certificate Owner's basis
in the Certificate. With certain exceptions, an additional 10% tax will be
imposed on the portion of any distribution that is includible in income. All
modified endowment contracts issued by the same insurance company to the same
Certificate Owner during any calendar period will be treated as a single
modified endowment contract in determining taxable distributions.
Currently, each Certificate is reviewed when premiums are received to determine
if it satisfies the seven-pay test. If the Certificate does not satisfy the
seven-pay test, the Company will notify the Certificate Owner of the option of
requesting a refund of the excess premium. The refund process must be completed
within 60 days after the Certificate anniversary, or the Certificate will be
permanently classified as a modified endowment contract.
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
As discussed earlier, you may allocate Net Premiums and transfer Certificate
Value to the General Account. Because of exemption and exclusionary provisions
in the securities law, any amount in the General Account is not generally
subject to regulation under the provisions of the 1933 Act or the 1940 Act.
Accordingly, the disclosures in this Section have not been reviewed by the SEC.
Disclosures regarding the fixed portion of the Certificate and the General
Account may, however, be subject to certain generally applicable provisions of
the Federal Securities Laws concerning the accuracy and completeness of
statements made in prospectuses.
GENERAL DESCRIPTION
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any separate account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. Subject to applicable law, the
Company has sole discretion over the investment of assets of the General
Account.
A portion or all of Net Premiums may be allocated or transferred to accumulate
at a fixed rate of interest in the General Account. Such net amounts are
guaranteed by the Company as to principal and a minimum rate of interest. The
allocation or transfer of funds to the General Account does not entitle you to
share in the investment experience of the General Account.
GENERAL ACCOUNT VALUE AND CERTIFICATE LOANS
The Company bears the full investment risk for amounts allocated to the General
Account and guarantees that interest credited to each Certificate Owner's
Certificate Value in the General Account will not be less than an annual rate of
4% ("Guaranteed Minimum Rate"). (Under the Certificate, the Guaranteed Minimum
Rate may be higher than 4%.)
The Company may, AT ITS SOLE DISCRETION, credit a higher rate of interest
("excess interest"), although it is not obligated to credit interest in excess
of the Guaranteed Minimum Rate, and might not do so. However, the excess
interest rate, if any, in effect on the date a premium is received at the
Principal Office is guaranteed on that premium for one year, unless the
Certificate Value associated with the premium becomes security for a Certificate
loan. AFTER SUCH INITIAL ONE-YEAR GUARANTEE OF INTEREST ON NET PREMIUM, ANY
INTEREST CREDITED ON THE CERTIFICATE VALUE IN THE GENERAL ACCOUNT IN EXCESS OF
THE GUARANTEED MINIMUM RATE PER YEAR WILL BE DETERMINED IN THE SOLE DISCRETION
OF THE COMPANY. THE CERTIFICATE OWNER ASSUMES THE RISK THAT INTEREST CREDITED
MAY NOT EXCEED THE GUARANTEED MINIMUM RATE.
53
<PAGE>
Even if excess interest is credited to accumulated value in the General Account,
no excess interest will be credited to that portion of the Certificate Value
which is equal to Debt. However, such Certificate Value will be credited
interest at an effective annual yield of at least 6%.
The Company guarantees that, on each Monthly Processing Date, the Certificate
Value in the General Account will be the amount of the Net Premiums allocated or
Certificate Value transferred to the General Account, plus interest at the
Guaranteed Minimum Rate, plus any excess interest which the Company credits,
less the sum of all Certificate charges allocable to the General Account and any
amounts deducted from the General Account in connection with loans, partial
withdrawals, surrenders or transfers.
Certificate loans may also be made from the Certificate Value in the General
Account.
Transfers, surrenders, partial withdrawals, Death Proceeds and Certificate loans
payable from the General Account may be delayed up to six months. However, if
payment is delayed for 30 days or more, the Company will pay interest at least
equal to an effective annual yield of 3% for the period of deferment. Amounts
from the General Account used to pay premiums on policies with the Company will
not be delayed.
THE CERTIFICATE
This Prospectus describes certificates issued under a flexible premium variable
life insurance Certificate, and is generally intended to serve as a disclosure
document only for the aspects of the Certificate relating to the Separate
Account. For complete details regarding the General Account, see the Certificate
itself.
TRANSFERS, SURRENDERS, AND PARTIAL WITHDRAWALS
If a Certificate is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge, as applicable, may be imposed if such event
occurs before the Certificate, or an increase in the Face Amount, has been in
force for 15 Certificate years. In the event of a decrease in the Face Amount,
the surrender charge deducted is a fraction of the charge that would apply to a
full surrender of the Certificate. Partial withdrawals are made on a
last-in/first-out basis from Certificate Value allocated to the General Account.
This means that the last payments allocated to General Account will be withdrawn
first.
The first twelve transfers in a Certificate year are free of charge. Thereafter,
a $10 transfer charge will be deducted for each transfer in that Certificate
year. The transfer privilege is subject to the consent of the Company and to the
Company's then current rules.
FINANCIAL STATEMENTS
Financial Statements for the Company and for the Separate Account are included
in this Prospectus, beginning immediately after the Appendices. The financial
statements of the Company and for the Separate Account should be considered only
as bearing on the ability of the Company to meet its obligations under the
Certificate. They should not be considered as bearing on the investment
performance of the assets held in the Separate Account. The financial statements
for the Sub-Accounts investing in the portfolios of DGPF and the Trust are not
included because sales have not yet begun.
54
<PAGE>
APPENDIX A
OPTIONAL BENEFITS
This Appendix is intended to provide only a very brief overview of additional
insurance benefits available by rider. The following supplemental benefits are
available for issue under the Certificates for an additional charge.
WAIVER OF PREMIUM RIDER
This Rider provides that, during periods of total disability continuing for
more than the period of time specified in the Rider, the Company will add to
the Certificate Value each month an amount selected by you or the amount
necessary to maintain the Certificate in force, whichever is greater. This
benefit is subject to the Company's maximum issue benefits. Its cost may
change yearly.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At
present, this benefit is only available for the spouse and children of the
primary Insured. The Rider includes a feature that allows the "Other
Insured" to convert the coverage to a flexible premium adjustable life
insurance Certificate.
CHILDREN'S INSURANCE RIDER
This rider provides coverage for eligible minor children. It also covers
future children, including adopted children and stepchildren.
ACCIDENTAL DEATH BENEFIT RIDER
This Rider pays an additional benefit for death resulting from a covered
accident prior to the Certificate anniversary nearest the Insured's Age 70.
OPTION TO ACCELERATE BENEFITS RIDER
This Rider permits part of the proceeds of the Certificate to be available
before death if the Insured becomes terminally ill and, depending on the
group to which the Policy is issued, may also pay part of the proceeds if
the Insured is permanently confined to a nursing home.
EXCHANGE OPTION RIDER
This Rider allows you to use the Certificate to insure a different person,
subject to Company guidelines.
EXCHANGE TO TERM INSURANCE RIDER
This Rider allows a Certificate Owner which is a corporation, a corporate
grantor trust, or a corporate assignee in the case of a split dollar
arrangement, to exchange the Certificate prior to the third Certificate
anniversary for a five-year non-convertible term insurance policy. An
exchange credit will be paid to the Certificate Owner or the corporate
assignee in the case of a corporate-sponsored collateral assignment split
dollar arrangement.
REFUND OF SALES LOAD RIDER
This Rider allows a Certificate Owner which is a corporation, a corporate
grantor trust, or a corporate assignee in the case of a split dollar
arrangement, to exchange the Certificate prior to the third Certificate
anniversary for a five-year non-convertible term insurance policy. An
exchange credit will be paid to the Certificate Owner or the corporate
assignee in the case of a corporate-sponsored collateral assignment split
dollar arrangement. The Company will, upon written request, refund a
percentage of a portion of the previously paid Premium Expense Charge that
exceeded our local, state and federal tax expenses upon full surrender of
the Certificate within the first three Certificate years, in certain
situations. See CHARGES AND DEDUCTIONS.
CERTAIN OF THESE RIDERS MAY NOT BE AVAILABLE IN ALL STATES.
A-1
<PAGE>
APPENDIX B
PAYMENT OPTIONS
PAYMENT OPTIONS
Upon Written Request, the Surrender Value or all or part of the Death Proceeds
may be placed under one or more of the payment options then offered by the
Company. If you do not make an election, the Company will pay the benefits in a
single sum. A certificate will be provided to the payee describing the payment
option selected.
If a payment option is selected, the Beneficiary may pay to the Company any
amount that would otherwise by deducted from the Death Benefit.
The amounts payable under a payment option are paid from the General Account.
These amounts are not based on the investment experience of the Separate
Account.
SELECTION OF PAYMENT OPTIONS
The amount applied under any one option for any one payee must be at least
$5,000. The periodic payment for any one payee must be at least $50. Subject to
your and/or the Beneficiary's provision, any option selection may be changed
before the Death Proceeds become payable. If you make no selection, the
Beneficiary may select an option when the Death Proceeds become payable.
B-1
<PAGE>
APPENDIX C
ILLUSTRATIONS OF SUM INSURED, CERTIFICATE VALUES
AND ACCUMULATED PREMIUMS
The tables illustrate the way in which a Certificate's Sum Insured and
Certificate Value could vary over an extended period of time.
ASSUMPTIONS
The tables illustrate a Certificate issued to a person, Age 30, under a standard
Premium Class and qualifying for the non-smoker discount, and a Certificate
issued to a person, Age 45, under a standard Premium Class and qualifying for
the non-smoker discount. The tables illustrate the guaranteed cost of insurance
rates and the current cost of insurance rates as presently in effect.
The tables illustrate the Certificate Values that would result based upon the
assumptions that no Certificate loans have been made, that you have not
requested an increase or decrease in the initial Face Amount, that no partial
withdrawals have been made, and that no transfers above 12 have been made in any
Certificate year (so that no transaction or transfer charges have been
incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown, and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6% and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the premiums paid
were invested each year to earn interest (after taxes) at 5% compounded
annually.
The Certificate Values and Death Proceeds would be different from those shown if
the gross annual investment rates of return averaged 0%, 6% and 12% over a
period of years, but fluctuated above or below such averages for individual
Certificate years. The values would also be different depending on the
allocation of a Certificate's total Certificate Value among the Sub-Accounts of
the Separate Account, if the actual rates of return averaged 0%, 6% or 12%, but
the rates of each Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown for the Death Proceeds and Certificate Values take into
account the deduction from premium for the tax expense charge, the Monthly
Deduction from Certificate Value, and the monthly charge against the Separate
Account for mortality and expense risks. In both the Current Cost of Insurance
Charges tables and the Guaranteed Cost of Insurance Charges tables, the Separate
Account charge for mortality and expense risks is equivalent to an effective
annual rate of 0.90% of the average monthly value of the assets in the Separate
Account attributable to the Certificates.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.85% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary and, in 1999, ranged from an
annual rate of 0.29% to an annual rate of 1.52% of average daily net assets. The
fees and expenses associated with the Certificate may be more or less than 0.85%
in the aggregate, depending upon how you make allocations of Certificate Value
among the Sub-Accounts.
The investment adviser for the DGPF Growth & Income Series, DGPF Devon Series,
DGPF Growth Opportunities Series (formerly known as "DelCap Series"), DGPF U.S.
Growth Series, DGPF Select Growth Series (formerly known as "Aggressive Growth
Series"), DGPF Social Awareness Series, DGPF REIT Series, DGPF Small Cap Value
Series, DGPF Trend Series, DGPF Balanced Series (formerly known as "Delaware
C-1
<PAGE>
Balanced Series"), DGPF High Yield Series (formerly known as "Delchester
Series"), DGPF Capital Reserves Series, DGPF Strategic Income Series, and DGPF
Cash Reserve Series is Delaware Management Company, a series of Delaware
Management Business Trust ("Delaware Management"). The investment adviser for
the DGPF International Equity Series, and the DGPF Emerging Markets Series is
Delaware International Advisers Ltd. ("Delaware International"). Effective
May 1, 2000 through October 31, 2000, the investment advisers for the Series of
DGPF have agreed voluntarily to waive their management fees and reimburse each
Series for expenses to the extent that total expenses will not exceed 1.50% for
the DGPF Emerging Markets Series; 0.95% for the DGPF International Equity
Series; 0.85% for DGPF Growth Opportunities Series, DGPF Select Growth Series,
DGPF Social Awareness Series, DGPF REIT Series, DGPF Small Cap Value Series,
DGPF Trend Series, and 0.75% for DGPF U.S. Growth Series, and 0.80% for all
other Series. The fee ratios shown above have been restated, if necessary, to
reflect the new voluntary limitations which took effect on May 1, 2000. The
declaration of a voluntary expense limitation does not bind the investment
advisers to declare future expense limitations with respect to these Funds.
Until further notice, AFIMS has declared a voluntary expense limitation of 0.60%
for the Money Market Fund. The total operating expenses of this Fund was less
than its expense limitation throughout 1999.
For the fiscal year ended December 31, 1999, before waiver and/or reimbursement
by the investment adviser, total Series expenses as a percentage of average
daily net assets were 1.42% for AIM V.I. High Yield Fund.
From time to time, the Alliance Technology Portfolio's investment adviser, in
its own discretion, may voluntarily waive all or part of its fees and/or
voluntarily assume certain portfolio expenses. An expense cap of 1.20% which was
in effect during 1999, is no longer in effect as of May 1, 2000. Therefore, the
expenses shown in the above table have been restated to reflect current fees
without the cap.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company
NET ANNUAL RATES OF INVESTMENT
Taking into account the 0.90% charge to the Separate Account and the assumed
0.85% charge for Underlying Investment Company advisory fees and operating
expenses, the gross annual rates of investment return of 0%, 6% and 12%
correspond to net annual rates of -1.75%, 4.25% and 10.25%, respectively.
The hypothetical returns shown in the table do not reflect any charges for
income taxes against the Separate Account since no charges are currently made.
However, if in the future such charges are made, in order to produce illustrated
death benefits and cash values, the gross annual investment rate of return would
have to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSUREDS' AGE, SEX, AND UNDERWRITING CLASSIFICATION, AND THE REQUESTED
FACE AMOUNT, SUM INSURED OPTION, AND RIDERS.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- --------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 63 3,448 250,000 289 3,674 250,000 516 3,901 250,000
2 9,041 2,946 6,799 250,000 3,614 7,467 250,000 4,310 8,163 250,000
3 13,903 7,923 10,054 250,000 9,252 11,383 250,000 10,692 12,823 250,000
4 19,008 12,145 13,211 250,000 14,357 15,423 250,000 16,851 17,917 250,000
5 24,368 16,271 16,271 250,000 19,591 19,591 250,000 23,489 23,489 250,000
6 29,996 19,233 19,233 250,000 23,892 23,892 250,000 29,588 29,588 250,000
7 35,906 22,092 22,092 250,000 28,324 28,324 250,000 36,259 36,259 250,000
8 42,112 24,850 24,850 250,000 32,892 32,892 250,000 43,565 43,565 250,000
9 48,627 27,505 27,505 250,000 37,602 37,602 250,000 51,569 51,569 250,000
10 55,469 30,055 30,055 250,000 42,455 42,455 250,000 60,342 60,342 250,000
11 62,652 32,581 32,581 250,000 47,571 47,571 250,000 70,124 70,124 250,000
12 70,195 34,972 34,972 250,000 52,828 52,828 250,000 80,859 80,859 250,000
13 78,114 37,225 37,225 250,000 58,230 58,230 250,000 92,654 92,654 250,000
14 86,430 39,345 39,345 250,000 63,790 63,790 250,000 105,636 105,636 250,000
15 95,161 41,322 41,322 250,000 69,510 69,510 250,000 119,936 119,936 250,000
16 104,330 43,146 43,146 250,000 75,391 75,391 250,000 135,705 135,705 250,000
17 113,956 44,838 44,838 250,000 81,463 81,463 250,000 153,134 153,134 250,000
18 124,064 46,386 46,386 250,000 87,731 87,731 250,000 172,418 172,418 250,000
19 134,677 47,779 47,779 250,000 94,198 94,198 250,000 193,783 193,783 250,000
20 145,821 49,002 49,002 250,000 100,872 100,872 250,000 217,447 217,447 265,285
Age 60 95,161 41,322 41,322 250,000 69,510 69,510 250,000 119,936 119,936 250,000
Age 65 145,821 49,002 49,002 250,000 100,872 100,872 250,000 217,447 217,447 265,285
Age 70 210,477 51,743 51,743 250,000 137,502 137,502 250,000 376,009 376,009 436,170
Age 75 292,995 46,948 46,948 250,000 181,478 181,478 250,000 631,123 631,123 675,302
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 1
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- --------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,410 0 2,643 250,000 0 2,831 250,000 0 3,020 250,000
2 9,041 1,326 5,179 250,000 1,867 5,721 250,000 2,433 6,287 250,000
3 13,903 5,476 7,607 250,000 6,537 8,669 250,000 7,691 9,822 250,000
4 19,008 8,855 9,921 250,000 10,603 11,669 250,000 12,581 13,647 250,000
5 24,368 12,121 12,121 250,000 14,723 14,723 250,000 17,791 17,791 250,000
6 29,996 14,203 14,203 250,000 17,828 17,828 250,000 22,282 22,282 250,000
7 35,906 16,155 16,155 250,000 20,973 20,973 250,000 27,144 27,144 250,000
8 42,112 17,969 17,969 250,000 24,149 24,149 250,000 32,409 32,409 250,000
9 48,627 19,632 19,632 250,000 27,346 27,346 250,000 38,108 38,108 250,000
10 55,469 21,130 21,130 250,000 30,550 30,550 250,000 44,277 44,277 250,000
11 62,652 22,516 22,516 250,000 33,837 33,837 250,000 51,081 51,081 250,000
12 70,195 23,722 23,722 250,000 37,128 37,128 250,000 58,484 58,484 250,000
13 78,114 24,739 24,739 250,000 40,413 40,413 250,000 66,554 66,554 250,000
14 86,430 25,559 25,559 250,000 43,688 43,688 250,000 75,367 75,367 250,000
15 95,161 26,168 26,168 250,000 46,943 46,943 250,000 85,012 85,012 250,000
16 104,330 26,539 26,539 250,000 50,153 50,153 250,000 95,578 95,578 250,000
17 113,956 26,648 26,648 250,000 53,300 53,300 250,000 107,177 107,177 250,000
18 124,064 26,456 26,456 250,000 56,352 56,352 250,000 119,932 119,932 250,000
19 134,677 25,914 25,914 250,000 59,268 59,268 250,000 133,987 133,987 250,000
20 145,821 24,976 24,976 250,000 62,009 62,009 250,000 149,520 149,520 250,000
Age 60 95,161 26,168 26,168 250,000 46,943 46,943 250,000 85,012 85,012 250,000
Age 65 145,821 24,976 24,976 250,000 62,009 62,009 250,000 149,520 149,520 250,000
Age 70 210,477 12,774 12,774 250,000 71,868 71,868 250,000 257,719 257,719 298,953
Age 75 292,995 0 0 250,000 68,925 68,925 250,000 433,431 433,431 463,772
</TABLE>
(1) Assumes a $4,200 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 238 1,162 76,162 314 1,238 76,238 390 1,314 76,314
2 3,014 1,249 2,299 77,299 1,474 2,524 77,524 1,707 2,757 77,757
3 4,634 2,923 3,412 78,412 3,369 3,859 78,859 3,853 4,343 79,343
4 6,336 4,256 4,501 79,501 5,001 5,245 80,245 5,840 6,085 81,085
5 8,123 5,564 5,564 80,564 6,683 6,683 81,683 7,997 7,997 82,997
6 9,999 6,603 6,603 81,603 8,176 8,176 83,176 10,096 10,096 85,096
7 11,969 7,617 7,617 82,617 9,724 9,724 84,724 12,401 12,401 87,401
8 14,037 8,606 8,606 83,606 11,328 11,328 86,328 14,931 14,931 89,931
9 16,209 9,570 9,570 84,570 12,992 12,992 87,992 17,708 17,708 92,708
10 18,490 10,509 10,509 85,509 14,715 14,715 89,715 20,755 20,755 95,755
11 20,884 11,452 11,452 86,452 16,540 16,540 91,540 24,154 24,154 99,154
12 23,398 12,371 12,371 87,371 18,434 18,434 93,434 27,892 27,892 102,892
13 26,038 13,267 13,267 88,267 20,401 20,401 95,401 32,004 32,004 107,004
14 28,810 14,139 14,139 89,139 22,443 22,443 97,443 36,527 36,527 111,527
15 31,720 14,988 14,988 89,988 24,562 24,562 99,562 41,503 41,503 116,503
16 34,777 15,811 15,811 90,811 26,760 26,760 101,760 46,977 46,977 121,977
17 37,985 16,610 16,610 91,610 29,041 29,041 104,041 52,998 52,998 127,998
18 41,355 17,383 17,383 92,383 31,406 31,406 106,406 59,622 59,622 134,622
19 44,892 18,131 18,131 93,131 33,858 33,858 108,858 66,909 66,909 141,909
20 48,607 18,853 18,853 93,853 36,400 36,400 111,400 74,926 74,926 149,926
Age 60 97,665 24,302 24,302 99,302 67,182 67,182 142,182 215,482 215,482 290,482
Age 65 132,771 25,324 25,324 100,324 86,410 86,410 161,410 354,973 354,973 433,067
Age 70 177,576 24,556 24,556 99,556 108,080 108,080 183,080 578,929 578,929 671,558
Age 75 234,759 21,114 21,114 96,114 131,532 131,532 206,532 938,907 938,907 1,013,907
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this to lapse because of insufficient Certificate
Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 30
SPECIFIED FACE AMOUNT = $75,000
SUM INSURED OPTION 2
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- --------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,470 39 964 75,964 105 1,029 76,029 170 1,094 76,094
2 3,014 855 1,905 76,905 1,046 2,096 77,096 1,245 2,295 77,295
3 4,634 2,336 2,825 77,825 2,714 3,203 78,203 3,124 3,614 78,614
4 6,336 3,479 3,724 78,724 4,106 4,351 79,351 4,815 5,060 80,060
5 8,123 4,597 4,597 79,597 5,538 5,538 80,538 6,643 6,643 81,643
6 9,999 5,449 5,449 80,449 6,768 6,768 81,768 8,380 8,380 83,380
7 11,969 6,276 6,276 81,276 8,039 8,039 83,039 10,282 10,282 85,282
8 14,037 7,079 7,079 82,079 9,352 9,352 84,352 12,365 12,365 87,365
9 16,209 7,856 7,856 82,856 10,708 10,708 85,708 14,646 14,646 89,646
10 18,490 8,607 8,607 83,607 12,106 12,106 87,106 17,142 17,142 92,142
11 20,884 9,355 9,355 84,355 13,581 13,581 88,581 19,921 19,921 94,921
12 23,398 10,076 10,076 85,076 15,103 15,103 90,103 22,968 22,968 97,968
13 26,038 10,772 10,772 85,772 16,677 16,677 91,677 26,313 26,313 101,313
14 28,810 11,439 11,439 86,439 18,301 18,301 93,301 29,982 29,982 104,982
15 31,720 12,080 12,080 87,080 19,978 19,978 94,978 34,010 34,010 109,010
16 34,777 12,690 12,690 87,690 21,705 21,705 96,705 38,429 38,429 113,429
17 37,985 13,271 13,271 88,271 23,486 23,486 98,486 43,278 43,278 118,278
18 41,355 13,821 13,821 88,821 25,321 25,321 100,321 48,601 48,601 123,601
19 44,892 14,338 14,338 89,338 27,210 27,210 102,210 54,442 54,442 129,442
20 48,607 14,822 14,822 89,822 29,153 29,153 104,153 60,854 60,854 135,854
Age 60 97,665 17,084 17,084 92,084 51,109 51,109 126,109 171,395 171,395 246,395
Age 65 132,771 15,505 15,505 90,505 62,928 62,928 137,928 279,005 279,005 354,005
Age 70 177,576 10,569 10,569 85,569 73,422 73,422 148,422 449,265 449,265 524,265
Age 75 234,759 261 261 75,261 79,653 79,653 154,653 718,334 718,334 793,334
</TABLE>
(1) Assumes a $1,400 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
CURRENT COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 7,650 11,931 250,000 8,396 12,677 250,000 9,142 13,424 250,000
2 28,327 18,143 23,609 250,000 20,382 25,848 250,000 22,711 28,177 250,000
3 43,561 32,907 35,038 250,000 37,402 39,533 250,000 42,266 44,398 250,000
4 59,557 45,157 46,222 250,000 52,689 53,755 250,000 61,169 62,235 250,000
5 76,353 57,169 57,169 250,000 68,538 68,538 250,000 81,858 81,858 250,000
6 93,989 67,883 67,883 250,000 83,909 83,909 250,000 103,418 103,418 277,160
7 112,506 78,366 78,366 250,000 99,880 99,880 259,688 127,004 127,004 330,211
8 131,950 88,626 88,626 250,000 116,394 116,394 293,313 152,805 152,805 385,070
9 152,365 98,670 98,670 250,000 133,468 133,468 325,663 181,026 181,026 441,704
10 173,801 108,464 108,464 257,059 151,113 151,113 358,138 211,881 211,881 502,158
11 196,309 118,295 118,295 272,080 169,750 169,750 390,425 246,167 246,167 566,185
12 219,943 127,864 127,864 285,137 189,018 189,018 421,509 283,680 283,680 632,606
13 244,758 137,172 137,172 296,292 208,930 208,930 451,290 324,712 324,712 701,377
14 270,814 146,225 146,225 307,072 229,506 229,506 481,962 369,585 369,585 776,128
15 298,173 155,022 155,022 316,244 250,755 250,755 511,540 418,638 418,638 854,022
16 326,899 163,553 163,553 325,471 272,673 272,673 542,619 472,213 472,213 939,704
17 357,062 171,857 171,857 331,684 295,330 295,330 569,986 530,813 530,813 1,024,470
18 388,733 179,923 179,923 338,256 318,723 318,723 599,199 594,856 594,856 1,118,330
19 421,988 187,754 187,754 343,589 342,867 342,867 627,446 664,828 664,828 1,216,634
20 456,905 195,352 195,352 347,726 367,780 367,780 654,648 741,262 741,262 1,319,446
Age 60 298,173 155,022 155,022 316,244 250,755 250,755 511,540 418,638 418,638 854,022
Age 65 456,905 195,352 195,352 347,726 367,780 367,780 654,648 741,262 741,262 1,319,446
Age 70 659,493 229,543 229,543 362,679 503,524 503,524 795,568 1,240,052 1,240,052 1,959,282
Age 75 918,052 257,837 257,837 366,128 659,088 659,088 935,905 2,004,303 2,004,303 2,846,110
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
GROUP VARI-EXCEPTIONAL LIFE PLUS CERTIFICATE
NON-SMOKER AGE 45
SPECIFIED FACE AMOUNT = $250,000
SUM INSURED OPTION 3
GUARANTEED COST OF INSURANCE CHARGES
<TABLE>
<CAPTION>
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL 12%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST ------------------------------- ------------------------------- ---------------------------------
CERTIFICATE AT 5% SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH SURRENDER CERTIFICATE DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
----------- ------------ --------- ----------- ------- --------- ----------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 13,818 5,977 10,259 250,000 6,632 10,914 250,000 7,287 11,569 250,000
2 28,327 14,818 20,284 250,000 16,771 22,238 250,000 18,805 24,271 250,000
3 43,561 27,947 30,079 250,000 31,859 33,990 250,000 36,094 38,226 250,000
4 59,557 38,579 39,645 250,000 45,122 46,188 250,000 52,495 53,561 250,000
5 76,353 48,990 48,990 250,000 58,857 58,857 250,000 70,430 70,430 250,000
6 93,989 58,117 58,117 250,000 72,020 72,020 250,000 88,998 88,998 250,000
7 112,506 67,024 67,024 250,000 85,697 85,697 250,000 109,330 109,330 284,257
8 131,950 75,712 75,712 250,000 99,914 99,914 251,783 131,459 131,459 331,278
9 152,365 84,183 84,183 250,000 114,541 114,541 279,480 155,531 155,531 379,496
10 173,801 92,435 92,435 250,000 129,556 129,556 307,047 181,685 181,685 430,594
11 196,309 100,733 100,733 250,000 145,309 145,309 334,211 210,568 210,568 484,306
12 219,943 108,841 108,841 250,000 161,503 161,503 360,152 241,995 241,995 539,649
13 244,758 116,710 116,710 252,093 178,145 178,145 384,793 276,182 276,182 596,553
14 270,814 124,307 124,307 261,045 195,228 195,228 409,979 313,340 313,340 658,014
15 298,173 131,639 131,639 268,544 212,759 212,759 434,028 353,716 353,716 721,580
16 326,899 138,688 138,688 275,989 230,703 230,703 459,099 397,509 397,509 791,042
17 357,062 145,473 145,473 280,763 249,087 249,087 480,738 445,034 445,034 858,916
18 388,733 151,973 151,973 285,709 267,866 267,866 503,588 496,504 496,504 933,428
19 421,988 158,181 158,181 289,470 287,016 287,016 525,239 552,180 552,180 1,010,490
20 456,905 164,098 164,098 292,094 306,523 306,523 545,611 612,358 612,358 1,089,998
Age 60 298,173 131,639 131,639 268,544 212,759 212,759 434,028 353,716 353,716 721,580
Age 65 456,905 164,098 164,098 292,094 306,523 306,523 545,611 612,358 612,358 1,089,998
Age 70 659,493 189,284 189,284 299,069 408,591 408,591 645,574 991,711 991,711 1,566,903
Age 75 918,052 207,364 207,364 294,456 516,092 516,092 732,851 1,535,814 1,535,814 2,180,855
</TABLE>
(1) Assumes a $13,160 premium is paid at the beginning of each Certificate year.
Values will be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no Certificate loan has been made. Excessive loans or
withdrawals may cause this Certificate to lapse because of insufficient
Certificate Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A CERTIFICATE
OWNER, AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS.
THE SURRENDER VALUE OF UNITS, CERTIFICATE VALUE, AND DEATH BENEFIT FOR A
CERTIFICATE WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF
INVESTMENT RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL CERTIFICATE YEARS, OR IF ANY
PREMIUMS WERE ALLOCATED OR CERTIFICATE VALUE TRANSFERRED TO THE FIXED ACCOUNT.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL INVESTMENT RATES OF
RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
C-8
<PAGE>
APPENDIX D
CALCULATION OF MAXIMUM SURRENDER CHARGES
A separate surrender charge may be calculated upon issuance of the Certificate
and upon each increase in the Face Amount. The maximum surrender charge
calculated upon issuance of the Certificate is equal to $8.50 per thousand
dollars of the initial Face Amount plus up to 50% (less any premium expense
charge not associated with state and local premium taxes) of the Guideline
Annual Premium, depending on the group to which the Policy is issued. The
maximum surrender charge for an increase in the Face Amount is $8.50 per
thousand dollars of increase, plus up to 50% (less any premium expense charge
not associated with state and local premium taxes) of the Guideline Annual
Premium for the increase. The calculation may be summarized in the following
formula:
Maximum Surrender Charge = (8.5 X Face Amount) + (up to 50% X Guideline Annual
Premium)qc
1000
A further limitation is imposed based on the Standard Nonforfeiture Law of each
state. The maximum surrender charges upon issuance of the Certificate and upon
each increase in the Face Amount are shown in the following table. During the
first two Certificate years following issue or an increase in Face Amount, the
actual surrender charge may be less than the maximum. See "CHARGES AND
DEDUCTIONS -- "Surrender Charge."
The maximum surrender charge remains level for up to the first 24 Certificate
months, reduces uniformly for the balance of the surrender charge period, and is
zero thereafter. The actual surrender charge imposed may be less than the
maximum.
The Factors used in calculating the maximum surrender charges vary with the
issue Age and Underwriting Class as indicated in the following table.
D-1
<PAGE>
MAXIMUM SURRENDER CHARGE PER $1000 FACE AMOUNT
<TABLE>
<CAPTION>
Age at Age at
Issue or Unisex Unisex Issue or Unisex Unisex
Increase Nonsmoker Smoker Increase Nonsmoker Smoker
- -------- ---------- ------ -------- ---------- ------
<S> <C> <C> <C> <C> <C>
0 14.89 41 24.90 28.00
1 14.84 42 25.40 28.70
2 15.00 43 25.95 29.45
3 15.17 44 26.55 30.25
4 15.35 45 27.15 31.10
5 15.53 46 27.85 32.00
6 15.73 47 28.55 32.95
7 15.94 48 29.30 34.00
8 16.16 49 30.10 35.10
9 16.39 50 31.00 36.30
10 16.64 51 31.95 37.55
11 16.91 52 32.95 38.90
12 17.18 53 34.05 40.35
13 17.47 54 35.25 41.95
14 17.70 55 36.50 43.60
15 18.08 56 37.85 45.35
16 18.38 57 39.35 47.25
17 18.67 58 40.95 49.30
18 17.15 18.98 59 42.70 51.50
19 17.40 19.29 60 44.60 53.85
20 17.65 19.62 61 46.60 56.40
21 17.92 19.95 62 48.85 56.34
22 18.20 20.25 63 51.25 56.26
23 18.49 20.50 64 53.85 56.18
24 18.80 20.75 65 56.03 56.10
25 19.13 21.00 66 55.90 56.01
26 19.48 21.25 67 55.74 55.90
27 19.85 21.55 68 55.58 55.76
28 20.24 21.85 69 55.41 55.63
29 20.60 22.20 70 55.27 55.49
30 20.85 22.50 71 55.12 55.38
31 21.10 22.85 72 54.96 55.29
32 21.40 23.25 73 54.85 55.23
33 21.70 23.65 74 54.75 55.19
34 22.05 24.10 75 54.64 55.16
35 22.35 24.55 76 54.52 55.10
36 22.75 25.05 77 54.36 55.01
37 23.10 25.55 78 54.18 54.86
38 23.50 26.10 79 53.97 54.68
39 23.95 26.70 80 53.75 54.49
40 24.40 27.35
</TABLE>
D-2
<PAGE>
EXAMPLES
For the purposes of these examples, assume that a unisex, Age 35 non-smoker
purchases a $100,000 Certificate. In this example the Guideline Annual Premium
("GAP") equals $1,032.25. The maximum surrender charge is calculated as follows:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge $516.13
(50% X GAP)
------------
$1,336.13
Maximum surrender charge per Table (22.35 X 100) $2,235.00
During the first two Certificate years after the Date of Issue, the actual
surrender charge is the smaller of the maximum surrender charge and the
following sum:
(1) Deferred Administrative Charge $850.00
($8.50/$1,000 of Face Amount)
(2) Deferred Sales Charge Varies
(not to exceed 30% of premiums received, up to one
GAP, plus 9% of premiums
received in excess of one GAP)
--------------------
Sum of (1) and (2)
The maximum surrender charge is $1,366.13. All premiums are associated with the
initial Face Amount unless the Face Amount is increased.
EXAMPLE 1:
Assume the Certificate Owner surrenders the Certificate in the 10th Certificate
month, having paid total premiums of $900. The actual surrender charge would be
$1,120.
EXAMPLE 2:
Assume the Certificate Owner surrenders the Certificate in the 120th Certificate
month. Also assume that after the 24th Certificate month, the maximum surrender
charge decreases by 1/156 per month, thereby reaching zero at the end of the
15th Certificate year. In this example, the maximum surrender charge would be
$525.43.
D-3
<PAGE>
APPENDIX E
PERFORMANCE INFORMATION
The Certificates were first offered to the public in 1998. However, the Company
may advertise "Total Return" and "Average Annual Total Return" performance
information based on the periods that the Underlying Funds have been in
existence (Tables I(A) and I(B)). The results for any period prior to the
Certificates being offered will be calculated as if the Certificates had been
offered during that period of time, with all charges assumed to be those
applicable to the Sub-Accounts, the Underlying Funds, and (in Table I) under a
"representative" Certificate that is surrendered at the end of the applicable
period. For more information on charges under the Certificates, see CHARGES AND
DEDUCTIONS.
Performance information may be compared, in reports and promotional literature,
to: (1) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow Jones Industrial
Average ("DJIA"), Shearson Lehman Aggregate Bond Index or other unmanaged
indices so that investors may compare results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (2) other groups of variable life separate accounts or other
investment products tracked by Lipper Inc. Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, such as Morningstar, Inc., who rank such
investment products on overall performance or other criteria; or (3) the
Consumer Price Index (a measure for inflation) to assess the real rate of return
from an investment. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management costs
and expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Services ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
The Company may provide information on various topics of interest to Certificate
Owners and prospective Certificate Owners in sales literature, periodic
publications or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments.
E-1
<PAGE>
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE CERTIFICATE
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges (assumed to be 0.90%), and all
Certificate charges (including surrender charges) for a representative
Certificate. It is assumed that the Insured is male (unisex rates), Age 36,
standard (non-smoker) Premium Class, that the Face Amount of the Certificate is
$250,000, that an annual premium payment of $3,000 (approximately one Guideline
Annual Premium) was made at the beginning of each Certificate year, that ALL
premiums were allocated to EACH Sub-Account individually, and that there was a
full surrender of the Certificate at the end of the applicable period.
<TABLE>
TEN YEARS OR
SINCE
ONE-YEAR FIVE INCEPTION
UNDERLYING FUND TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C>
DGPF Growth & Income Series -100.00% 12.69% 8.39%
DGPF Devon Series -100.00% N/A -14.92%
DGPF Growth Opportunities Series -56.55% 21.18% 13.83%
DGPF U.S. Growth N/A N/A -15.22%
DGPF Select Growth Series N/A N/A -50.42%
DGPF Social Awareness Series -100.00% N/A -6.50%
DGPF REIT Series -100.00% N/A -77.99%
DGPF Small Cap Value Series -100.00% 7.14% 6.06%
DGPF Trend Series -49.65% 24.18% 19.67%
DGPF International Equity Series -99.74% 7.57% 7.32%
DGPF Emerging Markets Series -69.99% N/A -37.25%
DGPF Balanced Series -100.00% 9.50% 8.60%
DGPF High Yield Series -100.00% 1.54% 5.15%
DGPF Capital Reserves Series -100.00% 0.81% 2.45%
DGPF Strategic Income Series -100.00% N/A 29.34%
DGPF Cash Reserve Series -100.00% -0.56% 1.07%
Money Market Fund -100.00% -0.17% 1.52%
AIM V.I. Growth Fund -81.94% 23.84% 18.27%
AIM V.I. High Yield Fund 100.00% N/A -69.93%
AIM V.I. Value Fund -86.82% 21.46% 18.41%
Alger American Leveraged AllCap Portfolio -42.63% N/A 40.25%
Alger American Small Capitalization Portfolio -74.46% 16.87% 14.73%
Alliance Growth and Income Portfolio (Class B) -100.00% 18.17% 11.70%
Alliance Technology Portfolio (Class B) -44.82% N/A 27.06%
Templeton International Securities Fund -90.35% 9.42% 8.42%
</TABLE>
The inception dates for the Underlying Funds are: 5/3/99 for DGPF Select Growth
Series; 10/29/92 for DGPF International Equity Series; 12/27/93 for DGPF Small
Cap Value and DGPF Trend Series; 7/2/91 for DGPF Growth Opportunities Series;
7/28/88 for DGPF Balanced Series, DGPF Growth & Income Series, DGPF High Yield
Series, DGPF Capital Reserves Series, and DGPF Cash Reserve Series; 5/1/97 for
DGPF Devon Series, DGPF Social Awareness Series, DGPF Emerging Markets Series,
and DGPF Strategic Income Series; 5/1/98 for DGPF REIT Series; 4/29/85 for the
Money Market Fund; 5/5/93 for AIM V.I. Growth Fund and AIM V.I. Value Fund;
5/1/98 for AIM V.I. High Yield Fund; 1/25/95 for Alger American Leveraged AllCap
Portfolio; 9/21/88 for Alger American Small Capitalization Portfolio; 1/14/91
for Alliance Growth and Income Portfolio; 1/11/96 for the Alliance Technology
Portfolio; and 1/27/92 for Templeton Internationl Securities Fund.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-2
<PAGE>
TABLE I(B)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY CERTIFICATE CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses and all Sub-Account charges. THE DATA DOES NOT
REFLECT MONTHLY CHARGES UNDER THE CERTIFICATE OR SURRENDER CHARGES. It is
assumed that an annual premium payment of $3,000 (approximately one Guideline
Annual Premium) was made at the beginning of each Certificate year and that ALL
premiums were allocated to EACH Sub-Account individually.
<TABLE>
TEN YEARS OR
SINCE
ONE-YEAR FIVE INCEPTION
UNDERLYING FUND TOTAL RETURN YEARS (IF LESS)
<S> <C> <C> <C>
DGPF Growth & Income Series -3.85% 17.32% 10.94%
DGPF Devon Series -10.94% N/A 12.97%
DGPF Growth Opportunities Series 61.48% 25.81% 16.69%
DGPF U.S. Growth Series N/A N/A 5.78%
DGPF Select Growth Series N/A N/A 42.04%
DGPF Social Awareness Series 11.89% N/A 20.18%
DGPF REIT Series -3.49% N/A -7.49%
DGPF Small Cap Value Series -5.72% 11.80% 10.07%
DGPF Trend Series 68.92% 28.80% 23.56%
DGPF International Equity Series 14.72% 12.22% 10.76%
DGPF Emerging Markets Series 46.95% N/A -5.17%
DGPF Balanced Series -8.68% 14.14% 11.15%
DGPF High Yield Series -3.52% 6.23% 7.79%
DGPF Capital Reserves Series -0.62% 5.50% 5.17%
DGPF Strategic Income Series -4.16% N/A 1.07%
DGPF Cash Reserve Series 3.87% 4.13% 3.85%
Money Market Fund 4.24% 4.52% 4.28%
AIM V.I. Growth Fund 34.02% 28.47% 21.82%
AIM V.I. High Yield Fund 9.53% N/A 0.35%
AIM V.I. Value Fund 28.73% 26.09% 21.96%
Alger American Leveraged AllCap Portfolio 76.50% N/A 45.08%
Alger American Small Capitalization Portfolio 42.11% 21.50% 17.14%
Alliance Growth and Income Portfolio (Class B) 10.37% 22.80% 14.44%
Alliance Technology Portfolio (Class B) 74.13% N/A 34.71%
Templeton International Securities Fund 24.91% 14.07% 11.56%
</TABLE>
The inception dates for the Underlying Funds are: 5/3/99 for DGPF Select Growth
Series; 10/29/92 for DGPF International Equity Series; 12/27/93 for DGPF Small
Cap Value and DGPF Trend Series; 7/2/91 for DGPF Growth Opportunities Series;
7/28/88 for DGPF Balanced Series, DGPF Growth & Income Series, DGPF High Yield
Series, DGPF Capital Reserves Series, and DGPF Cash Reserve Series; 5/1/97 for
DGPF Devon Series, DGPF Social Awareness Series, DGPF Emerging Markets Series,
and DGPF Strategic Income Series; 5/1/98 for DGPF REIT Series; 4/29/85 for the
Money Market Fund; 5/5/93 for AIM V.I. Growth Fund and AIM V.I. Value Fund;
5/1/98 for AIM V.I. High Yield Fund; 1/25/95 for Alger American Leveraged AllCap
Portfolio; 9/21/88 for Alger American Small Capitalization Portfolio; 1/14/91
for Alliance Growth and Income Portfolio; 1/11/96 for the Alliance Technology
Portfolio; and 1/27/92 for Templeton Internationl Securities Fund.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
E-3
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 0.5 $ 22.8
Universal life and investment product
policy fees.............................. 328.1 267.4 212.2
Net investment income...................... 150.2 151.3 164.2
Net realized investment (losses) gains..... (8.7) 20.0 2.9
Other income............................... 36.9 0.6 1.4
------ ------ ------
Total revenues......................... 507.0 439.8 403.5
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims and losses......... 173.6 153.9 187.8
Policy acquisition expenses................ 49.8 64.6 2.8
Sales practice litigation.................. -- 21.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Other operating expenses................... 151.3 104.1 101.3
------ ------ ------
Total benefits, losses and expenses.... 374.7 343.6 345.8
------ ------ ------
Income before federal income taxes............. 132.3 96.2 57.7
------ ------ ------
FEDERAL INCOME TAX EXPENSE
Current.................................... 15.5 22.1 13.9
Deferred................................... 30.5 11.8 7.1
------ ------ ------
Total federal income tax expense....... 46.0 33.9 21.0
------ ------ ------
Net income..................................... $ 86.3 $ 62.3 $ 36.7
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,354.2 and $1,284.6)............................ $ 1,324.6 $ 1,330.4
Equity securities at fair value (cost of $25.2 and
$27.4)............................................ 32.6 31.8
Mortgage loans...................................... 223.7 230.0
Policy loans........................................ 166.8 151.5
Real estate and other long-term investments......... 25.1 23.6
--------- ---------
Total investments............................... 1,772.8 1,767.3
--------- ---------
Cash and cash equivalents............................. 132.9 217.9
Accrued investment income............................. 36.0 33.5
Deferred policy acquisition costs..................... 1,156.4 950.5
Reinsurance receivable on paid and unpaid losses,
benefits and unearned premiums...................... 287.2 308.0
Other assets.......................................... 64.8 46.9
Separate account assets............................... 14,527.9 11,020.4
--------- ---------
Total assets.................................... $17,978.0 $14,344.5
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,274.7 $ 2,284.8
Outstanding claims and losses....................... 13.7 17.9
Unearned premiums................................... 2.6 2.7
Contractholder deposit funds and other policy
liabilities....................................... 44.3 38.1
--------- ---------
Total policy liabilities and accruals........... 2,335.3 2,343.5
--------- ---------
Expenses and taxes payable............................ 216.8 146.2
Reinsurance premiums payable.......................... 17.9 45.7
Deferred federal income taxes......................... 94.8 78.8
Separate account liabilities.......................... 14,527.9 11,020.4
--------- ---------
Total liabilities............................... 17,192.7 13,634.6
--------- ---------
Contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,526 and 2,524 shares, issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 423.7 407.9
Accumulated other comprehensive (loss) income......... (2.6) 24.1
Retained earnings..................................... 361.7 275.4
--------- ---------
Total shareholder's equity...................... 785.3 709.9
--------- ---------
Total liabilities and shareholder's equity...... $17,978.0 $14,344.5
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
------ ------ ------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 407.9 386.9 346.3
Issuance of common stock................... 15.8 21.0 40.6
------ ------ ------
Balance at end of period................... 423.7 407.9 386.9
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 24.1 38.5 20.5
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (41.1) (23.4) 27.0
Benefit (provision) for deferred
federal income taxes................. 14.4 9.0 (9.0)
------ ------ ------
(26.7) (14.4) 18.0
------ ------ ------
Balance at end of period................... (2.6) 24.1 38.5
------ ------ ------
RETAINED EARNINGS
Balance at beginning of period............. 275.4 213.1 176.4
Net income................................. 86.3 62.3 36.7
------ ------ ------
Balance at end of period................... 361.7 275.4 213.1
------ ------ ------
Total shareholder's equity............. $785.3 $709.9 $641.0
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------ ------ ------
<S> <C> <C> <C>
Net income.................................. $ 86.3 $ 62.3 $36.7
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (41.1) (23.4) 27.0
Benefit (provision) for deferred federal
income taxes.......................... 14.4 9.0 (9.0)
------ ------ -----
Other comprehensive (loss) income... (26.7) (14.4) 18.0
------ ------ -----
Comprehensive income.................... $ 59.6 $ 47.9 $54.7
====== ====== =====
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 86.3 $ 62.3 $ 36.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized losses/(gains)......... 8.7 (20.0) (2.9)
Net amortization and depreciation... (2.3) (7.1) --
Sales practice litigation expense... -- 21.0 --
Loss from cession of disability
income business................... -- -- 53.9
Deferred federal income taxes....... 30.5 11.8 7.1
Payment related to cession of
disability income business........ -- -- (207.0)
Change in deferred acquisition
costs............................. (169.7) (177.8) (181.3)
Change in reinsurance premiums
payable........................... (31.5) 40.8 3.9
Change in accrued investment
income............................ (2.5) 0.7 3.5
Change in policy liabilities and
accruals, net..................... (8.4) 193.1 (72.4)
Change in reinsurance receivable.... 20.7 (56.9) 22.1
Change in expenses and taxes
payable........................... 64.1 55.4 0.2
Other, net.......................... (14.8) (28.5) (7.1)
------- ------- -------
Net cash (used in) provided by
operating activities.......... (18.9) 94.8 (343.3)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 330.9 187.0 909.7
Proceeds from disposals of equity
securities............................ 30.9 53.3 2.4
Proceeds from disposals of other
investments........................... 0.8 22.7 23.7
Proceeds from mortgages matured or
collected............................. 30.5 60.1 62.9
Purchase of available-for-sale fixed
maturities............................ (415.5) (136.0) (579.7)
Purchase of equity securities........... (20.2) (30.6) (3.2)
Purchase of other investments........... (44.1) (22.7) (9.0)
Purchase of mortgages................... -- (58.9) (70.4)
Other investing activities, net......... 2.0 (3.9) --
------- ------- -------
Net cash (used in) provided by
investing activities.............. (84.7) 71.0 336.4
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Contribution from subsidiaries.......... 14.6 -- --
Proceeds from issuance of stock and
capital paid in....................... 4.0 21.0 19.2
------- ------- -------
Net cash provided by financing
activities........................ 18.6 21.0 19.2
------- ------- -------
Net change in cash and cash equivalents..... (85.0) 186.8 12.3
Cash and cash equivalents, beginning of
period..................................... 217.9 31.1 18.8
------- ------- -------
Cash and cash equivalents, end of period.... $ 132.9 $ 217.9 $ 31.1
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ -- $ --
Income taxes paid....................... $ 4.4 $ 36.2 $ 5.4
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of First Allmerica Financial Life Insurance Company ("FAFLIC") which
is a wholly-owned subsidiary of Allmerica Financial Corporation ("AFC"). As
noted below, the consolidated accounts of AFLIAC include the accounts of certain
wholly-owned non-insurance subsidiaries (principally brokerage and investment
advisory subsidiaries).
Prior to July 1, 1999, AFLIAC was a wholly-owned subsidiary of SMA Financial
Corporation ("SMAFCO"), which was a wholly-owned subsidiary of FAFLIC. Effective
July 1, 1999 and in connection with AFC's restructuring activities, SMAFCO was
renamed Allmerica Asset Management , Inc. ("AAM") and contributed it's ownership
of AFLIAC to FAFLIC. AAM also contributed Allmerica Investments, Inc., Allmerica
Investment Management Company, Inc., Allmerica Financial Investment Management
Services, Inc., and Allmerica Financial Services Insurance Agency, Inc., to
AFLIAC in exchange for one share of AFLIAC common stock. The equity of these
four companies on July 1, 1999 was $11.8 million. For the six months ended
December 31, 1999, the subsidiaries of AFLIAC had total revenue of $35.5 million
and total benefits, losses and expenses of $24.4 million. All significant
intercompany accounts and transactions have been eliminated.
In addition, effective November 1, 1999, the Company's consolidated financial
statements include five wholly-owned insurance agencies. These agencies are
Allmerica Investments Insurance Agency Inc. of Alabama, Allmerica Investments
Insurance Agency of Florida Inc., Allmerica Investment Insurance Agency Inc. of
Georgia, Allmerica Investment Insurance Agency Inc. of Kentucky, and Allmerica
Investments Insurance Agency Inc. of Mississippi.
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary effective
November 30, 1998. Its results of operations are included for eleven months of
1998 and for the month of December, 1997.
The statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities," the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
F-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there was one property remaining in the Company's real
estate portfolio, which is being actively marketed. This asset is carried at the
estimated fair value less costs of disposal. Depreciation is not recorded on
this asset while it is held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other than temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the
F-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated total revenues over the contract periods based upon the same
assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of variable annuity and variable
life insurance contractholders. Assets consist principally of bonds, common
stocks, mutual funds, and short-term obligations at market value. The investment
income, gains and losses of these accounts generally accrue to the
contractholders and, therefore, are not included in the Company's net income.
Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for individual life and annuity policies, and are based upon
estimates as to future investment yield, mortality and withdrawals that include
provisions for adverse deviation. Future policy benefits for individual life
insurance and annuity policies are computed using interest rates ranging from
3.0% to 6.0% for life insurance and 3 1/2% to 9 1/2% for annuities. Mortality,
morbidity and withdrawal assumptions for all policies are based on the Company's
own experience and industry standards. Liabilities for universal life, variable
universal life and variable annuities include deposits received from customers
and investment earnings on their fund balances, less administrative charges.
Universal life fund balances are also assessed mortality and surrender charges.
Liabilities for variable annuities include a reserve for benefit claims in
excess of a guaranteed minimum fund value.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity and
interest which provide a margin for adverse deviation. Benefit liabilities for
disabled lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims and losses are estimates of payments to be
made for reported claims and estimates of claims incurred but not reported for
individual life and disability income policies. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
F-8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life insurance and individual and group annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual disability income insurance premiums are
recognized as revenue over the related contract periods. The unexpired portion
of these premiums is recorded as unearned premiums. Benefits, losses and related
expenses are matched with premiums, resulting in their recognition over the
lives of the contracts. This matching is accomplished through the provision for
future benefits, estimated and unpaid losses and amortization of deferred policy
acquisition costs. Revenues for investment-related products consist of net
investment income and contract charges assessed against the fund values. Related
benefit expenses include annuity benefit claims in excess of a guaranteed
minimum fund value, and net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). These differences result primarily from policy reserves,
policy acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. OTHER INCOME AND OTHER OPERATING EXPENSES
Other income and other operating expenses for the year ended December 31, 1999
include investment management and brokerage income and sub-advisory expenses
arising from the activities of the non-insurance subsidiaries that were
transferred to AFLIAC during 1999, as more fully described in Note 1A.
F-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
K. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (an indirect wholly-owned
subsidiary of Allmerica Financial Corporation) years beginning after June 15,
2000. The Company is currently assessing the impact of adoption of Statement No.
133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $9.8 million through December 31, 1998. The adoption of SOP 98-1 did
not have a material effect on the results of operations or financial position
for the three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The adoption of this statement had no effect on the results
of operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. AFLIAC consists
of one segment, Allmerica Financial Services, which underwrites and distributes
variable annuities and variable universal life insurance via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). Statement No. 130 establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and
F-10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 130 for the first quarter of 1998, which resulted
primarily in reporting unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
L. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. SIGNIFICANT TRANSACTIONS
During 1999, AFLIAC's parent contributed $11.8 million of additional paid-in
capital to the Company in the form of four subsidiaries as disclosed in Note 1A
above. These subsidiaries consisted of assets of $22.0 million, of which $14.6
million was cash and cash equivalents, and liabilities of $10.2 million. During
1999, 1998 and 1997, SMAFCO contributed $4.0 million, $21.0 million, and $40.6
million respectively, of additional paid-in capital to the Company. The nature
of the 1997 contribution was $19.2 million in cash and $21.4 million in other
assets including Somerset Square, Inc.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement did not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.2 $ 0.2 $-- $ 5.4
States and political subdivisions....... 12.4 0.1 -- 12.5
Foreign governments..................... 38.6 0.9 0.6 38.9
Corporate fixed maturities.............. 1,180.0 10.3 38.9 1,151.4
Mortgage-backed securities.............. 118.0 1.1 2.7 116.4
-------- ----- ----- --------
Total fixed maturities.................. $1,354.2 $12.6 $42.2 $1,324.6
======== ===== ===== ========
Equity securities....................... $ 25.2 $ 7.4 $-- $ 32.6
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
-------- ----- ----- --------
Total fixed maturities.................. $1,284.6 $66.4 $20.6 $1,330.4
======== ===== ===== ========
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1999, the amortized
cost and market value of these assets on deposit in New York were
$196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $4.1 million and
$4.2 million were on deposit with various state and governmental authorities at
December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 54.5 $ 54.8
Due after one year through five years....................... 349.1 347.2
Due after five years through ten years...................... 652.9 637.1
Due after ten years......................................... 297.7 285.5
-------- --------
Total....................................................... $1,354.2 $1,324.6
======== ========
</TABLE>
F-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- ------
<S> <C> <C> <C>
1999
Net appreciation, beginning of year......................... $ 16.2 $ 7.9 $ 24.1
------ ------ ------
Net depreciation on available-for-sale securities........... (75.3) (0.2) (75.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 34.4 -- 34.4
Benefit from deferred federal income taxes.................. 14.3 0.1 14.4
------ ------ ------
(26.6) (0.1) (26.7)
------ ------ ------
Net (depreciation) appreciation, end of year................ $(10.4) $ 7.8 $ (2.6)
====== ====== ======
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
------ ------ ------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
------ ------ ------
(5.9) (8.5) (14.4)
------ ------ ------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
====== ====== ======
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
------ ------ ------
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
------ ------ ------
9.4 8.6 18.0
------ ------ ------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
====== ====== ======
</TABLE>
(1) Includes net (depreciation) appreciation on other investments of $(3.1)
million, $0.9 million, and $1.3 million in 1999, 1998, and 1997,
respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans are diversified by property type and location. The real
estate investment was obtained by an affiliate through foreclosure. Mortgage
loans are collateralized by the related properties and generally are no more
than 75% of the property's value at the time the original loan is made.
The carrying values of mortgage loans and the real estate investment net of
applicable reserves were $234.6 million and $244.5 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $2.4 million and
$3.3 million at December 31, 1999 and 1998, respectively.
F-13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there was one property remaining in the Company's
real estate portfolio which is being actively marketed. Depreciation is not
recorded on this asset while it is held for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $136.1 $129.2
Residential............................................... 18.5 18.9
Retail.................................................... 28.3 37.4
Industrial/warehouse...................................... 51.1 59.2
Other..................................................... 3.0 3.1
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
Geographic region:
South Atlantic............................................ $ 60.7 $ 55.5
Pacific................................................... 76.2 80.0
East North Central........................................ 35.9 41.4
Middle Atlantic........................................... 20.1 22.5
New England............................................... 29.9 26.9
West South Central........................................ 1.9 6.7
Other..................................................... 12.3 14.8
Valuation allowances...................................... (2.4) (3.3)
------ ------
Total....................................................... $234.6 $244.5
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows:
2000 -- $40.8 million; 2001 -- $6.3 million; 2002 -- $11.2 million; 2003 --
$0.5 million; 2004 -- $23.7 million; and $141.2 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1999, the Company did not refinance any mortgage loans
based on terms which differed from those granted to new borrowers.
F-14
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $ 3.3 $(0.8) $0.1 $2.4
===== ===== ==== ====
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $3.3
===== ===== ==== ====
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $1.2 $9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ----- ---- ----
Total................................................... $11.2 $ 4.8 $6.6 $9.4
===== ===== ==== ====
</TABLE>
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $5.4 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $11.4 million and $15.3 million, with
related reserves of $0.7 million and $1.5 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $14.3 million, $17.0 million
and $19.8 million, with related interest income while such loans were impaired
of $1.5 million, $2.0 million and $2.2 million as of December 31, 1999, 1998 and
1997, respectively.
D. OTHER
At December 31, 1999 and 1998, AFLIAC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.2 $107.7 $130.0
Mortgage loans.............................................. 19.0 25.5 20.4
Equity securities........................................... 0.4 0.3 1.3
Policy loans................................................ 12.4 11.7 10.8
Real estate and other long-term investments................. 4.0 4.8 4.9
Short-term investments...................................... 9.5 4.2 1.4
------ ------ ------
Gross investment income................................. 152.5 154.2 168.8
Less investment expenses.................................... (2.3) (2.9) (4.6)
------ ------ ------
Net investment income................................... $150.2 $151.3 $164.2
====== ====== ======
</TABLE>
F-15
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the Company had fixed maturities with a carrying value of
$0.8 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. There were no mortgage loans or fixed maturities on
non-accrual status at December 31, 1998. The effect of non-accruals, compared
with amounts that would have been recognized in accordance with the original
terms of the investments, was a reduction in net income of $1.2 million in 1999,
and had no impact in 1998 and 1997.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.2 million, $12.6 million and $21.1 million at December 31,
1999, 1998 and 1997, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $0.9 million, $1.4 million and $1.9 million in 1999,
1998, and 1997, respectively. Actual interest income on these loans included in
net investment income aggregated $1.1 million, $1.8 million and $2.1 million in
1999, 1998 and 1997, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the year ended December 31, 1999.
Included in other long-term investments is income from limited partnerships of
$0.9 million and $0.7 million in 1999 and 1998, respectively. There was no
income from limited partnerships included in other long-term investments in
1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized (losses) gains on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- -----
<S> <C> <C> <C>
Fixed maturities............................................ $(18.8) $(6.1) $ 3.0
Mortgage loans.............................................. 0.8 8.0 (1.1)
Equity securities........................................... 8.5 15.7 0.5
Real estate and other....................................... 0.8 2.4 0.5
------ ----- -----
Net realized investment (losses) gains...................... $ (8.7) $20.0 $ 2.9
====== ===== =====
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------- ------------- ----- ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $162.3 $ 2.7 $4.3
Equity securities........................................... $ 30.4 $10.1 $1.6
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $2.0
Equity securities........................................... $ 52.6 $17.5 $0.9
1997
Fixed maturities............................................ $702.9 $11.4 $5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
</TABLE>
F-16
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the consolidated statements of comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (net
of taxes of $(18.0) million, $(5.6) million and
$10.2 million in 1999, 1998 and 1997, respectively)........ $(33.4) $ (8.2) $20.3
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes of $(3.6) million,
$3.4 million and $1.2 million in 1999, 1998 and 1997,
respectively).............................................. (6.7) 6.2 2.3
------ ------ -----
Other comprehensive (loss) income........................... $(26.7) $(14.4) $18.0
====== ====== =====
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases, may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
F-17
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
FIXED ANNUITY AND OTHER CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under individual fixed annuity
contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 132.9 $ 132.9 $ 217.9 $ 217.9
Fixed maturities.......................................... 1,324.6 1,324.6 1,330.4 1,330.4
Equity securities......................................... 32.6 32.6 31.8 31.8
Mortgage loans............................................ 223.7 222.8 230.0 241.9
Policy loans.............................................. 166.8 166.8 151.5 151.5
-------- -------- -------- --------
$1,880.6 $1,879.7 $1,961.6 $1,973.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $1,048.0 $1,014.9 $1,069.4 $1,034.6
Supplemental contracts without life contingencies......... 25.0 25.0 21.0 21.0
Other individual contract deposit funds................... 19.3 19.3 17.0 17.0
-------- -------- -------- --------
$1,092.3 $1,059.2 $1,107.4 $1,072.6
======== ======== ======== ========
</TABLE>
F-18
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense in
the consolidated statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense
Current................................................... $15.5 $22.1 $13.9
Deferred.................................................. 30.5 11.8 7.1
----- ----- -----
Total....................................................... $46.0 $33.9 $21.0
===== ===== =====
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
The deferred income tax (asset) liability represents the tax effects of
temporary differences:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------- -------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $(233.7) $(205.1)
Deferred acquisition costs................................ 339.7 278.8
Investments, net.......................................... (4.0) 12.5
Litigation reserves....................................... (4.3) (7.4)
Bad debt reserve.......................................... -- (0.4)
Other, net................................................ (2.9) 0.4
------- -------
Deferred tax liability, net................................. $ 94.8 $ 78.8
======= =======
</TABLE>
Gross deferred income tax liabilities totaled $360.4 million and $291.7 million
at December 31, 1999 and 1998, respectively. Gross deferred income tax assets
totaled $265.6 million and $212.9 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The Company has appealed certain adjustments proposed by the IRS with respect
federal income tax returns for 1992, 1993, and 1994 for the FAFLIC/AFLIAC
consolidated group. Also, certain adjustments proposed by the IRS with respect
to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983 remain
unresolved. If upheld, these adjustments would result in additional payments;
however, the Company will vigorously defend its position with respect to these
adjustments. In the Company's opinion, adequate tax liabilities have
F-19
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $173.9 million, $145.4 million and $124.1 million in
1999, 1998 and 1997 respectively. The net amounts payable to FAFLIC and
affiliates for accrued expenses and various other liabilities and receivables
were $48.6 million and $16.4 million at December 31, 1999 and 1998,
respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
No dividends were declared by the Company during 1999, 1998 or 1997. During
2000, AFLIAC could pay dividends of $34.3 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement
No. 113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain
F-20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
standard terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
Amounts recoverable from reinsurers at December 31, 1999 and 1998 for the
disability income business were $241.5 million and $230.8 million, respectively,
traditional life were $9.7 million and $11.4 million, respectively, and
universal and variable universal life were $36.0 million and $65.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 41.3 $ 45.5 $ 48.8
Assumed................................................... -- -- 2.6
Ceded..................................................... (40.8) (45.0) (28.6)
------ ------ ------
Net premiums................................................ $ 0.5 $ 0.5 $ 22.8
====== ====== ======
Insurance and other individual policy benefits, claims and
losses:
Direct.................................................... $210.6 $204.0 $226.0
Assumed................................................... -- -- 4.2
Ceded..................................................... (37.0) (50.1) (42.4)
------ ------ ------
Net policy benefits, claims and losses...................... $173.6 $153.9 $187.8
====== ====== ======
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition cost
asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 950.5 $765.3 $632.7
Acquisition expenses deferred............................. 219.5 242.4 184.2
Amortized to expense during the year...................... (49.8) (64.6) (53.1)
Adjustment to equity during the year...................... 36.2 7.4 (10.2)
Adjustment for cession of disability income insurance..... -- -- (38.6)
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- -- 50.3
-------- ------ ------
Balance at end of year...................................... $1,156.4 $950.5 $765.3
======== ====== ======
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims and losses as new information becomes available
and further events occur which may impact the resolution of
F-21
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unsettled claims. Changes in prior estimates are recorded in results of
operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims and losses
related to the Company's disability income business was $240.7 million and
$233.3 million at December 31, 1999 and 1998. Due to the reinsurance agreement
whereby the Company has ceded substantially all of its disability income
business to a highly rated reinsurer, the Company believes that no material
adverse development of losses will occur. However, the amount of the liabilities
could be revised in the near term if the estimates used in determining the
liability are revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement. The court granted preliminary approval of the settlement
on December 4, 1998. On May 19, 1999, the Court issued an order certifying the
class for settlement purposes and granting final approval of the settlement
agreement. AFLIAC recognized a $21.0 million pre-tax expense during the third
quarter of 1998 related to this litigation. Although the Company believes that
this expense reflects appropriate recognition of its obligation under the
settlement, this estimate assumes the availability of insurance coverage for
certain claims, and the estimate may be revised based on the amount of
reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion, based on the advice of
legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's consolidated financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
F-22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Although the Company does not believe that there is a material contingency
associated with the Year 2000 issue, there can be no assurance that exposure for
material contingencies will not arise.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. In 1999, 49 out of 50 states have adopted the
National Association of Insurance Commissioners proposed Codification, which
provides for uniform statutory accounting principles. These principles are
effective January 1, 2001. The Company is currently assessing the impact that
the adoption of Codification will have on its statutory results of operations
and financial position. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ 5.0 $ (8.2) $ 31.5
Statutory shareholder's surplus............................. $342.7 $312.2 $309.7
</TABLE>
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Policyowners of the Group VEL Account of Allmerica Financial
Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Group VEL Account of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1999, the results of each of their operations
and the changes in each of their net assets for each of the periods indicated,
in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of Allmerica Financial
Life Insurance and Annuity Company; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT
INVESTMENT MONEY EQUITY GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MARKET INDEX BOND GROWTH
---------- ------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $4,668,521 $24,452,781 $5,440,130 $2,458,780 $ 25,703 $1,376,807
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- 150 -- -- --
---------- ----------- ---------- ---------- --------- ----------
Total assets.............................. 4,668,521 24,452,781 5,440,280 2,458,780 25,703 1,376,807
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 29 9 -- 212 3 5
---------- ----------- ---------- ---------- --------- ----------
Net assets................................ $4,668,492 $24,452,772 $5,440,280 $2,458,568 $ 25,700 $1,376,802
========== =========== ========== ========== ========= ==========
Net asset distribution by category:
Variable life policies.................... $4,668,492 $24,452,772 $5,440,280 $2,458,568 $ 25,700 $1,376,802
========== =========== ========== ========== ========= ==========
Units outstanding, December 31, 1999........ 1,682,116 18,201,719 4,272,526 811,422 19,878 512,135
Net asset value per unit, December 31,
1999...................................... $ 2.775368 $ 1.343432 $ 1.273317 $ 3.029949 $1.292882 $2.688360
<CAPTION>
SELECT SELECT
SELECT GROWTH VALUE
GROWTH AND INCOME OPPORTUNITY
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $19,730,630 $ 360,630 $21,143,601
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
----------- --------- -----------
Total assets.............................. 19,730,630 360,630 21,143,601
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 255 -- 75
----------- --------- -----------
Net assets................................ $19,730,375 $ 360,630 $21,143,526
=========== ========= ===========
Net asset distribution by category:
Variable life policies.................... $19,730,375 $ 360,630 $21,143,526
=========== ========= ===========
Units outstanding, December 31, 1999........ 5,817,688 145,870 11,920,865
Net asset value per unit, December 31,
1999...................................... $ 3.391446 $2.472277 $ 1.773657
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SELECT SELECT SELECT FIDELITY
INTERNATIONAL SELECT CAPITAL EMERGING STRATEGIC VIP HIGH FIDELITY VIP
EQUITY APPRECIATION MARKETS GROWTH INCOME EQUITY-INCOME
------------- -------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $6,399,666 $ 416,787 $ 38,426 $ 14,425 $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- 229,432 392,179
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- 2
---------- --------- --------- --------- --------- ---------
Total assets.............................. 6,399,666 416,787 38,426 14,425 229,432 392,181
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 1 -- 3 -- -- --
---------- --------- --------- --------- --------- ---------
Net assets................................ $6,399,665 $ 416,787 $ 38,423 $ 14,425 $ 229,432 $ 392,181
========== ========= ========= ========= ========= =========
Net asset distribution by category:
Variable life policies.................... $6,399,665 $ 416,787 $ 38,423 $ 14,425 $ 229,432 $ 392,181
========== ========= ========= ========= ========= =========
Units outstanding, December 31, 1999........ 2,891,414 168,585 22,820 12,251 149,451 188,109
Net asset value per unit, December 31,
1999...................................... $ 2.213334 $2.472283 $1.683890 $1.177443 $1.535166 $2.084855
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP VIP VIP II ASSET
GROWTH OVERSEAS MANAGER
---------- --------- ------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 2,011,071 121,440 942,626
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
---------- --------- ---------
Total assets.............................. 2,011,071 121,440 942,626
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 6 -- 5
---------- --------- ---------
Net assets................................ $2,011,065 $ 121,440 $ 942,621
========== ========= =========
Net asset distribution by category:
Variable life policies.................... $2,011,065 $ 121,440 $ 942,621
========== ========= =========
Units outstanding, December 31, 1999........ 594,798 55,613 474,523
Net asset value per unit, December 31,
1999...................................... $ 3.381090 $2.183667 $1.986462
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
T. ROWE PRICE DGPF DGPF
FIDELITY VIP II INTERNATIONAL GROWTH & DGPF Capital
INDEX 500 STOCK INCOME(a) Delchester(a) Reserves(a)
--------------- ------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ 52,967,255 -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- 670,974 -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- --
----------- --------- --------- --------- ---------
Total assets.............................. 52,967,255 670,974 -- -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 123 6 -- -- --
----------- --------- --------- --------- ---------
Net assets................................ $52,967,132 $ 670,968 $ -- $ -- $ --
=========== ========= ========= ========= =========
Net asset distribution by category:
Variable life policies.................... $52,967,132 $ 670,968 $ -- $ -- $ --
=========== ========= ========= ========= =========
Units outstanding, December 31, 1999........ 46,033,157 377,847 -- -- --
Net asset value per unit, December 31,
1999...................................... $ 1.150630 $1.775768 $1.000000 $1.000000 $1.000000
<CAPTION>
DGPF DGPF DGPF
Cash DGPF Delaware International
Reserves(a) DelCap(a) Balanced(a) Equity
----------- --------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- 44,794,844
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- --
--------- --------- --------- -----------
Total assets.............................. -- -- -- 44,794,844
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- 3
--------- --------- --------- -----------
Net assets................................ $ -- $ -- $ -- $44,794,841
========= ========= ========= ===========
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ -- $44,794,841
========= ========= ========= ===========
Units outstanding, December 31, 1999........ -- -- -- 30,064,075
Net asset value per unit, December 31,
1999...................................... $1.000000 $1.000000 $1.000000 $ 1.489979
</TABLE>
(a) For the year ended 12/31/99, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DGPF DGPF DGPF DGPF
SMALL CAP DGPF Strategic DGPF Emerging Social
VALUE(a) Trend(a) Income(a) Devon(a) Markets(a) Awareness(a)
---------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- -- -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- -- -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total assets.............................. -- -- -- -- -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net assets................................ $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= ========= =========
Units outstanding, December 31, 1999........ -- -- -- -- -- --
Net asset value per unit, December 31,
1999...................................... $1.000000 $1.000000 $1.000000 $1.000000 $1.000000 $1.000000
<CAPTION>
DGPF
DGPF Aggressive DGPF U.S.
REIT(a) Growth(a) Growth(a)
--------- ---------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
--------- --------- ---------
Total assets.............................. -- -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
--------- --------- ---------
Net assets................................ $ -- $ -- $ --
========= ========= =========
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ --
========= ========= =========
Units outstanding, December 31, 1999........ -- -- --
Net asset value per unit, December 31,
1999...................................... $1.000000 $1.000000 $1.000000
</TABLE>
(a) For the year ended 12/31/99, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESCO INVESCO MFVAT U.S. MFVAT
VIF EQUITY VIF TOTAL MORGAN STANLEY GOVERNMENT Asset
INCOME* RETURN FIXED INCOME INCOME(a) Allocation(a)
---------- ---------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. 10,555 27,685 -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- 29,912,451 -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- 12 -- --
--------- --------- ----------- --------- ---------
Total assets.............................. 10,555 27,685 29,912,463 -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- --
--------- --------- ----------- --------- ---------
Net assets................................ $ 10,555 $ 27,685 $29,912,463 $ -- $ --
========= ========= =========== ========= =========
Net asset distribution by category:
Variable life policies.................... $ 10,555 $ 27,685 $29,912,463 $ -- $ --
========= ========= =========== ========= =========
Units outstanding, December 31, 1999........ 5,713 19,938 28,095,948 -- --
Net asset value per unit, December 31,
1999...................................... $1.847415 $1.388528 $ 1.064654 $1.000000 $1.000000
<CAPTION>
MFVAT
Growth MFVAT MFVAT
& Capital International
Income(a) Growth(a) Equity(a)
--------- --------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust.......................... $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............ -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investments in shares of Delaware Group
Premium Fund.............................. -- -- --
Investments in shares of INVESCO Variable
Investment Funds, Inc. (VIF).............. -- -- --
Investment in shares of Morgan Stanley
Universal Funds, Inc...................... -- -- --
Investments in shares of Mutual Fund
Variable Annuity Trust (MFVAT)............ -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
--------- --------- ---------
Total assets.............................. -- -- --
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- --
--------- --------- ---------
Net assets................................ $ -- $ -- $ --
========= ========= =========
Net asset distribution by category:
Variable life policies.................... $ -- $ -- $ --
========= ========= =========
Units outstanding, December 31, 1999........ -- -- --
Net asset value per unit, December 31,
1999...................................... $1.000000 $1.000000 $1.000000
</TABLE>
* Name changed. See Note 1.
(a) For the year ended 12/31/99, there were no transactions.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 23,481 $ 24,155 $ 19,495 $ 1,343,154 $882,578 $611,287
EXPENSES:
Mortality and expense risk
fees......................... 5,592 12,008 6,270 117,498 92,564 61,160
-------- -------- -------- ----------- -------- --------
Net investment income
(loss)..................... 17,889 12,147 13,225 1,225,656 790,014 550,127
-------- -------- -------- ----------- -------- --------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 286,696 21,129 282,628 18,099 -- --
Net realized gain (loss) from
sales of investments......... 47,530 (4,698) 22,096 (42,607) 20,005 7,069
-------- -------- -------- ----------- -------- --------
Net realized gain (loss)..... 334,226 16,431 304,724 (24,508) 20,005 7,069
Net unrealized gain (loss)..... 456,438 330,418 (57,127) (1,572,308) 166,355 282,868
-------- -------- -------- ----------- -------- --------
Net realized and unrealized
gain (loss)................ 790,664 346,849 247,597 (1,596,816) 186,360 289,937
-------- -------- -------- ----------- -------- --------
Net increase (decrease) in
net assets from
operations................. $808,553 $358,996 $260,822 $ (371,160) $976,374 $840,064
======== ======== ======== =========== ======== ========
<CAPTION>
MONEY MARKET EQUITY INDEX
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $63,607 $222,239 $168,681 $ 130,745 $ 340,554 $ 99,982
EXPENSES:
Mortality and expense risk
fees......................... 7,616 21,736 24,667 97,822 122,802 49,283
------- -------- -------- ----------- ---------- ----------
Net investment income
(loss)..................... 55,991 200,503 144,014 32,923 217,752 50,699
------- -------- -------- ----------- ---------- ----------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... -- -- -- 3,576 1,091,932 231,984
Net realized gain (loss) from
sales of investments......... -- -- -- 11,658,579 313,038 57,606
------- -------- -------- ----------- ---------- ----------
Net realized gain (loss)..... -- -- -- 11,662,155 1,404,970 289,590
Net unrealized gain (loss)..... -- -- -- (7,166,459) 5,974,791 1,759,333
------- -------- -------- ----------- ---------- ----------
Net realized and unrealized
gain (loss)................ -- -- -- 4,495,696 7,379,761 2,048,923
------- -------- -------- ----------- ---------- ----------
Net increase (decrease) in
net assets from
operations................. $55,991 $200,503 $144,014 $ 4,528,619 $7,597,513 $2,099,622
======= ======== ======== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $1,412 $ 911 $837 $ -- $ -- $ --
EXPENSES:
Mortality and expense risk
fees......................... 78 103 19 5,695 3,950 706
------ ------ ---- -------- ------- -------
Net investment income
(loss)..................... 1,334 808 818 (5,695) (3,950) (706)
------ ------ ---- -------- ------- -------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... -- -- -- -- -- 17,916
Net realized gain (loss) from
sales of investments......... (153) 926 1 16,919 (3,058) 748
------ ------ ---- -------- ------- -------
Net realized gain (loss)..... (153) 926 1 16,919 (3,058) 18,664
Net unrealized gain (loss)..... (596) 83 (88) 356,020 42,784 3,863
------ ------ ---- -------- ------- -------
Net realized and unrealized
gain (loss)................ (749) 1,009 (87) 372,939 39,726 22,527
------ ------ ---- -------- ------- -------
Net increase (decrease) in
net assets from
operations................. $ 585 $1,817 $731 $367,244 $35,776 $21,821
====== ====== ==== ======== ======= =======
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 8,328 $ 7,079 $ 20,160 $ 3,501 $ 2,753 $1,134
EXPENSES:
Mortality and expense risk
fees......................... 83,487 58,229 39,740 1,862 1,576 365
---------- ---------- ---------- ------- ------- ------
Net investment income
(loss)..................... (75,159) (51,150) (19,580) 1,639 1,177 769
---------- ---------- ---------- ------- ------- ------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 529,243 93,491 363,902 23,247 922 13,936
Net realized gain (loss) from
sales of investments......... 518,323 576,009 51,101 1,849 1,778 296
---------- ---------- ---------- ------- ------- ------
Net realized gain (loss)..... 1,047,566 669,500 415,003 25,096 2,700 14,232
Net unrealized gain (loss)..... 3,239,541 2,339,939 1,431,596 22,927 25,056 (5,403)
---------- ---------- ---------- ------- ------- ------
Net realized and unrealized
gain (loss)................ 4,287,107 3,009,439 1,846,599 48,023 27,756 8,829
---------- ---------- ---------- ------- ------- ------
Net increase (decrease) in
net assets from
operations................. $4,211,948 $2,958,289 $1,827,019 $49,662 $28,933 $9,598
========== ========== ========== ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY SELECT INTERNATIONAL EQUITY
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
----------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 118 $ 5,317 $ 1,289 $ -- $ 117,829 $131,715
EXPENSES:
Mortality and expense risk
fees......................... 64,483 2,543 633 42,211 53,990 35,909
----------- ------- ------- ---------- ---------- --------
Net investment income
(loss)..................... (64,365) 2,774 656 (42,211) 63,839 95,806
----------- ------- ------- ---------- ---------- --------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 1,173,968 1,651 30,900 -- -- 182,156
Net realized gain (loss) from
sales of investments......... (58,716) (3,746) 700 803,256 77,352 11,256
----------- ------- ------- ---------- ---------- --------
Net realized gain (loss)..... 1,115,252 (2,095) 31,600 803,256 77,352 193,412
Net unrealized gain (loss)..... (2,332,303) 16,497 (5,610) 900,525 1,085,145 (15,069)
----------- ------- ------- ---------- ---------- --------
Net realized and unrealized
gain (loss)................ (1,217,051) 14,402 25,990 1,703,781 1,162,497 178,343
----------- ------- ------- ---------- ---------- --------
Net increase (decrease) in
net assets from
operations................. $(1,281,416) $17,176 $26,646 $1,661,570 $1,226,336 $274,149
=========== ======= ======= ========== ========== ========
<CAPTION>
SELECT EMERGING MARKETS
SELECT CAPITAL APPRECIATION
FOR THE YEAR ENDED FOR THE FOR THE
DECEMBER 31, YEAR ENDED PERIOD
-------------------------------- DECEMBER 31, 11/9/98* TO
1999 1998 1997 1999 12/31/98
-------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ -- $ -- $ -- $ 100 $ --
EXPENSES:
Mortality and expense risk
fees......................... 1,681 914 204 40 --
------- -------- ------ ------ ---------------
Net investment income
(loss)..................... (1,681) (914) (204) 60 --
------- -------- ------ ------ ---------------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 412 37,550 -- -- --
Net realized gain (loss) from
sales of investments......... 28 (803) 544 21 --
------- -------- ------ ------ ---------------
Net realized gain (loss)..... 440 36,747 544 21 --
Net unrealized gain (loss)..... 74,213 (13,375) 6,529 5,716 --
------- -------- ------ ------ ---------------
Net realized and unrealized
gain (loss)................ 74,653 23,372 7,073 5,737 --
------- -------- ------ ------ ---------------
Net increase (decrease) in
net assets from
operations................. $72,972 $ 22,458 $6,869 $5,797 $ --
======= ======== ====== ====== ===============
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SELECT STRATEGIC FIDELITY VIP HIGH INCOME
GROWTH FOR THE YEAR ENDED
FOR THE DECEMBER 31,
PERIOD 3/5/99* --------------------------------
TO 12/31/99 1999 1998 1997
---------------- -------- -------- --------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 40 $ 8,271 $ 3,501 $ 351
EXPENSES:
Mortality and expense risk fees........... 20 783 354 119
---- ------- ------- ------
Net investment income (loss)............ 20 7,488 3,147 232
---- ------- ------- ------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 309 2,225 43
Net realized gain (loss) from sales of
investments............................. (17) (2,862) (683) 94
---- ------- ------- ------
Net realized gain (loss)................ (17) (2,553) 1,542 137
Net unrealized gain (loss)................ 918 2,236 (8,346) 2,892
---- ------- ------- ------
Net realized and unrealized gain
(loss)................................ 901 (317) (6,804) 3,029
---- ------- ------- ------
Net increase (decrease) in net assets
from
operations............................ $921 $ 7,171 $(3,657) $3,261
==== ======= ======= ======
<CAPTION>
FIDELITY VIP EQUITY-INCOME FIDELITY VIP GROWTH
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $2,402 $ 898 $ 91 $ 2,233 $ 1,819 $ 2,224
EXPENSES:
Mortality and expense risk fees........... 1,479 569 177 6,781 2,312 1,311
------ ------- ------ -------- -------- -------
Net investment income (loss)............ 923 329 (86) (4,548) (493) 913
------ ------- ------ -------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 5,309 3,197 457 140,400 47,583 9,956
Net realized gain (loss) from sales of
investments............................. 3,125 802 242 114,230 37,911 16,498
------ ------- ------ -------- -------- -------
Net realized gain (loss)................ 8,434 3,999 699 254,630 85,494 26,454
Net unrealized gain (loss)................ (277) 5,752 5,483 242,219 115,549 43,944
------ ------- ------ -------- -------- -------
Net realized and unrealized gain
(loss)................................ 8,157 9,751 6,182 496,849 201,043 70,398
------ ------- ------ -------- -------- -------
Net increase (decrease) in net assets
from
operations............................ $9,080 $10,080 $6,096 $492,301 $200,550 $71,311
====== ======= ====== ======== ======== =======
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II
FOR THE ASSET MANAGER
YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 1,054 $1,056 $ 344 $20,569 $11,971 $ 6,739
EXPENSES:
Mortality and expense risk fees........... 502 338 205 1,247 2,662 994
------- ------ ------ ------- ------- -------
Net investment income (loss)............ 552 718 139 19,322 9,309 5,745
------- ------ ------ ------- ------- -------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ 1,699 3,112 1,365 26,054 35,913 16,905
Net realized gain (loss) from sales of
investments............................. 1,721 165 201 1,785 5,268 499
------- ------ ------ ------- ------- -------
Net realized gain (loss)................ 3,420 3,277 1,566 27,839 41,181 17,404
Net unrealized gain (loss)................ 30,111 1,086 285 12,862 15,917 28,899
------- ------ ------ ------- ------- -------
Net realized and unrealized gain
(loss)................................ 33,531 4,363 1,851 40,701 57,098 46,303
------- ------ ------ ------- ------- -------
Net increase (decrease) in net assets
from
operations............................ $34,083 $5,081 $1,990 $60,023 $66,407 $52,048
======= ====== ====== ======= ======= =======
<CAPTION>
FIDELITY VIP II T. ROWE PRICE
INDEX 500 INTERNATIONAL STOCK
FOR THE YEAR ENDED
FOR THE DECEMBER 31,
PERIOD --------------------------------
5/4/99* TO 12/31/99 1999 1998 1997
------------------- -------- -------- --------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ -- $ 2,334 $ 4,272 $ 898
EXPENSES:
Mortality and expense risk fees........... 56,677 2,485 1,337 560
---------- -------- ------- ------
Net investment income (loss)............ (56,677) (151) 2,935 338
---------- -------- ------- ------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................ -- 7,335 1,508 1,272
Net realized gain (loss) from sales of
investments............................. 1,274 1,538 318 183
---------- -------- ------- ------
Net realized gain (loss)................ 1,274 8,873 1,826 1,455
Net unrealized gain (loss)................ 4,566,606 144,131 23,676 (326)
---------- -------- ------- ------
Net realized and unrealized gain
(loss)................................ 4,567,880 153,004 25,502 1,129
---------- -------- ------- ------
Net increase (decrease) in net assets
from
operations............................ $4,511,203 $152,853 $28,437 $1,467
========== ======== ======= ======
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
INVESCO VIF
DGPF INTERNATIONAL EQUITY EQUITY INCOME**
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 183,862 $ 11,680 $ 118 $ 123 $ 150 $ 112
EXPENSES:
Mortality and expense risk
fees......................... 50,747 16,877 251 39 38 23
---------- -------- ----- ------ ------ ------
Net investment income
(loss)..................... 133,115 (5,197) (133) 84 112 89
---------- -------- ----- ------ ------ ------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 13,428 -- -- 55 311 398
Net realized gain (loss) from
sales of investments......... 20,862 7,893 164 234 401 25
---------- -------- ----- ------ ------ ------
Net realized gain (loss)..... 34,290 7,893 164 289 712 423
Net unrealized gain (loss)..... 2,827,542 442,761 (695) 947 312 752
---------- -------- ----- ------ ------ ------
Net realized and unrealized
gain (loss)................ 2,861,832 450,654 (531) 1,236 1,024 1,175
---------- -------- ----- ------ ------ ------
Net increase (decrease) in
net assets from
operations................. $2,994,947 $445,457 $(664) $1,320 $1,136 $1,264
========== ======== ===== ====== ====== ======
<CAPTION>
INVESCO VIF MORGAN STANLEY FIXED INCOME
TOTAL RETURN
FOR THE YEAR ENDED FOR THE FOR THE
DECEMBER 31, YEAR ENDED PERIOD
-------------------------------- DECEMBER 31, 2/17/98* TO
1999 1998 1997 1999 12/31/98
-------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends...................... $ 642 $1,276 $1,045 $ 1,356,031 $648,460
EXPENSES:
Mortality and expense risk
fees......................... 149 257 137 78,341 35,898
------- ------ ------ ----------- --------
Net investment income
(loss)..................... 493 1,019 908 1,277,690 612,562
------- ------ ------ ----------- --------
REALIZED AND UNREALIZED GAIN
(LOSS)
ON INVESTMENTS:
Realized gain distributions
from portfolio sponsors...... 107 1,325 245 3,424 256,451
Net realized gain (loss) from
sales of investments......... 4,008 553 31 (11,666) 8,635
------- ------ ------ ----------- --------
Net realized gain (loss)..... 4,115 1,878 276 (8,242) 265,086
Net unrealized gain (loss)..... (5,835) 2,122 5,287 (1,680,097) (179,067)
------- ------ ------ ----------- --------
Net realized and unrealized
gain (loss)................ (1,720) 4,000 5,563 (1,688,339) 86,019
------- ------ ------ ----------- --------
Net increase (decrease) in
net assets from
operations................. $(1,227) $5,019 $6,471 $ (410,649) $698,581
======= ====== ====== =========== ========
</TABLE>
* Date of initial investment.
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH
YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..................... $ 17,889 $ 12,147 $ 13,225
Net realized gain (loss)......................... 334,226 16,431 304,724
Net unrealized gain (loss)....................... 456,438 330,418 (57,127)
---------- ---------- ----------
Net increase (decrease) in net assets from
operations..................................... 808,553 358,996 260,822
---------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums..................................... 873,749 675,094 793,195
Terminations..................................... (337,479) (48,810) (2,053)
Insurance and other charges...................... (13,900) (7,692) (3,267)
Transfers between sub-accounts (including fixed
account), net.................................. 540,030 (72,668) 75,006
Other transfers from (to) the General Account.... 116,813 492 (6,615)
Net increase (decrease) in investment by
Sponsor........................................ -- -- --
---------- ---------- ----------
Net increase (decrease) in net assets from policy
transactions................................... 1,179,213 546,416 856,266
---------- ---------- ----------
Net increase (decrease) in net assets............ 1,987,766 905,412 1,117,088
NET ASSETS:
Beginning of year.................................. 2,680,726 1,775,314 658,226
---------- ---------- ----------
End of year........................................ $4,668,492 $2,680,726 $1,775,314
========== ========== ==========
<CAPTION>
INVESTMENT GRADE INCOME
YEAR ENDED
DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..................... $ 1,225,656 $ 790,014 $ 550,127
Net realized gain (loss)......................... (24,508) 20,005 7,069
Net unrealized gain (loss)....................... (1,572,308) 166,355 282,868
----------- ----------- ----------
Net increase (decrease) in net assets from
operations..................................... (371,160) 976,374 840,064
----------- ----------- ----------
FROM POLICY TRANSACTIONS:
Net premiums..................................... 8,011,892 2,981,137 9,313,499
Terminations..................................... (13,958) (53,707) --
Insurance and other charges...................... (633,839) (451,085) (447,871)
Transfers between sub-accounts (including fixed
account), net.................................. 2,113,615 2,055,119 138,291
Other transfers from (to) the General Account.... (6,858) 892 402
Net increase (decrease) in investment by
Sponsor........................................ -- (265) --
----------- ----------- ----------
Net increase (decrease) in net assets from policy
transactions................................... 9,470,852 4,532,091 9,004,321
----------- ----------- ----------
Net increase (decrease) in net assets............ 9,099,692 5,508,465 9,844,385
NET ASSETS:
Beginning of year.................................. 15,353,080 9,844,615 230
----------- ----------- ----------
End of year........................................ $24,452,772 $15,353,080 $9,844,615
=========== =========== ==========
<CAPTION>
MONEY MARKET
YEAR ENDED
DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..................... $ 55,991 $ 200,503 $ 144,014
Net realized gain (loss)......................... -- -- --
Net unrealized gain (loss)....................... -- -- --
---------- ------------ -----------
Net increase (decrease) in net assets from
operations..................................... 55,991 200,503 144,014
---------- ------------ -----------
FROM POLICY TRANSACTIONS:
Net premiums..................................... 6,325,820 1,928,083 30,656,799
Terminations..................................... (69,826) (47,901) (31)
Insurance and other charges...................... (709,087) (830,359) (704,864)
Transfers between sub-accounts (including fixed
account), net.................................. (391,608) (29,510,393) (1,673,588)
Other transfers from (to) the General Account.... (10,636) (771) 35
Net increase (decrease) in investment by
Sponsor........................................ -- -- --
---------- ------------ -----------
Net increase (decrease) in net assets from policy
transactions................................... 5,144,663 (28,461,341) 28,278,351
---------- ------------ -----------
Net increase (decrease) in net assets............ 5,200,654 (28,260,838) 28,422,365
NET ASSETS:
Beginning of year.................................. 239,626 28,500,464 78,099
---------- ------------ -----------
End of year........................................ $5,440,280 $ 239,626 $28,500,464
========== ============ ===========
<CAPTION>
EQUITY INDEX
YEAR ENDED
DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)..................... $ 32,923 $ 217,752 $ 50,699
Net realized gain (loss)......................... 11,662,155 1,404,970 289,590
Net unrealized gain (loss)....................... (7,166,459) 5,974,791 1,759,333
------------ ----------- ----------
Net increase (decrease) in net assets from
operations..................................... 4,528,619 7,597,513 2,099,622
------------ ----------- ----------
FROM POLICY TRANSACTIONS:
Net premiums..................................... 2,363,320 17,533,507 6,793,979
Terminations..................................... (172,583) (86,149) (198)
Insurance and other charges...................... (587,637) (998,917) (364,580)
Transfers between sub-accounts (including fixed
account), net.................................. (49,801,441) 13,535,625 8,426
Other transfers from (to) the General Account.... (2,377) 5,188 (34)
Net increase (decrease) in investment by
Sponsor........................................ -- -- --
------------ ----------- ----------
Net increase (decrease) in net assets from policy
transactions................................... (48,200,718) 29,989,254 6,437,593
------------ ----------- ----------
Net increase (decrease) in net assets............ (43,672,099) 37,586,767 8,537,215
NET ASSETS:
Beginning of year.................................. 46,130,667 8,543,900 6,685
------------ ----------- ----------
End of year........................................ $ 2,458,568 $46,130,667 $8,543,900
============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ 1,334 $ 808 $ 818 $ (5,695) $ (3,950) $ (706)
Net realized gain (loss)................. (153) 926 1 16,919 (3,058) 18,664
Net unrealized gain (loss)............... (596) 83 (88) 356,020 42,784 3,863
-------- -------- ------- ---------- -------- --------
Net increase (decrease) in net assets
from
operations............................. 585 1,817 731 367,244 35,776 21,821
-------- -------- ------- ---------- -------- --------
FROM POLICY TRANSACTIONS:
Net premiums............................. 12,424 13,471 5,649 298,089 448,702 98,882
Terminations............................. (12,517) (81) (713) (29,100) (76,946) (3,662)
Insurance and other charges.............. (554) (216) (163) (29,164) (18,498) (3,465)
Transfers between sub-accounts (including
fixed
account), net.......................... 3,007 (30,874) 31,189 (17,644) 181,020 115,907
Other transfers from (to) the General
Account................................ (583) (389) -- (17,822) (3,910) 1,120
Net increase (decrease) in investment by
Sponsor................................ -- -- -- -- -- --
-------- -------- ------- ---------- -------- --------
Net increase (decrease) in net assets
from policy
transactions........................... 1,777 (18,089) 35,962 204,359 530,368 208,782
-------- -------- ------- ---------- -------- --------
Net increase (decrease) in net assets.... 2,362 (16,272) 36,693 571,603 566,144 230,603
NET ASSETS:
Beginning of year.......................... 23,338 39,610 2,917 805,199 239,055 8,452
-------- -------- ------- ---------- -------- --------
End of year................................ $ 25,700 $ 23,338 $39,610 $1,376,802 $805,199 $239,055
======== ======== ======= ========== ======== ========
<CAPTION>
SELECT GROWTH SELECT GROWTH AND INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------- --------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)............. $ (75,159) $ (51,150) $ (19,580) $ 1,639 $ 1,177 $ 769
Net realized gain (loss)................. 1,047,566 669,500 415,003 25,096 2,700 14,232
Net unrealized gain (loss)............... 3,239,541 2,339,939 1,431,596 22,927 25,056 (5,403)
----------- ----------- ---------- -------- -------- --------
Net increase (decrease) in net assets
from
operations............................. 4,211,948 2,958,289 1,827,019 49,662 28,933 9,598
----------- ----------- ---------- -------- -------- --------
FROM POLICY TRANSACTIONS:
Net premiums............................. 3,049,445 2,111,416 5,368,817 88,966 155,220 65,720
Terminations............................. (33,196) (97,238) (18) (7,618) (44,778) (4,379)
Insurance and other charges.............. (345,255) (281,352) (292,989) (5,494) (7,462) (3,633)
Transfers between sub-accounts (including
fixed
account), net.......................... 2,130,460 (952,256) 76,402 3,125 (70,127) 101,691
Other transfers from (to) the General
Account................................ (8,787) 4,794 1,070 (639) (1,320) 800
Net increase (decrease) in investment by
Sponsor................................ -- -- -- -- -- --
----------- ----------- ---------- -------- -------- --------
Net increase (decrease) in net assets
from policy
transactions........................... 4,792,667 785,364 5,153,282 78,340 31,533 160,199
----------- ----------- ---------- -------- -------- --------
Net increase (decrease) in net assets.... 9,004,615 3,743,653 6,980,301 128,002 60,466 169,797
NET ASSETS:
Beginning of year.......................... 10,725,760 6,982,107 1,806 232,628 172,162 2,365
----------- ----------- ---------- -------- -------- --------
End of year................................ $19,730,375 $10,725,760 $6,982,107 $360,630 $232,628 $172,162
=========== =========== ========== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE OPPORTUNITY SELECT INTERNATIONAL EQUITY
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
----------- -------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ (64,365) $ 2,774 $ 656 $ (42,211) $ 63,839 $ 95,806
Net realized gain (loss)...... 1,115,252 (2,095) 31,600 803,256 77,352 193,412
Net unrealized gain (loss).... (2,332,303) 16,497 (5,610) 900,525 1,085,145 (15,069)
----------- -------- -------- ----------- ---------- ----------
Net increase (decrease) in net
assets from
operations.................. (1,281,416) 17,176 26,646 1,661,570 1,226,336 274,149
----------- -------- -------- ----------- ---------- ----------
FROM POLICY TRANSACTIONS:
Net premiums.................. 7,573,904 245,642 151,059 1,382,581 1,910,773 5,449,561
Terminations.................. (10,156) (32,190) (3,904) (40,201) (85,614) (8)
Insurance and other charges... (504,046) (12,119) (4,266) (135,408) (257,943) (259,243)
Transfers between sub-accounts
(including fixed
account), net............... 14,728,048 182,286 59,070 (5,542,260) 655,125 108,744
Other transfers from (to) the
General Account............. 3,590 (2,227) 432 (5,159) (6,961) 947
Net increase (decrease) in
investment by
Sponsor..................... -- -- -- -- -- --
----------- -------- -------- ----------- ---------- ----------
Net increase (decrease) in net
assets from policy
transactions................ 21,791,340 381,392 202,391 (4,340,447) 2,215,380 5,300,001
----------- -------- -------- ----------- ---------- ----------
Net increase (decrease) in net
assets...................... 20,509,924 398,568 229,037 (2,678,877) 3,441,716 5,574,150
NET ASSETS:
Beginning of year............... 633,602 235,034 5,997 9,078,542 5,636,826 62,676
----------- -------- -------- ----------- ---------- ----------
End of year..................... $21,143,526 $633,602 $235,034 $ 6,399,665 $9,078,542 $5,636,826
=========== ======== ======== =========== ========== ==========
<CAPTION>
SELECT CAPITAL APPRECIATION SELECT EMERGING MARKETS
YEAR ENDED
DECEMBER 31, YEAR ENDED PERIOD
-------------------------------- DECEMBER 31, FROM 11/9/98*
1999 1998 1997 1999 TO 12/31/98
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ (1,681) $ (914) $ (204) $ 60 $--
Net realized gain (loss)...... 440 36,747 544 21 --
Net unrealized gain (loss).... 74,213 (13,375) 6,529 5,716 --
-------- -------- ------- ------- ---
Net increase (decrease) in net
assets from
operations.................. 72,972 22,458 6,869 5,797 --
-------- -------- ------- ------- ---
FROM POLICY TRANSACTIONS:
Net premiums.................. 118,843 105,063 53,911 21,690 11
Terminations.................. (14,254) (8,341) (3,829) -- --
Insurance and other charges... (9,399) (5,861) (1,570) (399) --
Transfers between sub-accounts
(including fixed
account), net............... 4,812 69,728 (4,978) 11,082 --
Other transfers from (to) the
General Account............. (4,275) (344) (16) 242 --
Net increase (decrease) in
investment by
Sponsor..................... -- -- -- -- --
-------- -------- ------- ------- ---
Net increase (decrease) in net
assets from policy
transactions................ 95,727 160,245 43,518 32,615 11
-------- -------- ------- ------- ---
Net increase (decrease) in net
assets...................... 168,699 182,703 50,387 38,412 11
NET ASSETS:
Beginning of year............... 248,088 65,385 14,998 11 --
-------- -------- ------- ------- ---
End of year..................... $416,787 $248,088 $65,385 $38,423 $11
======== ======== ======= ======= ===
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-14
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT STRATEGIC FIDELITY VIP HIGH INCOME FIDELITY VIP EQUITY-INCOME
GROWTH YEAR ENDED YEAR ENDED
PERIOD DECEMBER 31, DECEMBER 31,
FROM 3/5/99* -------------------------------- --------------------------------
TO 12/31/99 1999 1998 1997 1999 1998 1997
---------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 20 $ 7,488 $ 3,147 $ 232 $ 923 $ 329 $ (86)
Net realized gain (loss)....... (17) (2,553) 1,542 137 8,434 3,999 699
Net unrealized gain (loss)..... 918 2,236 (8,346) 2,892 (277) 5,752 5,483
------- -------- ------- ------- -------- -------- -------
Net increase (decrease) in net
assets from
operations................... 921 7,171 (3,657) 3,261 9,080 10,080 6,096
------- -------- ------- ------- -------- -------- -------
FROM POLICY TRANSACTIONS:
Net premiums................... 12,853 180,207 36,812 37,542 187,400 116,536 49,237
Terminations................... -- (21,248) (4,930) (1,972) (33,829) (23,881) (817)
Insurance and other charges.... (1,346) (15,258) (3,521) (1,317) (15,364) (6,484) (1,985)
Transfers between sub-accounts
(including fixed
account), net................ 1,952 (6,975) 21,213 1,849 92,974 4,066 1,915
Other transfers from (to) the
General Account.............. 45 (3,559) (252) 15 (7,403) 25 89
Net increase (decrease) in
investment by
Sponsor...................... -- -- -- -- -- -- --
------- -------- ------- ------- -------- -------- -------
Net increase (decrease) in net
assets from policy
transactions................. 13,504 133,167 49,322 36,117 223,778 90,262 48,439
------- -------- ------- ------- -------- -------- -------
Net increase (decrease) in net
assets....................... 14,425 140,338 45,665 39,378 232,858 100,342 54,535
NET ASSETS:
Beginning of year................ -- 89,094 43,429 4,051 159,323 58,981 4,446
------- -------- ------- ------- -------- -------- -------
End of year...................... $14,425 $229,432 $89,094 $43,429 $392,181 $159,323 $58,981
======= ======== ======= ======= ======== ======== =======
<CAPTION>
FIDELITY VIP GROWTH
YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (4,548) $ (493) $ 913
Net realized gain (loss)....... 254,630 85,494 26,454
Net unrealized gain (loss)..... 242,219 115,549 43,944
---------- ---------- --------
Net increase (decrease) in net
assets from
operations................... 492,301 200,550 71,311
---------- ---------- --------
FROM POLICY TRANSACTIONS:
Net premiums................... 444,886 267,715 137,061
Terminations................... (337,035) (25,480) (17,376)
Insurance and other charges.... (37,954) (8,916) (4,065)
Transfers between sub-accounts
(including fixed
account), net................ 266,957 375,715 (169,900)
Other transfers from (to) the
General Account.............. 30,447 (3,680) 199
Net increase (decrease) in
investment by
Sponsor...................... -- -- --
---------- ---------- --------
Net increase (decrease) in net
assets from policy
transactions................. 367,301 605,354 (54,081)
---------- ---------- --------
Net increase (decrease) in net
assets....................... 859,602 805,904 17,230
NET ASSETS:
Beginning of year................ 1,151,463 345,559 328,329
---------- ---------- --------
End of year...................... $2,011,065 $1,151,463 $345,559
========== ========== ========
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-15
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP OVERSEAS FIDELITY VIP II ASSET MANAGER
YEAR ENDED YEAR ENDED FIDELITY VIP II
DECEMBER 31, DECEMBER 31, INDEX 500
-------------------------------- -------------------------------- PERIOD FROM 5/4/99*
1999 1998 1997 1999 1998 1997 TO 12/31/99
-------- -------- -------- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ 552 $ 718 $ 139 $ 19,322 $ 9,309 $ 5,745 $ (56,677)
Net realized gain (loss)....... 3,420 3,277 1,566 27,839 41,181 17,404 1,274
Net unrealized gain (loss)..... 30,111 1,086 285 12,862 15,917 28,899 4,566,606
-------- -------- ------- -------- -------- -------- -----------
Net increase (decrease) in net
assets from
operations................... 34,083 5,081 1,990 60,023 66,407 52,048 4,511,203
-------- -------- ------- -------- -------- -------- -----------
FROM POLICY TRANSACTIONS:
Net premiums................... 33,875 38,586 31,760 333,909 216,035 142,926 16,597,260
Terminations................... (2,242) (1,996) (184) (84,288) (219) (172) --
Insurance and other charges.... (4,895) (3,619) (1,796) (4,448) (759) (455) (418,198)
Transfers between sub-accounts
(including fixed
account), net................ 475 (20,410) 685 (34,218) (2,565) (14,401) 32,276,822
Other transfers from (to) the
General Account.............. (7,437) (832) 2 23,270 (1,965) (194) 45
Net increase (decrease) in
investment by
Sponsor...................... -- -- -- -- -- -- --
-------- -------- ------- -------- -------- -------- -----------
Net increase (decrease) in net
assets from policy
transactions................. 19,776 11,729 30,467 234,225 210,527 127,704 48,455,929
-------- -------- ------- -------- -------- -------- -----------
Net increase (decrease) in net
assets....................... 53,859 16,810 32,457 294,248 276,934 179,752 52,967,132
NET ASSETS:
Beginning of year................ 67,581 50,771 18,314 648,373 371,439 191,687 --
-------- -------- ------- -------- -------- -------- -----------
End of year...................... $121,440 $ 67,581 $50,771 $942,621 $648,373 $371,439 $52,967,132
======== ======== ======= ======== ======== ======== ===========
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK
YEAR ENDED
DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss)... $ (151) $ 2,935 $ 338
Net realized gain (loss)....... 8,873 1,826 1,455
Net unrealized gain (loss)..... 144,131 23,676 (326)
-------- -------- -------
Net increase (decrease) in net
assets from
operations................... 152,853 28,437 1,467
-------- -------- -------
FROM POLICY TRANSACTIONS:
Net premiums................... 152,351 104,206 36,785
Terminations................... (4,759) (2,000) --
Insurance and other charges.... (12,033) (5,246) (1,021)
Transfers between sub-accounts
(including fixed
account), net................ 10,736 148,557 533
Other transfers from (to) the
General Account.............. (323) 360 (1)
Net increase (decrease) in
investment by
Sponsor...................... -- -- --
-------- -------- -------
Net increase (decrease) in net
assets from policy
transactions................. 145,972 245,877 36,296
-------- -------- -------
Net increase (decrease) in net
assets....................... 298,825 274,314 37,763
NET ASSETS:
Beginning of year................ 372,143 97,829 60,066
-------- -------- -------
End of year...................... $670,968 $372,143 $97,829
======== ======== =======
</TABLE>
* Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-16
<PAGE>
GROUP VEL ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DGPF INTERNATIONAL EQUITY INVESCO VIF EQUITY INCOME**
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
----------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ 133,115 $ (5,197) $ (133) $ 84 $ 112 $ 89
Net realized gain (loss)...... 34,290 7,893 164 289 712 423
Net unrealized gain (loss).... 2,827,542 442,761 (695) 947 312 752
----------- ---------- ------- ------- ------- ------
Net increase (decrease) in net
assets from
operations.................. 2,994,947 445,457 (664) 1,320 1,136 1,264
----------- ---------- ------- ------- ------- ------
FROM POLICY TRANSACTIONS:
Net premiums.................. 33,755,687 3,720,116 82,362 2,113 6,284 2,869
Terminations.................. (3,114) (370) (1,381) (149) (916) --
Insurance and other charges... (501,577) (204,104) (1,510) (1,958) (4,494) (242)
Transfers between sub-accounts
(including fixed
account), net............... (1,808) 4,507,084 1,085 -- -- --
Other transfers from (to) the
General Account............. (354) 244 11 -- 8 3
Net increase (decrease) in
investment by
Sponsor..................... -- -- -- -- -- --
----------- ---------- ------- ------- ------- ------
Net increase (decrease) in net
assets from policy
transactions................ 33,248,834 8,022,970 80,567 6 882 2,630
----------- ---------- ------- ------- ------- ------
Net increase (decrease) in net
assets...................... 36,243,781 8,468,427 79,903 1,326 2,018 3,894
NET ASSETS:
Beginning of year............... 8,551,060 82,633 2,730 9,229 7,211 3,317
----------- ---------- ------- ------- ------- ------
End of year..................... $44,794,841 $8,551,060 $82,633 $10,555 $ 9,229 $7,211
=========== ========== ======= ======= ======= ======
<CAPTION>
INVESCO VIF TOTAL RETURN MORGAN STANLEY FIXED INCOME
YEAR ENDED
DECEMBER 31, YEAR ENDED PERIOD
-------------------------------- DECEMBER 31, FROM 2/17/98*
1999 1998 1997 1999 TO 12/31/98
-------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)...................... $ 493 $ 1,019 $ 908 $ 1,277,690 $ 612,562
Net realized gain (loss)...... 4,115 1,878 276 (8,242) 265,086
Net unrealized gain (loss).... (5,835) 2,122 5,287 (1,680,097) (179,067)
-------- ------- ------- ----------- -----------
Net increase (decrease) in net
assets from
operations.................. (1,227) 5,019 6,471 (410,649) 698,581
-------- ------- ------- ----------- -----------
FROM POLICY TRANSACTIONS:
Net premiums.................. 1,559 7,489 26,884 7,703,567 9,708,358
Terminations.................. (32,859) (8) -- -- --
Insurance and other charges... (1,694) (860) (764) (522,326) (446,219)
Transfers between sub-accounts
(including fixed
account), net............... -- -- -- 3,300,001 9,881,316
Other transfers from (to) the
General Account............. (1) 42 32 19 (185)
Net increase (decrease) in
investment by
Sponsor..................... -- -- -- -- --
-------- ------- ------- ----------- -----------
Net increase (decrease) in net
assets from policy
transactions................ (32,995) 6,663 26,152 10,481,261 19,143,270
-------- ------- ------- ----------- -----------
Net increase (decrease) in net
assets...................... (34,222) 11,682 32,623 10,070,612 19,841,851
NET ASSETS:
Beginning of year............... 61,907 50,225 17,602 19,841,851 --
-------- ------- ------- ----------- -----------
End of year..................... $ 27,685 $61,907 $50,225 $29,912,463 $19,841,851
======== ======= ======= =========== ===========
</TABLE>
* Date of initial investment.
** Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-17
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
The Group VEL Account (Group VEL) is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company (the Company) established
on May 1, 1995 for the purpose of separating from the general assets of the
Company, those assets used to fund the variable portion of certain flexible
premium variable life insurance policies issued by the Company. The Company is a
wholly-owned subsidiary of First Allmerica Financial Life Insurance Company
(First Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica
Financial Corporation (AFC). Under applicable insurance law, the assets and
liabilities of Group VEL are clearly identified and distinguished from the other
assets and liabilities of the Company. Group VEL cannot be charged with
liabilities arising out of any other business of the Company.
Group VEL is registered as a unit investment trust under the Investment
Company Act of 1940, as amended (the 1940 Act). Group VEL currently offers
forty-four Sub-Accounts. Each Sub-Account invests exclusively in a corresponding
investment portfolio of the Allmerica Investment Trust (the Trust) managed by
Allmerica Financial Investment Management Services, Inc. (AFIMS), a wholly-owned
subsidiary of the Company; or of the Variable Insurance Products Fund (Fidelity
VIP) or the Variable Insurance Products Fund II (Fidelity VIP II), managed by
Fidelity Management & Research Company (FMR); or of the T. Rowe Price
International Series, Inc. (T. Rowe Price) managed by Rowe Price-Fleming
International, Inc.; or of the Delaware Group Premium Fund (DGPF) managed by
Delaware Management Company or Delaware International Advisers Ltd.; or of the
INVESCO Variable Investment Funds, Inc. (INVESCO VIF) managed by INVESCO Funds
Group, Inc.; or of the Morgan Stanley Universal Funds, Inc. (Morgan Stanley)
managed by Miller Anderson & Sherrerd, LLP; or of the Mutual Fund Variable
Annuity Trust (MFVAT) managed by Chase Manhattan Bank, N.A.. The Trust, Fidelity
VIP, Fidelity VIP II, T. Rowe Price, DGPF, INVESCO, Morgan Stanley and MFVAT
(the Funds) are open-end, management investment companies registered under the
1940 Act. INVESCO is available only to employees of INVESCO VIF and its
affiliates. Morgan Stanley is available only to employees of Duke Energy
Corporation and its affiliates.
Effective May 1, 1999, Decatur Total Return Fund was renamed Growth and
Income Fund and Delaware Fund was renamed Delaware Balanced Fund. Effective
September 1, 1999, INVESCO VIF Industrial Income Fund was renamed Equity Income.
Effective May 1, 2000, AIT Investment Grade Income Fund will be renamed Select
Investment Grade Income Fund and AIT Growth Fund will be renamed Core Equity
Fund.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Realized gains and losses
on securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of the
Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of Group VEL.
Therefore, no provision for income taxes has been charged against Group VEL.
SA-18
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-----------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- -------------------- ----------- ----------- ---------
<S> <C> <C> <C>
Growth............................................... 1,410,003 $ 3,972,164 $ 3.311
Investment Grade Income.............................. 23,266,205 25,575,861 1.051
Money Market......................................... 5,440,130 5,440,130 1.000
Equity Index......................................... 605,611 1,891,214 4.060
Government Bond...................................... 25,424 26,300 1.011
Select Aggressive Growth............................. 403,637 974,516 3.411
Select Growth........................................ 6,471,181 12,719,748 3.049
Select Growth and Income............................. 186,565 318,146 1.933
Select Value Opportunity............................. 13,901,118 23,464,808 1.521
Select International Equity.......................... 3,150,993 4,425,284 2.031
Select Capital Appreciation.......................... 203,014 349,493 2.053
Select Emerging Markets.............................. 29,741 32,710 1.292
Select Strategic Growth.............................. 12,811 13,507 1.126
Fidelity VIP High Income............................. 20,286 232,562 11.310
Fidelity VIP Equity-Income........................... 15,254 381,097 25.710
Fidelity VIP Growth.................................. 36,612 1,607,076 54.930
Fidelity VIP Overseas................................ 4,426 88,722 27.440
Fidelity VIP II Asset Manager........................ 50,489 877,472 18.670
Fidelity VIP II Index 500............................ 316,392 48,400,649 167.410
T. Rowe Price International Stock.................... 35,240 500,046 19.040
DGPF Growth & Income*................................ -- -- --
DGPF Delchester...................................... -- -- --
DGPF Capital Reserves................................ -- -- --
DGPF Cash Reserves................................... -- -- --
DGPF DelCap.......................................... -- -- --
DGPF Delaware Balanced*.............................. -- -- --
DGPF International Equity............................ 2,404,447 41,525,167 18.630
DGPF Small Cap Value................................. -- -- --
DGPF Trend........................................... -- -- --
DGPF Strategic Income................................ -- -- --
DGPF Devon........................................... -- -- --
DGPF Emerging Markets................................ -- -- --
DGPF Social Awareness................................ -- -- --
DGPF REIT............................................ -- -- --
DGPF Aggressive Growth............................... -- -- --
DGPF U.S. Growth..................................... -- -- --
INVESCO VIF Equity Income*........................... 502 8,685 21.010
INVESCO VIF Total Return Fund........................ 1,777 26,149 15.580
Morgan Stanley Fixed Income.......................... 2,976,363 31,771,615 10.050
MFVAT U.S. Government Income......................... -- -- --
MFVAT Asset Allocation............................... -- -- --
MFVAT Growth & Income................................ -- -- --
MFVAT Capital Growth................................. -- -- --
MFVAT International Equity........................... -- -- --
</TABLE>
* Name changed. See Note 1.
SA-19
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
On the date of issue and each monthly payment date thereafter, a monthly
charge is deducted from the policy value to compensate the Company for the cost
of insurance, which varies by policy, the cost of any additional benefits
provided by rider, and a monthly administrative charge. The policyowner may
instruct the Company to deduct this monthly charge from a specific Sub-Account,
but if not so specified, it will be deducted on a pro-rata basis of allocation
which is the same proportion that the policy value in the General Account of the
Company and in each Sub-Account bear to the total policy value.
The Company makes a charge of up to 0.90% per annum based on the average
daily net asset value of each certificate (certificate value) in each
Sub-Account for mortality and expense risks. This charge may be different
between groups and increased or decreased within a group, subject to compliance
with applicable state and federal requirements, but the total charge may not
exceed 0.90% per annum. During the first 10 policy years, the Company may charge
up to 0.25% per annum of the certificate value in each Sub-Account for
administrative expenses.
Allmerica Investments, Inc., (Allmerica Investments), a wholly-owned
subsidiary of the Company, is principal underwriter and general distributor of
Group VEL, and does not receive any compensation for sales of Group VEL
policies. Commissions are paid to registered representatives of Allmerica
Investments and to independent broker-dealers by the Company. The current series
of policies have a surrender charge and no deduction is made for sales charges
at the time of the sale.
NOTE 5 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable life
insurance policy, other than a policy issued in connection with certain types of
employee benefit plans, will not be treated as a variable life insurance policy
for federal income tax purposes for any period for which the investments of the
segregated asset account on which the policy is based are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Group VEL satisfies the current requirements
of the regulations, and it intends that Group VEL will continue to meet such
requirements.
SA-20
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Group
VEL during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- -------------------- ------------ -----------
<S> <C> <C>
Growth...................................................... $ 6,209,905 $ 4,726,086
Investment Grade Income..................................... 13,304,771 2,590,083
Money Market................................................ 6,728,412 1,527,775
Equity Index................................................ 2,778,482 50,942,818
Government Bond............................................. 100,147 97,033
Select Aggressive Growth.................................... 367,494 168,825
Select Growth............................................... 7,082,831 1,835,886
Select Growth and Income.................................... 118,228 15,002
Select Value Opportunity.................................... 23,459,039 558,021
Select International Equity................................. 1,547,678 5,930,335
Select Capital Appreciation................................. 136,005 41,547
Select Emerging Markets..................................... 33,137 459
Select Strategic Growth..................................... 13,989 465
Fidelity VIP High Income.................................... 196,679 55,715
Fidelity VIP Equity-Income.................................. 279,813 49,803
Fidelity VIP Growth......................................... 1,740,132 1,236,973
Fidelity VIP Overseas....................................... 37,059 15,032
Fidelity VIP II Asset Manager............................... 1,715,193 1,435,587
Fidelity VIP II Index 500................................... 48,857,756 458,381
T. Rowe Price International Stock........................... 172,083 18,921
DGPF Growth & Income*....................................... -- --
DGPF Delchester............................................. -- --
DGPF Capital Reserves....................................... -- --
DGPF Cash Reserves.......................................... -- --
DGPF DelCap................................................. -- --
DGPF Delaware Balanced*..................................... -- --
DGPF International Equity................................... 33,669,161 273,795
DGPF Small Cap Value........................................ -- --
DGPF Trend.................................................. -- --
DGPF Strategic Income....................................... -- --
DGPF Devon.................................................. -- --
DGPF Emerging Markets....................................... -- --
DGPF Social Awareness....................................... -- --
DGPF REIT................................................... -- --
DGPF Aggressive Growth...................................... -- --
DGPF U.S. Growth............................................ -- --
INVESCO VIF Equity Income*.................................. 1,693 1,548
INVESCO VIF Total Return Fund............................... 2,251 34,646
Morgan Stanley Fixed Income................................. 12,363,038 600,667
MFVAT U.S. Government Income................................ -- --
MFVAT Asset Allocation...................................... -- --
MFVAT Growth & Income....................................... -- --
MFVAT Capital Growth........................................ -- --
MFVAT International Equity.................................. -- --
------------ -----------
Totals...................................................... $160,914,976 $72,615,403
============ ===========
</TABLE>
* Name changed. See Note 1.
SA-21
<PAGE>
GROUP VEL ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PLAN OF SUBSTITUTION FOR PORTFOLIO OF THE TRUST
An application has been filed with the Securities and Exchange Commission
(SEC) seeking an order approving the substitution of shares of the Select
Investment Grade Income Fund (SIGIF) for all of the shares of the Select Income
Fund (SIF). To the extent required by law, approvals of such substitution will
also be obtained from the state insurance regulators in certain jurisdictions.
The effect of the substitution will be to replace SIF shares with SIGIF shares.
The substitution is planned to be effective on or about July 1, 2000.
SA-22
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission ("SEC") such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the SEC heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article VIII of Registrant's Bylaws provides: Each Director and each officer of
the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation against
all expenses actually and necessarily incurred by him in the defense or
reasonable settlement of any action, suit, or proceeding in which he is made a
party by reason of his being or having been a Director or officer of the
Corporation, including any sums paid in settlement or to discharge judgment,
except in relation to matters as to which he shall be finally adjudged in such
action, suit, or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.
Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of
such issue.
REPRESENTATIONS PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
<PAGE>
CONTENTS OF THE REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet.
Cross-references for Prospectuses A and B to items required by Form N-8B-2.
The prospectus A consisting of _____ pages.
The prospectus B consisting of _____ pages. The undertaking to file reports.
The undertaking pursuant to Rule 484 under the 1933 Act. Representations
pursuant to Section 26(e) of the 1940 Act.
The signatures.
Written consents of the following persons:
1. Actuarial Consent
2. Opinion of Counsel
3. Consent of Independent Accountants
The following exhibits:
1. Exhibit 1 (Exhibits required by paragraph A of the instructions to
Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors of the
Company of November 22, 1993 establishing the Group VEL Account
was previously filed in Post-Effective Amendment No. 9 on April
16, 1998, and is incorporated by reference herein.
(2) Not Applicable.
(3) (a) Underwriting and Administrative Services Agreement between
the Company and Allmerica Investments, Inc. was previously
filed in Post-Effective Amendment No. 9 on April 16, 1998,
and is incorporated by reference herein.
(b) Registered Representatives/Agents Agreement was previously
filed in Post-Effective Amendment No. 9 on April 16, 1998,
and is incorporated by reference herein.
(c) Sales Agreements were previously filed in Post-Effective
Amendment No. 9 on April 16, 1998, and are incorporated by
reference herein.
(d) Commission Schedule was previously filed in Post-Effective
Amendment No. 9 on April 16, 1998, and is incorporated by
reference herein.
(e) General Agent's Agreement was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998, and is
incorporated by reference herein.
<PAGE>
(f) Career Agent Agreement was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998, and is
incorporated by reference herein.
(g) Form of Delaware Wholesaling Agreement was previously
filed in Post-Effective Amendment No. 10 on December 15,
1998, and is incorporated by reference herein.
(4) Not Applicable.
(5) Policy and initial Riders were previously filed in
Post-Effective Amendment No. 9 on April 16, 1998 and are
incorporated by reference herein. The Preferred Loan Endorsement
and Exchange to Term Rider were previously filed in
Post-Effective Amendment No. 5 on April 30, 1997, and are
incorporated by reference herein.
(6) Articles of Incorporation and Bylaws, as amended, of the Company
were previously filed in Post-Effective Amendment No. 1 on
October 1, 1995, and are incorporated by reference herein.
(7) Not Applicable.
(8) (a) Participation Agreement between the Company and
Allmerica Investment Trust dated March 22, 2000 was
previously filed in April 2000 in Post-Effective Amendment
No. 14 of Registration Statement No. 33-57792/811-7466,
and is incorporated by reference herein.
(b) Amendment dated March 29, 2000 and Amendment dated
November 13, 1998 to the Variable Insurance Products
Fund Participation Agreement was previously filed in
April 2000 in Post-Effective Amendment No. 14 of
Registration Statement No. 33-57792/811-7466, and is
incorporated by reference herein. Participation
Agreement, as amended, with Variable Insurance Products
Fund was previously filed in Post-Effective Amendment
No. 9 on April 16, 1998, and is incorporated by
reference herein.
Amendment dated March 29, 2000 and Amendment dated
November 13, 1998 to the Variable Insurance Products
Fund II Participation Agreement was previously filed in
April 2000 in Post-Effective Amendment No. 14 of
Registration Statement No. 33-57792/811-7466, and is
incorporated by reference herein. Participation
Agreement, as amended, with Variable Insurance Products
Fund II was previously filed in Post-Effective
Amendment No. 9 on April 16, 1998, and is incorporated
by reference herein.
Form of Amendment to the Delaware Group Premium Fund
Participation Agreement was previously filed in
April 2000 in Post-Effective Amendment No.
14 of Registration Statement No.
33-57792/811-7466, and is incorporated by reference
herein. Participation Agreement with Delaware Group
Premium Fund, Inc. was previously filed on April 16,
1998 in Post-Effective Amendment No. 11, and is
incorporated by reference herein.
(e) Participation Agreement with T. Rowe Price
International Series, Inc. was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998, and
is incorporated by reference herein.
(f) Fidelity Service Agreement, effective as of November 1,
1995, was previously filed on April 30, 1996 in
Post-Effective Amendment No. 3, and is incorporated by
reference herein.
(g) An Amendment to the Fidelity Services Agreement,
effective as of January 1, 1997, was previously filed
on April 30, 1997 in Post-Effective Amendment No. 3,
and is incorporated by reference herein.
(h) Fidelity Service Contract, effective as of January 1,
1997, was previously filed on April 30, 1997 in
Post-Effective Amendment No. 3, and is incorporated by
reference herein
(i) Service Agreement with Rowe Price-Fleming
International, Inc. was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998, and
is incorporated by reference herein.
(j) Amendment to the Service Fee Agreement Letter with
Morgan Stanley Asset Management, Inc. is filed
herewith. Service Fee Agreement Letter with Morgan
Stanley Asset Management, Inc., was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998, and
is incorporated by reference herein.
(k) Amendment to the Participation Agreement with Morgan
Stanley is filed herewith. Participation Agreement with
Morgan Stanley was previously filed in Post-Effective
Amendment No. 9 on April 16, 1998, and is incorporated
by reference herein.
(l) Form of Amendment to AIM Participation Agreement is
filed herewith. Participation Agreement with AIM
Variable Insurance Funds was previously filed on August
27, 1998 in Post-Effective Amendment No. 3 of
Registration Statement No. 333-11377/811-7799, and is
incorporated by reference herein.
(m) Participation Agreement with Alger is filed herewith.
(n) Form of Participation Agreement with Alliance is filed
herewith.
(o) Form of Participation Agreement with Franklin Templeton is
filed herewith.
(9) Directors' Power of Attorney is filed herewith.
(10) Amended Application was previously filed in Post-Effective
Amendment No. 10 on December 15, 1998, and is incorporated by
reference herein. Application was previously filed in
Post-Effective Amendment No. 9 on April 16, 1998, and is
incorporated by reference herein.
2. Policy and Policy riders are as set forth in Item 1(5) above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
7. Procedures Memorandum dated August, 1994 pursuant to Rule
6e-3(T)(b)(12)(iii) under the 1940 Act which includes conversion
procedures pursuant to Rule 6e-3(T)(b)(13)(v)(B) was previously filed
in Post-Effective Amendment No. 9 on April 16, 1998, and is
incorporated by reference herein.
8. Consent of Independent Accountants is filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 3rd day of April,
2000.
GROUP VEL ACCOUNT OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Mary Eldridge
-----------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller April 3,2000
- ------------------------------
Warren E. Barnes
Edward J. Parry III* Director, Vice President, Chief Financial
- ------------------------------ Officer and Treasurer
Richard M. Reilly* Director, President and
- ------------------------------ Chief Executive Officer
John F. O'Brien* Director and Chairman of the Board
- ------------------------------
Bruce C. Anderson* Director
- ------------------------------
Mark R. Colborn* Director and Vice President
- ------------------------------
J. Kendall Huber* Director, Vice President and
- ------------------------------ General Counsel
John P. Kavanaugh* Director, Vice President and
- ------------------------------ Chief Investment Officer
J. Barry May* Director
- ------------------------------
James R. McAuliffe* Director
- ------------------------------
Robert P. Restrepo, Jr.* Director
- ------------------------------
Eric A. Simonsen* Director and Vice President
- ------------------------------
</TABLE>
* Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 2, 2000 duly
executed by such persons.
/s/ Sheila B. St. Hilaire
- ----------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(33-82658)
<PAGE>
FORM S-6 EXHIBIT TABLE
Exhibit 1(8)(i) Amendment to the Service Fee Agreement Letter with Morgan
Stanley Asset Management, Inc.
Exhibit 1(8)(k) Amendment to the Participation Agreement with Morgan Stanley
Exhibit 1(8)(l) Form of Amendment to AIM Participation Agreement
Exhibit 1(8)(m) Participation Agreement with Alger
Exhibit 1(8)(n) Form of Participation Agreement with Alliance
Exhibit 1(8)(o) Form of Participation Agreement with Franklin Templeton
Exhibit 1(9) Directors' Power of Attorney
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 8 Consent of Independent Accountants
<PAGE>
February 8, 2000
Mr. Richard M. Reilly
President
Allmerica Financial Life Insurance
and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
Re: AMENDED SCHEDULE B TO PARTICIPATION AGREEMENT
---------------------------------------------
Dear Mr. Reilly:
This letter sets forth our understanding and acceptance of the enclosed
amended Schedule B to the Participation Agreement, dated November 15, 1997 (the
"Participation Agreement"), among Morgan Stanley Dean Witter Universal Funds,
Inc. (the "Fund," formerly Morgan Stanley Universal Funds, Inc.), Morgan Stanley
Dean Witter Investment Management Inc. (formerly Morgan Stanley Asset Management
Inc.), Miller Anderson & Sherrerd, LLP and Allmerica Financial Life Insurance
and Annuity Company (the "Company"), which has been amended at your direction to
reflect the addition of the Technology Portfolio of the Fund, effective
immediately.
Please indicate your receipt and acceptance of this letter and the
amended Schedule B attached hereto by signing all of the enclosed copies at the
appropriate place below and returning three signed originals to the attention of
Stefanie Chang-Yu, Morgan Stanley Dean Witter Investment Management Inc., 1221
Avenue of the Americas, 5th Floor, New York, New York 10020.
Sincerely,
MORGAN STANLEY DEAN WITTER MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC. UNIVERSAL FUNDS, INC.
By: /s/ Marna L. Whittington By: /s/ Michael F. Klein
MILLER ANDERSON & SHERRERD, LLP
By: /s/ Marna L. Whittington
Agreed and Accepted:
ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY
By: /s/ Donna M. Murphy
<PAGE>
PARTICIPATION AGREEMENT
AMONG
MORGAN STANLEY UNIVERSAL FUNDS, INC.,
MORGAN STANLEY ASSET MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
AND
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DATED AS OF
NOVEMBER 15, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. Purchase of Fund Shares 2
ARTICLE II Representations and Warranties 4
ARTICLE III. Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV. Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI. Diversification 10
ARTICLE VII. Potential Conflicts 10
ARTICLE VIII. Indemnification 12
ARTICLE IX. Applicable Law 18
ARTICLE X. Termination 18
ARTICLE XI. Notices 20
ARTICLE XII. Miscellaneous 21
SCHEDULE A Separate Accounts and Contracts A-1
SCHEDULE B Portfolios of Morgan Stanley Universal Funds, Inc. B-1
SCHEDULE C Proxy Voting Procedures C-1
</TABLE>
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 15th day of
November, 1997 by and among ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY (hereinafter the "Company"), a Delaware corporation, on
its own behalf and on behalf of each separate account of the Company
set forth on Schedule A hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account"), and
MORGAN STANLEY UNIVERSAL FUNDS, INC. (hereinafter the "Fund"), a
Maryland corporation, and MORGAN STANLEY ASSET MANAGEMENT INC. and
MILLER ANDERSON & SHERRERD, LLP (hereinafter collectively the
"Advisers" and individually the "Adviser"), a Delaware corporation and
a Pennsylvania limited liability partnership, respectively.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as (i) the investment vehicle for
separate accounts established by insurance companies for individual and group
life insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Insurance Products") and (ii) the investment vehicle for certain
qualified pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an
investment vehicle under their Variable Insurance Contracts enter into
participation agreements with the Fund and the Advisers (the "Participating
Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets, 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 19, 1996 (File No. 812-10118), granting
Participating Insurance Companies and Variable Insurance Product separate
accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended (hereinafter the "1940
Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by Variable
Annuity Product separate accounts of both affiliated and unaffiliated life
insurance companies and Qualified Plans (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, each Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and any applicable state
securities laws; and
WHEREAS, each Adviser manages certain Portfolios of the Fund; and
3
<PAGE>
WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is
registered as a broker/dealer under the Securities Exchange Act of 1934, as
amended (hereinafter the "1934 Act"), is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD") and serves
as principal underwriter of the shares of the Fund; and
WHEREAS, the Company has registered or will register certain Variable
Insurance Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, on the date shown for such Account on Schedule A
hereto, to set aside and invest assets attributable to the aforesaid Variable
Insurance Product; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Underwriter is
authorized to sell such shares to each such 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. PURCHASE OF FUND SHARES
1.1. The Fund agrees to make available for purchase by the Company
shares of the Fund and shall execute orders placed for each Account on a daily
basis at the net asset value next computed after receipt by the Fund or its
designee of such order. For purposes of this Section 1.1, the Company shall be
the designee of the Fund for receipt of such orders from each Account and
receipt by such designee shall constitute receipt by the Fund; provided that the
Fund receives notice of such order by 10:00 a.m. Eastern time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make
its shares available indefinitely for purchase at the applicable net asset value
per share by the Company and its Accounts on those days on which the Fund
calculates its net asset value pursuant to rules of the Securities and Exchange
Commission and the Fund shall use reasonable efforts to calculate such net asset
value on each day which the New York Stock Exchange is open for trading.
Notwithstanding the foregoing, the Board of Directors of the Fund (hereinafter
the "Board") may
4
<PAGE>
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund will not make its shares available for purchase by any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, V, VII and Section 2.5.
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 Variable Insurance
Products issued by the Company, under which amounts may be invested in the Fund
(hereinafter the "Contracts"), are listed on Schedule A attached hereto and
incorporated herein by reference, as such Schedule A may be amended from time to
time by mutual written agreement of all of the parties hereto. The Company will
give the Fund and the Adviser 45 days written notice of its intention to make
available in the future, as a funding vehicle under the Contracts, any 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 purposes 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
5
<PAGE>
gain distributions as are payable on the Portfolio shares in additional shares
of that Portfolio. The Company reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash. The
Fund shall notify the Company of the number of shares so issued as payment of
such dividends and distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Eastern time) and shall use its best efforts to make such net asset value
per share available by 7:00 p.m. Eastern time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the 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 2932 of the Delaware 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 Maryland 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.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
life insurance policies or annuity contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund 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.
6
<PAGE>
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have a board of directors, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
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 Maryland and the Fund represents that their respective operations are
and shall at all times remain in material compliance with the laws of the State
of Maryland to the extent required to perform this Agreement.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.8. Each Adviser represents and warrants that it is and shall remain
duly registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its directors, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid
includes coverage for larceny and embezzlement is issued by a reputable bonding
company. The Company agrees to make all reasonable efforts to see that this bond
or another bond containing these provisions is always in effect, and agrees to
notify the Fund and the Underwriter in the event that such coverage no longer
applies.
ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and
7
<PAGE>
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.
3.2. Except as provided in this Section 3.2., all expenses of printing
and distributing Fund prospectuses and statements of additional information
shall be the expense of the Company. For prospectuses and statements of
additional information provided by the Company to its existing owners of
Contracts who currently own shares of one or more of the Fund's Portfolios, in
order to update disclosure as required by the 1933 Act and/or the 1940 Act, the
cost of printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Contracts who currently own shares of one or more of the Fund's
Portfolios, and y is the Fund's per unit cost of typesetting and printing the
Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information. The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
Fund to assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those actually
distributed to existing owners of the Contracts.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners. The Fund or its designee shall bear
the cost of printing, duplicating, and mailing these documents to Contract
owners, and the Company shall bear the cost for such documents used for purposes
other than distribution to current Contract Owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with
instructions received from Contract owners; and
8
<PAGE>
(iii) vote Fund shares for which no instructions
have been received in the same proportion as
Fund shares of such Portfolio for which
instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the Securities and Exchange Commission's interpretation of the
requirements of Section 16(a) with respect to periodic elections of directors
and with whatever rules the Commission may promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund
prospectuses, reports to shareholders, proxy materials and other Fund
communications (or camera-ready equivalents) to the Company sufficiently in
advance of the Company's mailing dates to enable the Company to complete, at
reasonable cost, the printing, assembling and/or distribution of the
communications in accordance with applicable laws and regulations.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least ten Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within ten Business Days after receipt
of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
9
<PAGE>
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least ten Business Days prior to its use. No such material shall be
used if the Company or its designee reasonably objects to such use within ten
Business Days after receipt of such material.
4.4. The Fund and the Advisers shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts, other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Contracts.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Contracts.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund shall pay no fee or other compensation to the Company
under this Agreement, except that if the Fund or any Portfolio adopts and
implements a plan pursuant to Rule 12b-1 to finance distribution expenses, then
the Underwriter may make payments to the
10
<PAGE>
Company or to the underwriter for the Contracts if and in amounts agreed to by
the Underwriter in writing.
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.
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 within the grace period afforded by Regulation
817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by Variable Insurance Product owners; or (f) a decision by a Participating
Insurance Company to disregard the voting instructions of contract owners. The
Board shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2. 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
11
<PAGE>
necessary for the Board to consider any issues raised. This includes, but is not
limited to, an obligation by the Company to inform the Board whenever contract
owner voting instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested directors), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (I.E., annuity contract owners, life insurance policy
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2) establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the 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 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
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.
12
<PAGE>
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a) The Company agrees to indemnify and hold harmless the Fund and
each member of the Board and officers, and each Adviser and each director and
officer of each Adviser, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" and individually, "Indemnified Party," for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the 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
13
<PAGE>
registration statement, prospectus or sales literature of the
Fund not supplied by the Company, or persons under its control
and other than statements or representations authorized by the
Fund or an Adviser) or unlawful conduct of the Company or
persons under its control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of or as a result of any untrue
statement or alleged untrue statement of a material fact
contained in a registration statement, prospectus, or sales
literature of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement or
omission was made in reliance upon and in conformity with
information furnished to the Fund by or on behalf of the
Company; or
(iv) arise as a result of any failure by the
Company to provide the services and furnish the materials under
the terms of this Agreement; or
(v) arise out of or result from any material
breach of any representation and/or warranty made by the Company
in this Agreement or arise out of or result from any other
material breach of this Agreement by the Company, as limited by
and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed
against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made
against an Indemnified Party unless such Indemnified Party
shall have notified the Company in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated
agent), but failure to notify the Company of any such claim
shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such
action. The Company also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named
in the
14
<PAGE>
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 ADVISERS
8.2(a). Each Adviser agrees, with respect to each Portfolio
that it manages, 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" and
individually, "Indemnified Party," for purposes of this Section
8.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent
of the Adviser) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof) or settlements are related to
the sale or acquisition of shares of the Portfolio that it
manages or the 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 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 Portfolio shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained
15
<PAGE>
in the registration statement, prospectus or sales
literature for the Contracts not supplied by the
Fund or persons under its control and other than
statements or representations authorized by the
Company) or unlawful conduct of the Fund, Adviser(s)
or Underwriter or persons under their control, with
respect to the sale or distribution of the Contracts
or Portfolio shares; or
(iii) arise out of or as a result of any untrue
statement or alleged untrue statement of a material
fact contained in a registration statement,
prospectus, or sales literature covering the
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; or
(v) arise out of or result from any material
breach of any representation and/or warranty made by
the Adviser in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Adviser; as limited by and in
accordance with the provisions of Sections 8.2(b)
and 8.2(c) hereof.
8.2(b). An Adviser shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed
against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless
disregard of obligations and duties under this Agreement.
8.2(c). An Adviser shall not be liable under this
indemnification provision with respect to any claim made
against an Indemnified Party unless such Indemnified Party
shall have notified the Adviser in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated
agent), but failure to notify the Adviser of any such claim
shall not relieve the Adviser from any liability which it may
have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification
provision. In case any such action is brought against the
Indemnified Parties, the Adviser will be entitled to
participate, at its own expense,
16
<PAGE>
in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Adviser to such
party of the Adviser's election to assume the defense thereof,
the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable
costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of
the commencement of any litigation or proceedings against it or
any of its officers or directors in connection with the issuance
or sale of the 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 (hereinafter collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of
this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the
written consent of the Fund) or litigation (including legal and
other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful
misconduct of the Board or any member thereof, are related to
the operations of the Fund and:
(i) arise as a result of any failure by the Fund
to provide the services and furnish the materials
under the terms of this Agreement; or
(ii) arise out of or result from any material
breach of any representation and/or warranty made by
the Fund in this Agreement or arise out of or result
from any other material breach of this Agreement by
the Fund;
8.3(b). The Fund shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed
against an Indemnified Party as may arise from such
Indemnified Party's 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.
17
<PAGE>
8.3(c). The Fund shall not be liable under this
indemnification provision with respect to any claim made
against an Indemnified Party unless such Indemnified Party
shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving
information of the nature of the claim shall have been served
upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated
agent), but failure to notify the Fund of any such claim shall
not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified
Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be
entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice
from the Fund to such party of the Fund's election to assume
the defense thereof, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the
Fund will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof
other than reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of
the commencement of any litigation or proceedings against it or
any of its respective officers or directors in connection with
this Agreement, the issuance or sale of the 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
State of New York.
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 sixty (60)
days advance written notice delivered to the other parties; or
18
<PAGE>
(b) termination by the Company by written notice to
the Fund and the Adviser with respect to any Portfolio based
upon the Company's determination that shares of such Portfolio
is not reasonably available to meet the requirements of the
Contracts; or
(c) termination by the Company by written notice to
the Fund and the Adviser with respect to any Portfolio in the
event any of the Portfolio's shares are not registered, issued
or sold in accordance with applicable state and/or federal law
or such law precludes the use of such shares as the underlying
investment media of the Contracts issued or to be issued by
the Company; or
(d) termination by the Company by written notice to
the Fund and the Adviser with respect to any Portfolio in the
event that such Portfolio ceases to qualify as a Regulated
Investment Company under Subchapter M of the Code or under any
successor or similar provision, or if the Company reasonably
believes that the Fund may fail to so qualify; or
(e) termination by the Company by written notice to
the Fund and the Adviser with respect to any Portfolio in the
event that such Portfolio falls to meet the diversification
requirements specified in Article VI hereof; or
(f) termination by either the Fund by written notice
to the Company if the Fund shall determine, in its sole
judgment exercised in good faith, that the Company and/or its
affiliated companies has suffered a material adverse change in
its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material
adverse publicity, or
(g) termination by the Company by written notice to
the Fund and the Adviser, if the Company shall determine, in
its sole judgment exercised in good faith, that either the
Fund or the Adviser has suffered a material adverse change in
its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material
adverse publicity; or
(h) termination by the Fund or the Adviser by written
notice to the Company, if the Company gives the Fund and the
Adviser the written notice specified in Section 1.5 hereof and
at the time such notice was given there was no notice of
termination outstanding under any other provision of this
Agreement; provided, however any termination under this
Section 10.1(h) shall be effective forty five (45) days after
the notice specified in Section 1.5 was given.
10.2. Notwithstanding any termination of this Agreement, the
Fund shall at the option of the Company, continue to make
available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on
the effective date of termination of this Agreement (hereinafter
referred
19
<PAGE>
to as "Existing, Contracts"). Specifically, without limitation,
the owners of the Existing Contracts shall be permitted to
direct reallocation of investments in the Fund, redemption of
investments in the Fund and/or investment 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 distinct from Fund shares attributable to
the Company's assets held in the Account) except (i) as
necessary to implement Contract Owner initiated or approved
transactions, or (ii) as required by state and/or federal laws
or regulations or judicial or other legal precedent of general
application (hereinafter referred to as a "Legally Required
Redemption") or (iii) as permitted by an order of the Securities
and Exchange Commission pursuant to Section 26(b) of the 1940
Act. Upon request, the Company will promptly furnish to the Fund
the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any
redemption pursuant to clause (ii) above is a Legally Required
Redemption. Furthermore, except in cases where permitted under
the terms of the Contracts, the Company shall not prevent
Contract Owners from allocating payments to a Portfolio that was
otherwise available under the Contracts without first giving the
Fund 90 days prior written notice of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by
registered or certified mail to the other party at the address
of such party set forth below or at such other address as such
party may from time to time specify in writing to the other
party.
If to the Fund:
Morgan Stanley Universal Funds, Inc.
c/o Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
If to Adviser:
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Harold J. Schaaff, Jr., Esq.
20
<PAGE>
If to Adviser:
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, Pennsylvania 19428
Attention: Lorraine Truten
If to the Company:
Allmerica Financial Life Insurance and Annuity
Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. MISCELLANEOUS
12.1. 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 Securities and Exchange Commission, the
National Association of Securities Dealers and state insurance
regulators) and shall permit such authorities reasonable access
to
21
<PAGE>
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
an Adviser may assign this Agreement or any rights or
obligations hereunder to any affiliate of or company under
common control with the Adviser, if such assignee is duly
licensed and registered to perform the obligations of the
Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused
this Agreement to be executed in its name and on its behalf by
its duly authorized representative and its seal to be hereunder
affixed hereto as of the date specified above.
22
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
NAME: Richard M. Reilly
TITLE: President
MORGAN STANLEY UNIVERSAL FUNDS, INC.
By: /s/ Michael F. Klein
NAME: Michael F. Klein
TITLE: President
MORGAN STANLEY ASSET MANAGEMENT INC.
By: /s/ Marna L. Whittington
NAME: Marna L. Whittington
TITLE:Managing Director
MILLER ANDERSON & SHERRERD, LLP
By: /s/ Marna L. Whittington
NAME: Marna L. Whittington
TITLE:Managing Director
23
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND CONTRACTS
NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF CONTRACT
DATE ESTABLISHED BY BOARD OF DIRECTORS FUNDED BY SEPARATE ACCOUNT
Group VEL Account of Allmerica Financial Group Flexible Premium Variable
Life Insurance and Annuity Company: Life Insurance Policy on Policy
Established November 22, 1993 Form 1029P-94 Issued to Duke
Energy Corporation Grantor Trust
(Case WG 23)
A-1
<PAGE>
SCHEDULE B
PORTFOLIOS OF MORGAN STANLEY
DEAN WITTER UNIVERSAL FUNDS, INC.
Fixed Income Portfolio
Technology Portfolio
B-1
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
. The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of
voting instructions from owners of the Contracts and to facilitate the
establishment of tabulation procedures. At this time the Fund will
inform the Company of the Record, Mailing and Meeting dates. This will
be done verbally approximately two months before meeting.
. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in this Step #2. The Company will use its best efforts to
call in the number of Customers to the Fund , as soon as possible, but
no later than two weeks after the Record Date.
. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting,
instruction solicitation material. The Fund will provide the last
Annual Report to the Company pursuant to the terms of Section 3.3 of
the Agreement to which this Schedule relates.
. The text and format for the Voting Instruction Cards ("Cards" or
"Card") is provided to the Company by the Fund. The Company, at its
expense, shall produce and personalize the Voting Instruction Cards.
The Fund or its affiliate must approve the Card before it is printed.
Allow approximately 2-4 business days for printing information on the
Cards. Information commonly found on the Cards includes:
C-1
<PAGE>
. name (legal name as found on account registration)
. address
. fund or account number
. coding to state number of units
. individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
. During this time, the Fund will develop, produce and pay for the Notice
of Proxy and the Proxy Statement (one document). Printed and folded
notices and statements will be sent to Company for insertion into
envelopes (envelopes and return envelopes are provided and paid for by
the Company). Contents of envelope sent to Customers by the Company
will include:
. Voting Instruction Card(s)
. One proxy notice and statement (one document)
. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important. One copy will be
supplied by the Fund.)
. cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to the Fund.
. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including,) the meeting, counting backwards.
. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process
used. An often used procedure is to sort Cards on arrival by proposal
into vote categories of all yes, no, or mixed replies, and to begin
data entry.
C-2
<PAGE>
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter and a new Card and return envelope. The mutilated or illegible
Card is disregarded and considered to be NOT RECEIVED for purposes of
vote tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to
why they did not complete the system. Any questions on those Cards are
usually remedied individually.
. There are various control procedures used to ensure proper tabulation
of votes and accuracy of that tabulation. The most prevalent is to sort
the Cards as they first arrive into categories depending upon their
vote; an estimate of how the vote is progressing may then be
calculated. If the initial estimates and the actual vote do not
coincide, then an internal audit of that vote should occur. This may
entail a recount.
. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) The Fund
must review and approve tabulation format.
. Final tabulation in shares is verbally given by the Company to the Fund
on the morning of the meeting not later than 10:00 a.m. Eastern time.
The Fund may request an earlier deadline if reasonable and if required
to calculate the vote in time for the meeting.
. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final
vote. The Fund will provide a standard form for each Certification.
C-3
<PAGE>
. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will
be permitted reasonable access to such Cards.
. All approvals and "signing-off' may be done orally, but must always be
followed up in writing.
C-4
<PAGE>
AMENDMENT NO. 1
PARTICIPATION AGREEMENT
The Participation Agreement (the "Agreement"), dated July 27, 1998, by and
among AIM Variable Insurance Funds, Inc., a Maryland corporation, A I M
Distributors, Inc., a Delaware corporation, Allmerica Financial Life Insurance
and Annuity Company, a Delaware life insurance company and Allmerica
Investments, Inc., is hereby amended as follows:
Schedule A of the Agreement is hereby deleted in its entirety and replaced
with the following:
SCHEDULE A
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FUNDS AVAILABLE UNDER SEPARATE ACCOUNTS POLICIES FUNDED BY THE
THE POLICIES UTILIZING THE FUNDS SEPARATE ACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund Fulcrum Account of First Allmerica A3025-96GRC
AIM V.I. Value Fund Financial Life Insurance Company
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Equity Fund
AIM V.I. High Yield Fund
AIM V.I. Dent Demographic Trends Fund
AIM V.I. Aggressive Growth Fund
AIM V.I. Blue Chip Fund
-----------------------------------------------------------------------------------
FUVUL Separate Account of First 1036.NY-99GRC
Allmerica Financial Life Insurance
Company
-----------------------------------------------------------------------------------
Separate Account VA-K(Delaware) Delaware Medallion; Delaware
of First Allmerica Financial Life Golden Medallion; A3030-99
Insurance Company
-----------------------------------------------------------------------------------
Separate Account VA-K of First A3030-99; Agency Replacement
Allmerica Financial Life Insurance
Company
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All other terms and provisions of the Agreement not amended herein shall
remain in full force and effect.
Effective Date:
--------------------
AIM VARIABLE INSURANCE FUNDS, INC.
Attest: By:
-------------------------------- ----------------------------
Name: Nancy L. Martin Name: Robert H. Graham
Title: Assistant Secretary Title: President
(SEAL)
A I M DISTRIBUTORS, INC.
Attest: By:
-------------------------------- ----------------------------
Name: Nancy L. Martin Name: Michael J. Cemo
Title: Assistant Secretary Title: President
1 of 2
<PAGE>
(SEAL)
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
Attest: By:
-------------------------------- ----------------------------
Name: Name:
-------------------------------- ----------------------------
Title: Title:
-------------------------------- ----------------------------
(SEAL)
ALLMERICA INVESTMENTS, INC.
Attest: By:
-------------------------------- ----------------------------
Name: Name:
-------------------------------- ----------------------------
Title: Title:
-------------------------------- ----------------------------
(SEAL)
2 of 2
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 22nd day of October, 1999, by and among The
Alger American Fund (the "Trust"), an open-end management investment company
organized as a Massachusetts business trust, Allmerica Financial Life Insurance
and Annuity Company, a life insurance company organized as a corporation under
the laws of the State of Delaware, (the "Company"), on its own behalf and on
behalf of each segregated asset account of the Company set forth in Schedule A,
as may be amended from time to time (the "Accounts"), and Fred Alger & Company,
Incorporated, a Delaware corporation, the Trust's distributor (the
"Distributor").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Distributor desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, shares of beneficial interest in the Trust are divided into
the following series which are available for purchase by the Company for the
Accounts: Alger American Small Capitalization Portfolio, Alger American Growth
Portfolio, Alger American Income and Growth Portfolio, Alger American Balanced
Portfolio, Alger American MidCap Growth Portfolio, and Alger American Leveraged
AllCap Portfolio;
WHEREAS, the Trust has received an order from the Commission, dated
February 17, 1989 (File No. 812-7076), 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
Portfolios 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 (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and variable annuity contracts to be
issued by the Company under which the Portfolios are to be made available as
investment vehicles (the "Contracts");
1
<PAGE>
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised;
WHEREAS, the Company desires to use shares of the Portfolios indicated
on Schedule A as investment vehicles for the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1. For purposes of this Article I, the Company shall be the Trust's agent
for the receipt from each account of purchase orders and requests for
redemption pursuant to the Contracts relating to each Portfolio,
provided that the Company notifies the Trust of such purchase orders
and requests for redemption by 9:30 a.m. Eastern time on the next
following Business Day, as defined in Section 1.3.
1.2. The Trust shall make shares of the Portfolios available to the Accounts
at the net asset value next computed after receipt of a purchase order
by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust describing
Portfolio purchase procedures. The Company will transmit orders from
time to time to the Trust for the purchase and redemption of shares of
the Portfolios. 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 if, 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,
such action is deemed in the best interests of the shareholders of
such Portfolio.
1.3. The Company shall pay for the purchase of shares of a Portfolio on
behalf of an Account with federal funds to be transmitted by wire to
the Trust, with the reasonable expectation of receipt by the Trust by
2:00 p.m. Eastern time on the next Business Day after the Trust (or
its agent) receives the purchase order. Upon receipt by the Trust of
the federal funds so wired, such funds shall cease to be the
responsibility of the Company and shall become the responsibility of
the Trust for this purpose. "Business Day" shall mean any day on which
the New York Stock Exchange is open for trading and on which the Trust
calculates its net asset value pursuant to the rules of the
Commission.
1.4. The Trust will redeem for cash 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
2
<PAGE>
accordance with the provisions of the then current prospectus of the
Trust describing Portfolio redemption procedures. The Trust shall make
payment for such shares in the manner established from time to time by
the Trust. Proceeds of redemption with respect to a Portfolio will
normally be paid to the Company for an Account in federal funds
transmitted by wire to the Company by order of the Trust with the
reasonable expectation of receipt by the Company by 2:00 p.m. Eastern
time on the next Business Day after the receipt by the Trust (or its
agent) of the request for redemption. Such payment may be delayed if,
for example, the Portfolio's cash position so requires or if
extraordinary market conditions exist, but in no event shall payment
be delayed for a greater period than is permitted by the 1940 Act. The
Trust reserves the right to suspend the right of redemption,
consistent with Section 22(e) of the 1940 Act and any rules
thereunder.
1.5. Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of
the Trust's Portfolios under Section 1.4 on any Business Day may be
netted against one another for the purpose of determining the amount of
any wire transfer.
1.6. Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Accounts. Portfolio Shares purchased from the Trust will be recorded in
the appropriate title for each Account or the appropriate subaccount of
each Account.
1.7. The Trust shall furnish, on or before the ex-dividend date, notice to
the Company of any income dividends or capital gain distributions
payable on the shares of any Portfolio of the Trust. 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.
1.8. The Trust shall calculate the net asset value of each Portfolio on each
Business Day, as defined in Section 1.3. The Trust shall make the net
asset value per share for each Portfolio available to the Company or
its designated agent 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 to the
Company by 6:30 p.m. Eastern time each Business Day.
1.9. The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their segregated asset accounts,
to the Fund Sponsor or its affiliates and to such other entities as may
be permitted by Section 817(h) of the Code, the regulations hereunder,
or judicial or administrative interpretations thereof. No shares of any
Portfolio will be sold directly to the general public. The Company
agrees that it will use Trust shares only for the purposes of funding
the Contracts through the Accounts listed in Schedule A, as amended
from time to time.
3
<PAGE>
1.10. The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding materially to those contained in
Section 2.9 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
Commission 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 shares of the
Portfolios, 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. The Company shall distribute such prospectuses, proxy statements and
periodic reports of the Trust to the Contract owners as required to be
distributed to such Contract owners under applicable federal or state
law.
2.3. The Trust shall provide such documentation (including a final copy of
the Trust's prospectus as set in type or in camera-ready copy) and
other assistance as is reasonably necessary in order for the Company to
print together in one document the current prospectus for the Contracts
issued by the Company and the current prospectus for the Trust. The
Trust shall bear the expense of printing copies of its current
prospectus that will be distributed to existing Contract owners, and
the Company shall bear the expense of printing copies of the Trust's
prospectus that are used in connection with offering the Contracts
issued by the Company.
2.4. The Trust and the Distributor shall provide (1) at the Trust's expense,
one copy of the Trust's current Statement of Additional Information
("SAI") to the Company and to any Contract owner who requests such SAI,
(2) at the Company's expense, such additional copies of the Trust's
current SAI as the Company shall reasonably request and that the
Company shall require in accordance with applicable law in connection
with offering the Contracts issued by the Company.
2.5. The Trust, at its expense, shall provide the Company with copies of its
proxy material, periodic reports to shareholders and other
communications to shareholders in such quantity as the Company shall
reasonably require for purposes of distributing to Contract owners.The
Trust shall bear any costs associated with the distribution of its
proxy materials to existing shareholders. The Trust, at the Company's
expense, shall provide the Company with copies of its periodic reports
to shareholders and other communications to shareholders in such
quantity as the Company shall reasonably request for use in
4
<PAGE>
connection with offering the Contracts issued by the Company. If
requested by the Company in lieu thereof, the Trust shall provide such
documentation (including a final copy of the Trust's proxy materials,
periodic reports to shareholders and other communications to
shareholders, as set in type or in camera-ready copy) and other
assistance as reasonably necessary in order for the Company to print
such shareholder communications for distribution to Contract owners.
2.6. The Company agrees and acknowledges that the Distributor is the sole
owner of the name and mark "Alger" and that all use of any designation
comprised in whole or part of such name or mark under this Agreement
shall inure to the benefit of the Distributor. Except as provided in
Section 2.5, the Company shall not use any such name or 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 Distributor. Upon termination of this Agreement
for any reason, the Company shall cease all use of any such name or
mark as soon as reasonably practicable.
2.7. The Company shall furnish, or cause to be furnished, to the Trust or
its designee a copy of each Contract prospectus and/or statement of
additional information describing the Contracts, each report to
Contract owners, proxy statement, application for exemption or request
for no-action letter in which the Trust or the Distributor is named
contemporaneously with the filing of such document with the
Commission. 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 Distributor is named,
at least five Business Days prior to its use. No such material shall
be used if the Trust or its designee reasonably objects to such use
within three Business Days after receipt of such material.
2.8. The Company shall not give any information or make any representations
or statements on behalf of the Trust or concerning the Trust or the
Distributor in connection with the sale of the Contracts other than
information or representations contained in and accurately derived
from the registration statement or prospectus for the Trust shares (as
such registration statement and prospectus may be amended or
supplemented from time to time), annual and semi-annual reports of the
Trust, Trust-sponsored proxy statements, or in sales literature or
other promotional material approved by the Trust or its designee,
except as required by legal process or regulatory authorities or with
the prior written permission of the Trust, the Distributor or their
respective designees. The Trust and the Distributor agree to respond
to any request for approval on a prompt and timely basis. The Company
shall adopt and implement procedures reasonably designed to ensure
that "broker only" materials including information therein about the
Trust or the Distributor are not distributed to existing or
prospective Contract owners.
5
<PAGE>
2.9. The Trust shall use its best efforts to provide the Company, on a
timely basis, with such information about the Trust, the Portfolios and
the Distributor, in such form as the Company may reasonably require, as
the Company shall reasonably request in connection with the preparation
of registration statements, prospectuses and annual and semi-annual
reports pertaining to the Contracts.
2.10. The Trust and the Distributor shall not give, and agree that no
affiliate of either of them 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 prior written permission of the Company. The
Company agrees to respond to any request for approval on a prompt and
timely basis.
2.11. So long as, and to the extent that, the Commission interprets the 1940
Act to require pass-through voting privileges for Contract owners, the
Company will provide pass-through voting privileges to Contract owners
whose cash values are invested, through the registered Accounts, in
shares of one or more Portfolios 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 registered Account, the
Company will vote shares of each Portfolio of the Trust held by a
registered Account and for which no timely voting instructions from
Contract owners are received 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 Portfolio shares held to fund the Contacts without the
prior written consent of the Trust, which consent may be withheld in
the Trust's sole discretion. The Company reserves the right, to the
extent permitted by law, to vote shares held in any Account in its
sole discretion.
2.12. The Company and the Trust will each provide to the other information
about the results of any regulatory examination relating to the
Contracts or the Trust, including relevant portions of any "deficiency
letter" and any response thereto.
2.13. No compensation shall be paid by the Trust to the Company, or by the
Company to the Trust, under this Agreement (except for specified
expense reimbursements). However, nothing herein shall prevent the
parties hereto from otherwise agreeing to perform, and arranging for
appropriate compensation for, other services relating to the Trust, the
Accounts or both.
6
<PAGE>
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
Delaware and that it has legally and validly established each Account
as a segregated asset account under such law as of the date set forth
in Schedule A, and that Allmerica Investments, Inc., the principal
underwriter for the Contracts, is registered as a broker-dealer under
the Securities Exchange Act of 1934 and is a member in good standing of
the National Association of Securities Dealers, Inc.
3.2. The Company represents and warrants that it has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act
and cause each Account to remain so registered to serve as a segregated
asset account for the Contracts, unless an exemption from registration
is available.
3.3. The Company represents and warrants that the Contracts will be
registered under the 1933 Act unless an exemption from registration is
available prior to any issuance or sale of the Contracts; the Contracts
will be issued and sold in compliance in all material respects with all
applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance law suitability
requirements.
3.4. The Trust represents and warrants that it is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act and
the rules and regulations thereunder.
3.5. The Trust and the Distributor represent and warrant that the Portfolio
shares offered and sold pursuant to this Agreement will be registered
under the 1933 Act and sold in accordance with all applicable federal
and state laws, and the Trust shall be registered under the 1940 Act
prior to and at the time of any issuance or sale of such shares. The
Trust shall amend its registration statement under the 1933 Act and
the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Trust shall register and
qualify its shares for sale in accordance with the laws of the various
states only if and to the extent deemed advisable by the Trust.
3.6. The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements for
variable annuity, endowment or life insurance contracts set forth in
Section 817(h) of the Internal Revenue Code of 1986, as amended
7
<PAGE>
(the "Code"), and the rules and regulations thereunder, including
without limitation Treasury Regulation 1.817-5, and will notify the
Company immediately upon having a reasonable basis for believing any
Portfolio has ceased to comply or might not so comply and will
immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by
Regulation 1.817-5.
3.7. The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it
will make every effort to maintain such qualification and will notify
the Company immediately upon having a reasonable basis for believing it
has ceased to so qualify or might not so qualify in the future.
3.8. The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of
a Portfolio shall at all times be covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less
than the minimum coverage required by Rule 17g-1 or other applicable
regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3.9. The Distributor represents that it is duly organized and validly
existing under the laws of the State of Delaware and that it is
registered, and will remain registered, during the term of this
Agreement, as a broker-dealer under the Securities Exchange Act of 1934
and is a member in good standing of the National Association of
Securities Dealers, Inc.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1. The parties acknowledge that a Portfolio's shares may be made available
for investment to other Participating Insurance Companies. In such
event, the Trustees will monitor the Trust for the existence of any
material irreconcilable conflict between the interests of the contract
owners of all Participating Insurance Companies. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory 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 Trust shall promptly inform the Company of any
determination by the Trustees that a material irreconcilable conflict
exists and of the implications thereof.
4.2. The Company agrees to report promptly any potential or existing
conflicts of which it is
8
<PAGE>
aware to the Trustees. The Company will assist the Trustees in
carrying out their responsibilities under the Shared Funding Exemptive
Order by providing the Trustees with all information reasonably
necessary for and requested by 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. All
communications from the Company to the Trustees may be made in care of
the Trust.
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 own expense and to the
extent reasonably practicable (as determined by the Trustees) take
whatever steps are necessary to remedy or eliminate the material
irreconcilable conflict, which steps could include: (a) withdrawing
the assets allocable to some or all of the Accounts from the Trust or
any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Trust,
or submitting the question of whether or not such segregation should
be implemented to a vote of all affected Contract owners and, as
appropriate, segregating the assets of any appropriate group (i.e.,
annuity contract owners, life insurance contract owners, or variable
contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (b)
establishing a new registered management investment company or managed
separate account.
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 the Trust has
determined that such decision has created a material irreconcilable
conflict; provided, however, that such withdrawal and termination
shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the
disinterested Trustees. Until the
9
<PAGE>
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 Section 4.3 through 4.6 of this Agreement, a majority
of the disinterested Trustees shall determine whether any proposed
action adequately remedies any material irreconcilable conflict, but
in no event will the Trust be required to establish a new funding
medium for any Contract. The Company shall not 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 material irreconcilable conflict. In the
event that the Trustees determine that any proposed action does not
adequately remedy any material irreconcilable conflict, then the
Company will withdraw the Account's investment 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 Shared Funding Exemptive Order, and said reports, materials and
data shall be submitted more frequently if reasonably deemed
appropriate by the Trustees.
4.8. If and to the extent that Rule 6e-3(T) is amended, or Rule 6e-3 is
adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared
Funding Exemptive Order, then the Trust and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with Rule 6e-3(T), as amended, or 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 Distributor, the Trust and each of its Trustees,
officers, employees and agents and each person, if any, who controls
the Trust within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section
5.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Company, which consent shall not be unreasonably withheld) 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
10
<PAGE>
connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or
regulation, or at common law or otherwise, insofar as such Losses are
related to the sale or acquisition of the Contracts or Trust shares
and:
(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 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 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; or
(f) arise out of or result from the provision by the Company to
the Trust of insufficient or incorrect information regarding
the purchase or sale of shares of any Portfolio, or the
failure of the Company to provide such information on a timely
basis.
11
<PAGE>
5.2. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor agrees to
indemnify and hold harmless the Company and each of its directors,
officers, employees, and agents and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for the purposes of this
Section 5.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the
Distributor, which consent shall not be unreasonably withheld) or
expenses (including the reasonable costs of investigating or defending
any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively,
"Losses"), to which the Indemnified Parties may become subject under
any statute or regulation, or at common law or otherwise, insofar as
such Losses are related to the sale or acquisition of the Contracts or
Trust shares and:
(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 Distributor or 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 form Company Documents) or wrongful conduct
of the Distributor or persons under its control, with respect
to the sale or acquisition of the Contracts or Portfolio
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 Distributor or
the Trust to provide the services or furnish the materials
required under the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor or the
Trust in this Agreement or arise out of or
12
<PAGE>
result from any other material breach of this Agreement by the
Distributor or the Trust.
5.3. None of the Company, the Trust or the Distributor 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 Company, the Trust or the Distributor 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 party 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 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 an Indemnified Party, 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:
13
<PAGE>
(a) at the option of any party upon 60 days advance written notice
to the other parties, unless a shorter time is agreed to by
the parties;
(b) at the option of the Trust or the Distributor if the Contracts
issued by the Company 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
(c) at the option of any party upon a determination by a majority
of the Trustees of the Trust, or a majority of its
disinterested Trustees, that a material irreconcilable
conflict exists; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust or the Distributor by the NASD,
the SEC, or any state securities or insurance department or
any other regulatory body regarding the Trust's or the
Distributor's duties under this Agreement or related to the
sale of Trust shares or the operation of the Trust; or
(e) at the option of the Company if the Trust or a Portfolio fails
to meet the diversification requirements specified in Section
3.6 hereof; or
(f) at the option of the Company if shares of the Series are not
reasonably available to meet the requirements of the Variable
Contracts issued by the Company, as determined by the Company,
and upon prompt notice by the Company to the other parties; or
(g) at the option of the Company in the event any of the shares of
the Portfolio are not registered, issued or sold in accordance
with applicable state and/or federal law, or such law
precludes the use of such shares as the underlying investment
media of the Variable Contracts issued or to be issued by the
Company; or
(h) at the option of the Company, if the Portfolio fails to
qualify as a Regulated Investment Company under Subchapter M
of the Code; or
(i) at the option of the Distributor if it shall determine in its
sole judgment exercised in good faith, that the Company and/or
its affiliated companies has suffered a
material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares
of any Portfolio and redeem
14
<PAGE>
shares of 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.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.9 shall
survive the termination of this Agreement as long as shares of the
Trust are held on behalf of Contract owners in accordance with Section
6.2.
ARTICLE VII.
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or its Distributor:
Fred Alger Management, Inc.
30 Montgomery Street
Jersey City, NJ 07302
Attn: Gregory S. Duch
If to the Company:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Attn: Richard M. Reilly, President
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 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,
15
<PAGE>
statute, rule or otherwise, the remainder of the Agreement shall not
be affected thereby.
8.4. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York. It
shall also be subject to the provisions of the federal securities laws
and the rules and regulations thereunder and to any orders of the
Commission granting exemptive relief therefrom and the conditions of
such orders. Copies of any such orders shall be promptly forwarded by
the Trust to the Company.
8.5. 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 no Trustee, officer, agent or
holder of shares of beneficial interest of the Trust shall be
personally liable for any such liabilities.
8.6. Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Commission,
the National Association of Securities Dealers, Inc. 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. 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.
8.11. Each party hereto shall, except as required by law or otherwise
permitted by this greement, 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
shall not disclose such confidential information without the written
consent of the affected party unless such information has become
publicly available.
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.
16
<PAGE>
Fred Alger & Company, Incorporated
By: /s/ Gregory S. Duch
--------------------------------
Name: Gregory S. Duch
Title: Executive Vice President
The Alger American Fund
By: /s/ Gregory S. Duch
--------------------------------
Name: Gregory S. Duch
Title: Treasurer
Allmerica Financial Life Insurance and Annuity Company
By: /s/ Richard M. Reilly
--------------------------------
Name: Richard M. Reilly
Title: President
17
<PAGE>
SCHEDULE A
The Alger American Fund
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American Income and Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Balanced Portfolio
Alger American MidCap Growth Portfolio
The Accounts:
Separate Account KG
Separate Account KGC
FUVUL Separate Account of Allmerica Financial Life
Insurance and Annuity Company
Separate Account VA-K(Delaware)
18
<PAGE>
PARTICIPATION AGREEMENT
AMONG
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY,
ALLMERICA INVESTMENTS, INC.
ALLIANCE CAPITAL MANAGEMENT L.P.
AND
ALLIANCE FUND DISTRIBUTORS, INC.
DATED AS OF
MAY 1, 2000
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of the first day of May, 2000
("Agreement"), by and among Allmerica Financial Life Insurance and Annuity
Company, a Delaware life insurance company ("Insurer") (on behalf of itself and
its "Separate Account," defined below); Allmerica Investments, Inc., a
Massachusetts corporation ("Contracts Distributor"), the principal underwriter
with respect to the Contracts referred to below; Alliance Capital Management
L.P., a Delaware limited partnership ("Adviser"), the investment adviser of the
Fund referred to below; and Alliance Fund Distributors, Inc., a Delaware
corporation ("Distributor"), the Fund's principal underwriter (collectively, the
"Parties"),
WITNESSETH THAT:
WHEREAS Insurer, the Distributor, and Alliance Variable Products Series
Fund, Inc. (the "Fund") desire that Class B shares of the Fund's Alliance Growth
Portfolio, Alliance Premier Growth Portfolio, Alliance Growth and Income
Portfolio, and Alliance Technology Portfolio (the "Portfolios"; reference herein
to the "Fund" includes reference to each Portfolio to the extent the context
requires) be made available by Distributor to serve as underlying investment
media for those combination fixed and variable annuity contracts of Insurer
known as ________________ that are the subject of Insurer's Form N-4
registration statement filed with the Securities and Exchange Commission (the
"SEC"), File No. __________________ (the "Contracts"), to be offered through
Contracts Distributor and other registered broker-dealer firms as agreed to by
Insurer and Contracts Distributor; and
WHEREAS the Contracts provide for the allocation of net amounts received by
Insurer to separate series (the "Divisions"; reference herein to the "Separate
Account" includes reference to
1
<PAGE>
each Division to the extent the context requires) of the Separate Account for
investment in Class B shares of corresponding Portfolios of the Fund that are
made available through the Separate Account to act as underlying investment
media,
NOW, THEREFORE, in consideration of the mutual benefits and promises
contained herein, the Fund and Distributor will make Class B shares of the
Portfolios available to Insurer for this purpose at net asset value and with no
sales charges, all subject to the following provisions:
SECTION 1. ADDITIONAL PORTFOLIOS
The Fund has and may, from time to time, add additional Portfolios, which
will become subject to this Agreement, if, upon the written consent of each of
the Parties hereto, they are made available as investment media for the
Contracts.
SECTION 2. PROCESSING TRANSACTIONS
2.1 TIMELY PRICING AND ORDERS.
The Adviser or its designated agent will provide closing net asset value,
dividend and capital gain information for each Portfolio to Insurer at the close
of trading on each day (a "Business Day") on which (a) the New York Stock
Exchange is open for regular trading, (b) the Fund calculates the Portfolio's
net asset value and (c) Insurer is open for business. The Fund or its designated
agent will use its best efforts to provide this information by 6:00 p.m.,
Eastern time. Insurer will use these data to calculate unit values, which in
turn will be used to process transactions that receive that same Business Day's
Separate Account Division's unit values. Such Separate Account processing will
be done the same evening, and corresponding orders with
2
<PAGE>
respect to Fund shares will be placed the morning of the following Business Day.
Insurer will use its best efforts to place such orders with the Fund by
10:00 a.m., Eastern time.
2.2 TIMELY PAYMENTS.
Insurer will transmit orders for purchases and redemptions of Fund shares
to Distributor, and will wire payment for net purchases to a custodial account
designated by the Fund on the day the order for Fund shares is placed, to the
extent practicable. Payment for net redemptions will be wired by the Fund to an
account designated by Insurer on the same day as the order is placed, to the
extent practicable, and in any event be made within six calendar days after the
date the order is placed in order to enable Insurer to pay redemption proceeds
within the time specified in Section 22(e) of the Investment Company Act of
1940, as amended (the "1940 Act").
2.3 REDEMPTION IN KIND.
The Fund reserves the right to pay any portion of a redemption in kind of
portfolio securities, if the Fund's board of directors (the "Board of
Directors") determines that it would be detrimental to the best interests of
shareholders to make a redemption wholly in cash.
2.4 APPLICABLE PRICE.
The Parties agree that Portfolio share purchase and redemption orders
resulting from Contract owner purchase payments, surrenders, partial
withdrawals, routine withdrawals of charges, or other transactions under
Contracts will be executed at the net asset values as determined as of the close
of regular trading on the New York Stock Exchange on the Business Day that
Insurer receives such orders and processes such transactions, which, Insurer
agrees shall occur not earlier than the Business Day prior to Distributor's
receipt of the corresponding orders for purchases and redemptions of Portfolio
shares. For the purposes of this section, Insurer shall be deemed to be the
3
<PAGE>
agent of the Fund for receipt of such orders from holders or applicants of
contracts, and receipt by Insurer shall constitute receipt by the Fund. All
other purchases and redemptions of Portfolio shares by Insurer, will be effected
at the net asset values next computed after receipt by Distributor of the order
therefor, and such orders will be irrevocable. Insurer hereby elects to reinvest
all dividends and capital gains distributions in additional shares of the
corresponding Portfolio at the record-date net asset values until Insurer
otherwise notifies the Fund in writing, it being agreed by the Parties that the
record date and the payment date with respect to any dividend or distribution
will be the same Business Day.
SECTION 3. COSTS AND EXPENSES
3.1 GENERAL.
Except as otherwise specifically provided herein, each Party will bear all
expenses incident to its performance under this Agreement.
3.2 REGISTRATION.
The Fund will bear the cost of its registering as a management investment
company under the 1940 Act and registering its shares under the Securities Act
of 1933, as amended (the "1933 Act"), and keeping such registrations current and
effective; including, without limitation, the preparation of and filing with the
SEC of Forms N-SAR and Rule 24f-2 Notices respecting the Fund and its shares and
payment of all applicable registration or filing fees with respect to any of the
foregoing. Insurer will bear the cost of registering the Separate Account as a
unit investment trust under the 1940 Act and registering units of interest under
the Contracts under the 1933 Act and keeping such registrations current and
effective; including, without limitation, the preparation and filing with the
SEC of Forms
4
<PAGE>
N-SAR and Rule 24f-2 Notices respecting the Separate Account and its units of
interest and payment of all applicable registration or filing fees with respect
to any of the foregoing.
3.3 OTHER (NON-SALES-RELATED) EXPENSES.
The Fund will bear the costs of preparing, filing with the SEC and setting
for printing the Fund's prospectus, statement of additional information and any
amendments or supplements thereto (collectively, the "Fund Prospectus"),
periodic reports to shareholders, Fund proxy material and other shareholder
communications and any related requests for voting instructions from
Participants (as defined below). Insurer will bear the costs of preparing,
filing with the SEC and setting for printing, the Separate Account's prospectus,
statement of additional information and any amendments or supplements thereto
(collectively, the "Separate Account Prospectus"), any periodic reports to
owners, annuitants or participants under the Contracts (collectively,
"Participants"), and other Participant communications. The Fund and Insurer each
will bear the costs of printing in quantity and delivering to existing
Participants the documents as to which it bears the cost of preparation as set
forth above in this Section 3.3, it being understood that reasonable cost
allocations will be made in cases where any such Fund and Insurer documents are
printed or mailed on a combined or coordinated basis. If REQUESTED by Insurer,
the Fund will provide annual Prospectus text to Insurer on diskette for printing
and binding with the Separate Account Prospectus.
3.4 OTHER SALES-RELATED EXPENSES.
Expenses of distributing the Portfolio's shares and the Contracts will be
paid by Contracts Distributor and other parties, as they shall determine by
separate agreement.
5
<PAGE>
3.5 PARTIES TO COOPERATE.
The Adviser, Insurer, Contracts Distributor, and Distributor each agrees to
cooperate with the others, as applicable, in arranging to print, mail and/or
deliver combined or coordinated prospectuses or other materials of the Fund and
Separate Account.
SECTION 4. LEGAL COMPLIANCE
4.1 TAX LAWS.
(a) The Adviser will use its best efforts to qualify and to maintain
qualification of each Portfolio as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
the Adviser or Distributor will notify Insurer immediately upon having a
reasonable basis for believing that a Portfolio has ceased to so qualify or that
it might not so qualify in the future.
(b) Insurer represents that it believes, in good faith, that the
Contracts will be treated as [annuity] contracts under applicable provisions of
the Code and that it will make every effort to maintain such treatment. Insurer
will notify the Fund and Distributor immediately upon having a reasonable basis
for believing that any of the Contracts have ceased to be so treated or that
they might not be so treated in the future.
(c) The Fund will use its best efforts to comply and to maintain each
Portfolio's compliance with the diversification requirements set forth in
Section 817(h) of the Code and Section 1.817-5(b) of the regulations under the
Code, and the Fund, Adviser or Distributor will notify Insurer immediately upon
having a reasonable basis for believing that a Portfolio has ceased to so comply
or that a Portfolio might not so comply in the future.
6
<PAGE>
(d) Insurer represents that it believes, in good faith, that the Separate
Account is a "segregated asset account" and that interests in the Separate
Account are offered exclusively through the purchase of or transfer into a
"variable contract," within the meaning of such terms under Section 817(h) of
the Code and the regulations thereunder. Insurer will make every effort to
continue to meet such definitional requirements, and it will notify the Fund and
Distributor immediately upon having a reasonable basis for believing that such
requirements have ceased to be met or that they might not be met in the future.
(e) The Adviser will manage the Fund as a RIC in compliance with
Subchapter M of the Code and will use its best efforts to comply with
Section 817(h) of the Code and regulations thereunder. The Fund has adopted and
will maintain procedures for ensuring that the Fund is managed in compliance
with Subchapter M and Section 817(h) and regulations thereunder.
(f) Should the Distributor or Adviser become aware of a failure of Fund,
or any of its Portfolios, to comply with Subchapter M of the Code or
Section 817(h) of the Code and regulations thereunder, they represent and agree
that they will immediately notify Insurer of such in writing.
4.2 INSURANCE AND CERTAIN OTHER LAWS.
(a) The Adviser will use its best efforts to cause the Fund to comply
with any applicable state insurance laws or regulations, to the extent
specifically requested in writing by Insurer. If it cannot comply, it will so
notify Insurer in writing.
(b) Insurer represents and warrants that (i) it is an insurance company
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its
7
<PAGE>
obligations under this Agreement, (ii) it has legally and validly established
and maintains the Separate Account as a segregated asset account under Delaware
law, and (iii) the Contracts comply in all material respects with all other
applicable federal and state laws and regulations.
(c) Insurer and Contracts Distributor represent and warrant that
Contracts Distributor is a business corporation duly organized, validly
existing, and in good standing under the laws of the State of Massachusetts and
has full corporate power, authority and legal right to execute, deliver, and
perform its duties and comply with its obligations under this Agreement.
(d) Distributor represents and warrants that it is a business corporation
duly organized, validly existing, and in good standing under the laws of the
State of Delaware and has full corporate power, authority and legal right to
execute, deliver, and perform its duties and comply with its obligations under
this Agreement.
(e) Distributor represents and warrants that the Fund is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Maryland and has full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement.
(f) Adviser represents and warrants that it is a limited partnership,
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full power, authority, and legal right to execute,
deliver, and perform its duties and comply with its obligations under this
Agreement.
8
<PAGE>
4.3 SECURITIES LAWS.
(a) Insurer represents and warrants that (i) interests in the Separate
Account pursuant to the Contracts will be registered under the 1933 Act to the
extent required by the 1933 Act and the Contracts will be duly authorized for
issuance and sold in compliance with Delaware law, (ii) the Separate Account is
and will remain registered under the 1940 Act to the extent required by the 1940
Act, (iii) the Separate Account does and will comply in all material respects
with the requirements of the 1940 Act and the rules thereunder, (iv) the
Separate Account's 1933 Act registration statement relating to the Contracts,
together with any amendments thereto, will, at all times comply in all material
respects with the requirements of the 1933 Act and the rules thereunder, and (v)
the Separate Account Prospectus will at all times comply in all material
respects with the requirements of the 1933 Act and the rules thereunder.
(b) The Adviser and Distributor represent and warrant that (i) Fund
shares sold pursuant to this Agreement will be registered under the 1933 Act to
the extent required by the 1933 Act and duly authorized for issuance and sold in
compliance with Maryland law, (ii) the Fund is and will remain registered under
the 1940 Act to the extent required by the 1940 Act, (iii) the Fund will amend
the registration statement for its shares under the 1933 Act and itself under
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares, (iv) the Fund does and will comply in all material
respects with the requirements of the 1940 Act and the rules thereunder, (v) the
Fund's 1933 Act registration statement, together with any amendments thereto,
will at all times comply in all material respects with the requirements of the
1933 Act and rules thereunder, and (vi) the Fund Prospectus will at all times
comply in all material respects with the requirements of the 1933 Act and the
rules thereunder.
9
<PAGE>
(c) The Fund will register and qualify its shares for sale in accordance
with the laws of any state or other jurisdiction only if and to the extent
reasonably deemed advisable by the Fund, Insurer or any other life insurance
company utilizing the Fund.
(d) Distributor and Contracts Distributor each represents and warrants
that it is registered as a broker-dealer with the SEC under the Securities
Exchange Act of 1934, as amended, and is a member in good standing of the
National Association of Securities Dealers Inc. (the "NASD").
4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER CIRCUMSTANCES.
(a) Distributor or the Fund shall immediately notify Insurer of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar order with respect to the Fund's registration statement
under the 1933 Act or the Fund Prospectus, (ii) any request by the SEC for any
amendment to such registration statement or Fund Prospectus, (iii) the
initiation of any proceedings for that purpose or for any other purpose relating
to the registration or offering of the Fund's shares, or (iv) any other action
or circumstances that may prevent the lawful offer or sale of Fund shares in any
state or jurisdiction, including, without limitation, any circumstances in which
(x) the Fund's shares are not registered and, in all material respects, issued
and sold in accordance with applicable state and federal law or (y) such law
precludes the use of such shares as an underlying investment medium of the
Contracts issued or to be issued by Insurer. Distributor and the Fund will make
every reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to obtain
the lifting thereof at the earliest possible time.
(b) Insurer and Contracts Distributor shall immediately notify the Fund
of (i) the issuance by any court or regulatory body of any stop order, cease and
desist order or similar order with respect to the Separate Account's
registration statement under the 1933 Act relating to the Contracts or the
10
<PAGE>
Separate Account Prospectus, (ii) any request by the SEC for any amendment to
such registration statement or Separate Account Prospectus, (iii) the initiation
of any proceedings for that purpose or for any other purpose relating to the
registration or offering of the Separate Account interests pursuant to the
Contracts, or (iv) any other action or circumstances that may prevent the lawful
offer or sale of said interests in any state or jurisdiction, including, without
limitation, any circumstances in which said interests are not registered and, in
all material respects, issued and sold in accordance with applicable state and
federal law. Insurer and Contracts Distributor will make every reasonable effort
to prevent the issuance of any such stop order, cease and desist order or
similar order and, if any such order is issued, to obtain the lifting thereof at
the earliest possible time.
4.5 INSURER TO PROVIDE DOCUMENTS.
Upon request, Insurer will provide the Fund and the Distributor one
complete copy of SEC registration statements, Separate Account Prospectuses,
reports, any preliminary and final voting instruction solicitation material,
applications for exemptions, requests for no-action letters, and amendments to
any of the above, that relate to the Separate Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6 FUND TO PROVIDE DOCUMENTS.
Upon request, the Fund will provide to Insurer one complete copy of SEC
registration statements, Fund Prospectuses, reports, any preliminary and final
proxy material, applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
11
<PAGE>
SECTION 5. MIXED AND SHARED FUNDING
5.1 GENERAL.
The Fund has obtained an order exempting it from certain provisions of the
1940 Act and rules thereunder so that the Fund is available for investment by
certain other entities, including, without limitation, separate accounts funding
variable life insurance policies and separate accounts of insurance companies
unaffiliated with Insurer ("Mixed and Shared Funding Order"). The Parties
recognize that the SEC has imposed terms and conditions for such orders that are
substantially identical to many of the provisions of this Section 5.
5.2 DISINTERESTED DIRECTORS.
The Fund agrees that its Board of Directors shall at all times consist of
directors a majority of whom (the "Disinterested Directors") are not interested
persons of Adviser or Distributor within the meaning of Section 2(a)(19) of the
1940 Act.
5.3 MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS.
The Fund agrees that its Board of Directors will monitor for the existence
of any material irreconcilable conflict between the interests of the
participants in all separate accounts of life insurance companies utilizing the
Fund, including the Separate Account. Insurer agrees to inform the Board of
Directors of the Fund of the existence of or any potential for any such material
irreconcilable conflict of which it is aware. The concept of a "material
irreconcilable conflict" is not defined by the 1940 Act or the rules thereunder,
but the Parties recognize that such a conflict may arise for a variety of
reasons, including, without limitation:
(a) an action by any state insurance or other regulatory authority;
12
<PAGE>
(b) a change in applicable federal or state insurance, tax or securities
laws or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax or securities
regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Portfolio are being
managed;
(e) a difference in voting instructions given by variable annuity
contract and variable life insurance contract participants or by participants of
different life insurance companies utilizing the Fund; or
(f) a decision by a life insurance company utilizing the Fund to
disregard the voting instructions of participants.
Insurer will assist the Board of Directors in carrying out its
responsibilities by providing the Board of Directors with all information
reasonably necessary for the Board of Directors to consider any issue raised,
including information as to a decision by Insurer to disregard voting
instructions of Participants.
5.4 CONFLICT REMEDIES.
(a) It is agreed that if it is determined by a majority of the members of
the Board of Directors or a majority of the Disinterested Directors that a
material irreconcilable conflict exists, Insurer and the other life insurance
companies utilizing the Fund will, at their own expense and to the extent
reasonably practicable (as determined by a majority of the Disinterested
Directors), take
13
<PAGE>
whatever steps are necessary to remedy or eliminate the material irreconcilable
conflict, which steps may include, but are not limited to:
(i) withdrawing the assets allocable to some or all of the separate
accounts from the Fund or any Portfolio and reinvesting such assets
in a different investment medium, including another Portfolio of the
Fund, or submitting the question whether such segregation should be
implemented to a vote of all affected participants and, as
appropriate, segregating the assets of any particular group (e.g.,
annuity contract owners or participants, life insurance contract
owners or all contract owners and participants of one or more life
insurance companies utilizing the Fund) that votes in favor of such
segregation, or offering to the affected contract owners or
participants the option of making such a change; and
(ii) establishing a new registered investment company of the type defined
as a "Management Company" in Section 4(3) of the 1940 Act or a new
separate account that is operated as a Management Company.
(b) If the material irreconcilable conflict arises because of Insurer's
decision to disregard Participant voting instructions and that decision
represents a minority position or would preclude a majority vote, Insurer may be
required, at the Fund's election, to withdraw the Separate Account's investment
in the Fund. No charge or penalty will be imposed as a result of such
withdrawal. Any such withdrawal must take place within six months after the Fund
gives notice to Insurer that this provision is being implemented, and until such
withdrawal Distributor and the Fund shall continue to accept and implement
orders by Insurer for the purchase and redemption of shares of the Fund.
14
<PAGE>
(c) If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to Insurer conflicts with the
majority of other state regulators, then Insurer will withdraw the Separate
Account's investment in the Fund within six months after the Fund's Board of
Directors informs Insurer that it has determined that such decision has created
a material irreconcilable conflict, and until such withdrawal Distributor and
Fund shall continue to accept and implement orders by Insurer for the purchase
and redemption of shares of the Fund.
(d) Insurer agrees that any remedial action taken by it in resolving any
material irreconcilable conflict will be carried out at its expense and with a
view only to the interests of Participants.
(e) For purposes hereof, a majority of the Disinterested Directors will
determine whether or not any proposed action adequately remedies any material
irreconcilable conflict. In no event, however, will the Fund or Distributor be
required to establish a new funding medium for any Contracts. Insurer will not
be required by the terms hereof to establish a new funding medium for any
Contracts if an offer to do so has been declined by vote of a majority of
Participants materially adversely affected by the material irreconcilable
conflict.
5.5 NOTICE TO INSURER.
The Fund will promptly make known in writing to Insurer the Board of
Directors' determination of the existence of a material irreconcilable conflict,
a description of the facts that give rise to such conflict and the implications
of such conflict.
15
<PAGE>
5.6 INFORMATION REQUESTED BY BOARD OF DIRECTORS.
Insurer and the Fund will at least annually submit to the Board of
Directors of the Fund such reports, materials or data as the Board of Directors
may reasonably request so that the Board of Directors may fully carry out the
obligations imposed upon it by the provisions hereof, and said reports,
materials and data will be submitted at any reasonable time deemed appropriate
by the Board of Directors. All reports received by the Board of Directors of
potential or existing conflicts, and all Board of Directors actions with regard
to determining the existence of a conflict, notifying life insurance companies
utilizing the Fund of a conflict, and determining whether any proposed action
adequately remedies a conflict, will be properly recorded in the minutes of the
Board of Directors or other appropriate records, and such minutes or other
records will be made available to the SEC upon request.
5.7 COMPLIANCE WITH SEC RULES.
If, at any time during which the Fund is serving an investment medium for
variable life insurance policies, 1940 Act Rules 6e-3(T) or, if applicable, 6e-2
are amended or Rule 6e-3 is adopted to provide exemptive relief with respect to
mixed and shared funding, the Parties agree that they will comply with the terms
and conditions thereof and that the terms of this Section 5 shall be deemed
modified if and only to the extent required in order also to comply with the
terms and conditions of such exemptive relief that is afforded by any of said
rules that are applicable.
SECTION 6. TERMINATION
6.1 EVENTS OF TERMINATION.
Subject to Section 6.4 below, this Agreement will terminate as to a
Portfolio:
16
<PAGE>
(a) at the option of Insurer or Distributor upon at least six months
advance written notice to the other Parties, or
(b) at the option of the Fund upon (i) at least sixty days advance
written notice to the other parties, and (ii) approval by (x) a majority of the
disinterested Directors upon a finding that a continuation of this Contract is
contrary to the best interests of the Fund, or (y) a majority vote of the shares
of the affected Portfolio in the corresponding Division of the Separate Account
(pursuant to the procedures set forth in Section 11 of this Agreement for voting
Trust shares in accordance with Participant instructions).
(c) at the option of the Fund upon institution of formal proceedings
against Insurer or Contracts Distributor by the NASD, the SEC, any state
insurance regulator or any other regulatory body regarding Insurer's obligations
under this Agreement or related to the sale of the Contracts, the operation of
the Separate Account, or the purchase of the Fund shares, if, in each case, the
Fund reasonably determines that such proceedings, or the facts on which such
proceedings would be based, have a material likelihood of imposing material
adverse consequences on the Portfolio to be terminated; or
(d) at the option of Insurer upon institution of formal proceedings
against the Fund, Adviser, or Distributor by the NASD, the SEC, or any state
insurance regulator or any other regulatory body regarding the Fund's, Adviser's
or Distributor's obligations under this Agreement or related to the operation or
management of the Fund or the purchase of Fund shares, if, in each case, Insurer
reasonably determines that such proceedings, or the facts on which such
proceedings would be based, have a material likelihood of imposing material
adverse consequences on Insurer, Contracts Distributor or the Division
corresponding to the Portfolio to be terminated; or
17
<PAGE>
(e) at the option of any Party in the event that (i) the Portfolio's
shares are not registered and, in all material respects, issued and sold in
accordance with any applicable state and federal law or (ii) such law precludes
the use of such shares as an underlying investment medium of the Contracts
issued or to be issued by Insurer; or
(f) upon termination of the corresponding Division's investment in the
Portfolio pursuant to Section 5 hereof; or
(g) at the option of Insurer if the Portfolio ceases to qualify as a RIC
under Subchapter M of the Code or under successor or similar provisions; or
(h) at the option of Insurer if the Portfolio fails to comply with
Section 817(h) of the Code or with successor or similar provisions; or
(i) at the option of Insurer if Insurer reasonably believes that any
change in a Fund's investment adviser or investment practices will materially
increase the risks incurred by Insurer.
6.2 FUNDS TO REMAIN AVAILABLE.
Except (i) as necessary to implement Participant-initiated transactions,
(ii) as required by state insurance laws or regulations, (iii) as required
pursuant to Section 5 of this Agreement, or (iv) with respect to any Portfolio
as to which this Agreement has terminated, Insurer shall not (x) redeem Fund
shares attributable to the Contracts, or (y) prevent Participants from
allocating payments to or transferring amounts from a Portfolio that was
otherwise available under the Contracts, until, in either case, 60 calendar days
after Insurer shall have notified the Fund or Distributor of its intention to do
so.
18
<PAGE>
6.3 SURVIVAL OF WARRANTIES AND INDEMNIFICATIONS.
All warranties and indemnifications will survive the termination of this
Agreement.
6.4 CONTINUANCE OF AGREEMENT FOR CERTAIN PURPOSES.
Notwithstanding any termination of this Agreement, the Distributor shall
continue, at the option of the Insurer, to make available shares of the
Portfolios pursuant to the terms and conditions of this Agreement, for all
Contracts in effect on the effective date of termination of this Agreement (the
"Existing Contracts"), except as otherwise provided under Section 5 of this
Agreement. Specifically, and without limitation, the Distributor shall, at the
option of the Insurer, facilitate the sale and purchase of shares of the
Portfolios as necessary in order to process premium payments, surrenders and
other withdrawals, and transfers or reallocations of values under Existing
Contracts.
SECTION 7. PARTIES TO COOPERATE RESPECTING TERMINATION
The other Parties hereto agree to cooperate with and give reasonable
assistance to Insurer in taking all necessary and appropriate steps for the
purpose of ensuring that the Separate Account owns no shares of a Portfolio
after the Final Termination Date with respect thereto.
SECTION 8. ASSIGNMENT
This Agreement may not be assigned by any Party, except with the written
consent of each other Party.
19
<PAGE>
SECTION 9. CLASS B DISTRIBUTION PAYMENTS
From time to time during the term of this Agreement the Distributor may
make payments to the Contracts Distributor pursuant to a distribution plan
adopted by the Fund with respect to the Class B shares of the Portfolios
pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b-1 Plan) in
consideration of the Contracts Distributor's furnishing distribution services
relating to the Class B shares of the Portfolios and providing administrative,
accounting and other services, including personal service and/or the maintenance
of Participant accounts, with respect to such shares. The Distributor has no
obligation to make any such payments, and the Contracts Distributor waives any
such payment, until the Distributor receives monies therefor from the Fund. Any
such payments made pursuant to this Section 9 shall be subject to the following
terms and conditions:
(a) Any such payments shall be in such amounts as the Distributor may from
time to time advise the Contracts Distributor in writing but in any event not in
excess of the amounts permitted by the Rule 12b-1 Plan. Such payments may
include a service fee in the amount of .25 of 1% per annum of the average daily
net assets of the Fund attributable to the Class B shares of a Portfolio held by
clients of the Contracts Distributor. Any such service fee shall be paid solely
for personal service and/or the maintenance of Participant accounts.
(b) The provisions of this Section 9 relate to a plan adopted by the Fund
pursuant to Rule 12b-1. In accordance with Rule 12b-1, any person authorized to
direct the disposition of monies paid or payable by the Fund pursuant to this
Section 9 shall provide the Fund's Board of Directors, and the Directors shall
review, at least quarterly, a written report of the amounts so expended and the
purposes for which such expenditures were made.
(c) The provisions of this Section 9 shall remain in effect for not more
than a year and thereafter for successive annual periods only so long as such
continuance is specifically approved
20
<PAGE>
at least annually in conformity with Rule 12b-1 and the 1940 Act. The provisions
of this Section 9 shall automatically terminate in the event of the assignment
(as defined by the 1940 Act) of this Agreement, in the event the Rule 12b-1 Plan
terminates or is not continued or in the event this Agreement terminates or
ceases to remain in effect. In addition, the provisions of this Section 9 may be
terminated at any time, without penalty, by either the Distributor or the
Contracts Distributor with respect to any Portfolio on not more than 60 days'
nor less than 30 days' written notice delivered or mailed by registered mail,
postage prepaid, to the other party.
SECTION 10. NOTICES
Notices and communications required or permitted by Section 2 hereof will
be given by means mutually acceptable to the Parties concerned. Each other
notice or communication required or permitted by this Agreement will be given to
the following persons at the following addresses and facsimile numbers, or such
other persons, addresses or facsimile numbers as the Party receiving such
notices or communications may subsequently direct in writing:
If to Insurer
Allmerica Financial Life Insurance and
Annuity Company
440 Lincoln Street
Worcester, MA 01653
Attn: Richard M. Reilly, President
If to Contracts Distributor
Allmerica Investments, Inc.
440 Lincoln Street
Worcester, MA 01653
Attn: William F. Monroe, Jr., President
21
<PAGE>
If to Distributor
Alliance Fund Distributors, Inc.
1345 Avenue of the Americas
New York NY 10105
Attn.: Edmund P. Bergan
FAX: (212) 969-2290
If to Advisor or the Fund
Alliance Capital Management L.P.
1345 Avenue of the Americas
New York NY 10105
Attn: Edmund P. Bergan
FAX: (212) 969-2290
SECTION 11. VOTING PROCEDURES
Subject to the cost allocation procedures set forth in Section 3 hereof,
Insurer will distribute all proxy material furnished by the Fund to Participants
and will vote Fund shares in accordance with instructions received from
Participants. Insurer will vote Fund shares that are (a) not attributable to
Participants or (b) attributable to Participants, but for which no instructions
have been received, in the same proportion as Fund shares for which said
instructions have been received from Participants. Insurer agrees that it will
disregard Participant voting instructions only to the extent it would be
permitted to do so pursuant to Rule 6e-3 (T)(b)(15)(iii) under the 1940 Act if
the Contracts were variable life insurance policies subject to that rule. Other
participating life insurance companies utilizing the Fund will be responsible
for calculating voting privileges in a manner consistent with that of Insurer,
as prescribed by this Section 11.
22
<PAGE>
SECTION 12. FOREIGN TAX CREDITS
The Adviser agrees to consult in advance with Insurer concerning any
decision to elect or not to elect pursuant to Section 853 of the Code to pass
through the benefit of any foreign tax credits to the Fund's shareholders.
SECTION 13. INDEMNIFICATION
13.1 INDEMNIFICATION OF FUND, DISTRIBUTOR AND ADVISER BY INSURER.
(a) Except to the extent provided in Sections 13.1(b) and 13.1(c), below,
Insurer agrees to indemnify and hold harmless the Fund, Distributor and Adviser,
each of their directors and officers, and each person, if any, who controls the
Fund, Distributor or Adviser within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 13. 1)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of Insurer) or actions in respect thereof
(including, to the extent reasonable, legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
actions are related to the sale, acquisition, or holding of the Fund's shares
and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Separate Account's
1933 Act registration statement, the Separate Account Prospectus, the
Contracts or, to the extent prepared by Insurer or Contracts
Distributor, sales literature or advertising for the Contracts (or
any amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged omission to state
therein a material fact
23
<PAGE>
required to be stated therein or necessary to make the statements
therein not misleading; provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to Insurer or
Contracts Distributor by or on behalf of the Fund, Distributor or
Adviser for use in the Separate Account's 1933 Act registration
statement, the Separate Account Prospectus, the Contracts, or sales
literature or advertising (or any amendment or supplement to any of
the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations contained
in the Fund's 1933 Act registration statement, Fund Prospectus, sales
literature or advertising of the Fund, or any amendment or supplement
to any of the foregoing, not supplied for use therein by or on behalf
of Insurer or Contracts Distributor) or the negligent, illegal or
fraudulent conduct of Insurer or Contracts Distributor or persons
under their control (including, without limitation, their employees
and "Associated Persons," as that term is defined in paragraph (m) of
Article I of the NASD's By-Laws), in connection with the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund's 1933 Act
registration statement, Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or supplement to any of the
foregoing, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
24
<PAGE>
statements therein not misleading if such a statement or omission was
made in reliance upon and in conformity with information furnished to
the Fund, Adviser or Distributor by or on behalf of Insurer or
Contracts Distributor for use in the Fund's 1933 Act registration
statement, Fund Prospectus, sales literature or advertising of the
Fund, or any amendment or supplement to any of the foregoing; or
(iv) arise as a result of any failure by Insurer or Contracts Distributor
to perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement.
(b) Insurer shall not be liable under this Section 13.1 with respect to
any losses, claims, damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance by that Indemnified Party of its duties or
by reason of that Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to Distributor or to the Fund.
(c) Insurer shall not be liable under this Section 13.1 with respect to
any action against an Indemnified Party unless the Fund, Distributor or Adviser
shall have notified Insurer in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Insurer of any such action shall not relieve
Insurer from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this Section 13. 1. In
case any such action is brought against an Indemnified Party, Insurer shall be
entitled to participate, at its own expense, in the defense of such action.
Insurer also shall be entitled to assume the defense thereof,
25
<PAGE>
with counsel approved by the Indemnified Party named in the action, which
approval shall not be unreasonably withheld. After notice from Insurer to such
Indemnified Party of Insurer's election to assume the defense thereof, the
Indemnified Party will cooperate fully with Insurer and shall bear the fees and
expenses of any additional counsel retained by it, and Insurer will not be
liable to such Indemnified Party under this Agreement for any legal or other
expenses subsequently incurred by such Indemnified Party independently in
connection with the defense thereof, other than reasonable costs of
investigation.
13.2 INDEMNIFICATION OF INSURER AND CONTRACTS DISTRIBUTOR BY ADVISER.
(a) Except to the extent provided in Sections 13.2(d) and 13.2(e), below,
Adviser agrees to indemnify and hold harmless Insurer and Contracts Distributor,
each of their directors and officers, and each person, if any, who controls
Insurer or Contracts Distributor within the meaning of Section 15 of the 1933
Act (collectively, the "Indemnified Parties" for purposes of this Section 13.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of Adviser) or actions in respect thereof
(including, to the extent reasonable, legal and other expenses) to which the
Indemnified Parties may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or actions are
related to the sale, acquisition, or holding of the Fund's shares and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund's 1933 Act
registration statement, Fund Prospectus, sales literature or
advertising of the Fund or, to the extent not prepared by Insurer or
Contracts Distributor, sales literature or advertising for the
Contracts (or any amendment or supplement to any of the foregoing),
or arise out of or are based
26
<PAGE>
upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading; provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to
Distributor, Adviser or the Fund by or on behalf of Insurer or
Contracts Distributor for use in the Fund's 1933 Act registration
statement, Fund Prospectus, or in sales literature or advertising (or
any amendment or supplement to any of the foregoing); or
(ii) arise out of or as a result of any other statements or
representations (other than statements or representations contained
in the Separate Account's 1933 Act registration statement, Separate
Account Prospectus, sales literature or advertising for the
Contracts, or any amendment or supplement to any of the foregoing,
not supplied for use therein by or on behalf of Distributor, Adviser,
or the Fund) or the negligent, illegal or fraudulent conduct of the
Fund, Distributor, Adviser or persons under their control (including,
without limitation, their employees and Associated Persons), in
connection with the sale or distribution of the Contracts or Fund
shares; or
(iii) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Separate Account's
1933 Act registration statement, Separate Account Prospectus, sales
literature or advertising covering the Contracts, or any amendment or
supplement to any of the foregoing, or the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
if such statement or omission was made
27
<PAGE>
in reliance upon and in conformity with information furnished to
Insurer or Contracts Distributor by or on behalf of the Fund,
Distributor or Adviser for use in the Separate Account's 1933 Act
registration statement, Separate Account Prospectus, sales literature
or advertising covering the Contracts, or any amendment or supplement
to any of the foregoing; or
(iv) arise as a result of any failure by the Fund, Adviser or Distributor
to perform the obligations, provide the services and furnish the
materials required of them under the terms of this Agreement;
(b) Except to the extent provided in Sections 13.2(d) and 13.2(e) hereof,
Adviser agrees to indemnify and hold harmless the Indemnified Parties from and
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement thereof with, except as set forth in Section 13.2(c) below, the
written consent of Adviser) or actions in respect thereof (including, to the
extent reasonable, legal and other expenses) to which the Indemnified Parties
may become subject directly or indirectly under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or actions
directly or indirectly result from or arise out of the failure of any Portfolio
to operate as a regulated investment company in compliance with (i) Subchapter M
of the Code and regulations thereunder and (ii) Section 817(h) of the Code and
regulations thereunder (except to the extent that such failure is caused by
Insurer), including, without limitation, any income taxes and related penalties,
rescission charges, liability under state law to Contract owners or Participants
asserting liability against Insurer or Contracts Distributor pursuant to the
Contracts, the costs of any ruling and closing agreement or other settlement
with the Internal Revenue Service, and the cost of any substitution by Insurer
of shares of another investment company or portfolio for those of any
28
<PAGE>
adversely affected Portfolio as a funding medium for the Separate Account that
Insurer deems necessary or appropriate as a result of the noncompliance.
(c) The written consent of Adviser referred to in Section 13.2(b) above
shall not be required with respect to amounts paid in connection with any ruling
and closing agreement or other settlement with the Internal Revenue Service.
(d) Adviser shall not be liable under this Section 13.2 with respect to
any losses, claims; damages, liabilities or actions to which an Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith, or
gross negligence in the performance by that Indemnified Party of its duties or
by reason of such Indemnified Party's reckless disregard of its obligations and
duties under this Agreement or to Insurer, Contracts Distributor or the Separate
Account.
(e) Adviser shall not be liable under this Section 13.2 with respect to
any action against an Indemnified Party unless Insurer or Contracts Distributor
shall have notified Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but failure to notify Adviser of any such action shall not relieve
Adviser from any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this Section 13.2. In
case any such action is brought against an Indemnified Party, Adviser will be
entitled to participate, at its own expense, in the defense of such action.
Adviser also shall be entitled to assume the defense thereof (which shall
include, without limitation, the conduct of any ruling request and closing
agreement or other settlement proceeding with the Internal Revenue Service),
with counsel approved by the Indemnified Party named in the action, which
approval shall not be unreasonably
29
<PAGE>
withheld. After notice from Adviser to such Indemnified Party of Adviser's
election to assume the defense thereof, the Indemnified Party will cooperate
fully with Adviser and shall bear the fees and expenses of any additional
counsel retained by it, and Adviser will not be liable to such Indemnified Party
under this Agreement for any legal or other expenses subsequently incurred by
such Indemnified Party independently in connection with the defense thereof,
other than reasonable costs of investigation.
13.3 EFFECT OF NOTICE.
Any notice given by the indemnifying Party to an Indemnified Party referred
to in Section 13.1(c) or 13.2(e) above of participation in or control of any
action by the indemnifying Party will in no event be deemed to be an admission
by the indemnifying Party of liability, culpability or responsibility, and the
indemnifying Party will remain free to contest liability with respect to the
claim among the Parties or otherwise.
SECTION 13. APPLICABLE LAW
This Agreement will be construed and the provisions hereof interpreted
under and in accordance with New York law, without regard for that state's
principles of conflict of laws.
SECTION 14. EXECUTION IN COUNTERPARTS
This Agreement may be executed simultaneously in two or more counterparts,
each of which taken together will constitute one and the same instrument.
30
<PAGE>
SECTION 15. SEVERABILITY
If any provision of this Agreement is held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement will not
be affected thereby.
SECTION 16. RIGHTS CUMULATIVE
The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, that the Parties are entitled to under federal and state
laws.
SECTION 17. RESTRICTIONS ON SALES OF FUND SHARES
Insurer agrees that the Fund will be permitted (subject to the other terms
of this Agreement) to make its shares available to separate accounts of other
life insurance companies.
SECTION 18. HEADINGS
The Table of Contents and headings used in this Agreement are for purposes
of reference only and shall not limit or define the meaning of the provisions of
this Agreement.
31
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized officers
signing below.
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
By:
Name:
Title:
ALLMERICA INVESTMENTS, INC.
By:
Name:
Title:
ALLIANCE CAPITAL MANAGEMENT LP
By: Alliance Capital Management
Corporation, its General
Partner
By:
Name:
Title:
ALLIANCE FUND DISTRIBUTORS, INC.
By:
Name:
Title:
32
<PAGE>
PARTICIPATION AGREEMENT
as of [ , ] 2000
Franklin Templeton Variable Insurance Products Trust
Franklin Templeton Distributors, Inc.
[Company]
CONTENTS
PARAGRAPH SUBJECT MATTER
1. Parties and Purpose
2. Representations and Warranties
3. Purchase and Redemption of Trust Portfolio Shares
4. Fees, Expenses, Prospectuses, Proxy Materials and Reports
5. Voting
6. Sales Material, Information and Trademarks
7. Indemnification
8. Notices
9. Termination
10. Miscellaneous
SCHEDULES TO THIS AGREEMENT
A. The Company
B. Accounts of the Company
C. Available Portfolios and Classes of Shares of the Trust;
Investment Advisers
D. Contracts of the Company
E. Other Portfolios Available under the Contracts
F. [REDACTED]
G. Addresses for Notices
H. Shared Funding Order
1. PARTIES AND PURPOSE
This agreement (the "Agreement") is between Franklin Templeton Variable
Insurance Products Trust, an open-end management investment company organized as
a business trust under Massachusetts law (the "Trust"), Franklin Templeton
Distributors, Inc., a California corporation which is the principal underwriter
for the Trust (the "Underwriter," and together with the Trust, "we" or "us") and
the insurance company identified on Schedule A ("you"), on your own behalf and
on behalf of each segregated asset account maintained by you that is listed on
Schedule B, as that schedule may be amended from time to time ("Account" or
"Accounts").
<PAGE>
The purpose of this Agreement is to entitle you, on behalf of the Accounts,
to purchase the shares, and classes of shares, of portfolios of the Trust
("Portfolios") that are identified on Schedule C, solely for the purpose of
funding benefits of your variable life insurance policies or variable annuity
contracts ("Contracts") that are identified on Schedule D. This Agreement does
not authorize any other purchases or redemptions of shares of the Trust.
2. REPRESENTATIONS AND WARRANTIES
(a) REPRESENTATIONS AND WARRANTIES BY YOU
You represent and warrant that:
1. You are an insurance company duly organized and in good standing
under the laws of your state of incorporation.
2. All of your directors, officers, employees, and other
individuals or entities dealing with the money and/or securities of the Trust
are and shall be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Trust, in an amount not less than $5 million.
Such bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company. You agree to make all reasonable efforts
to see that this bond or another bond containing such provisions is always in
effect, and you agree to notify us in the event that such coverage no longer
applies.
3. Each Account is a duly organized, validly existing segregated
asset account under applicable insurance law and interests in each Account are
offered exclusively through the purchase of or transfer into a "variable
contract" within the meaning of such terms under Section 817 of the Internal
Revenue Code of 1986, as amended ("Code") and the regulations thereunder. You
will use your best efforts to continue to meet such definitional requirements,
and will notify us immediately upon having a reasonable basis for believing that
such requirements have ceased to be met or that they might not be met in the
future.
4. Each Account either: (i) has been registered or, prior to any
issuance or sale of the Contracts, will be registered as a unit investment
trust under the Investment Company Act of 1940 ("1940 Act"); or (ii) has not
been so registered in proper reliance upon an exemption from registration under
Section 3(c) of the 1940 Act; if the Account is exempt from registration as an
investment company under Section 3(c) of the 1940 Act, you will make every
effort to maintain such exemption and will notify us immediately upon having a
reasonable basis for believing that such exemption no longer applies or might
not apply in the future.
5. The Contracts or interests in the Accounts: (i) are or, prior to
any issuance or sale will be, registered as securities under the Securities Act
of 1933, as amended (the "1933 Act"); or (ii) are not registered because they
are properly exempt from registration under Section 3(a)(2) of the 1933 Act or
will be offered exclusively in transactions that are properly exempt from
registration under Section 4(2) or Regulation D of the 1933 Act, in which case
you will make every effort to maintain such exemption and will notify us
immediately upon having a
2
<PAGE>
reasonable basis for believing that such exemption no longer applies or might
not apply in the future.
6. The Contracts: (i) will be sold by broker-dealers, or their
registered representatives, who are registered with the Securities and Exchange
Commission ("SEC") under the Securities and Exchange Act of 1934, as amended
(the "1934 Act") and who are members in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"); (ii) will be issued and
sold in compliance in all material respects with all applicable federal and
state laws; and (iii) will be sold in compliance in all material respects with
state insurance suitability requirements and NASD suitability guidelines.
7. The Contracts currently are and will be treated as annuity
contracts or life insurance contracts under applicable provisions of the Code
and you will use your best efforts to maintain such treatment; you will notify
us immediately upon having a reasonable basis for believing that any of the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
8. The fees and charges deducted under each Contract, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by you.
9. You will use shares of the Trust only for the purpose of funding
benefits of the Contracts through the Accounts.
10. Contracts will not be sold outside of the United States.
11. With respect to any Accounts which are exempt from registration
under the 1940 Act in reliance on 3(c)(1) or Section 3(c)(7) thereof:
a. the principal underwriter for each such Account and any
subaccounts thereof is a registered broker-dealer with the
SEC under the 1934 Act;
b. the shares of the Portfolios of the Trust are and will
continue to be the only investment securities held by the
corresponding subaccounts; and
c. with regard to each Portfolio, you, on behalf of the
corresponding subaccount; will:
(i) vote such shares held by it in the same proportion as
the vote of all other holders of such shares; and
(ii) refrain from substituting shares of another security
for such shares unless the SEC has approved such
substitution in the manner provided in Section 26 of
the 1940 Act.
3
<PAGE>
(b) REPRESENTATIONS AND WARRANTIES BY THE TRUST
The Trust represents and warrants that:
1. It is duly organized and in good standing under the laws of the
State of Massachusetts.
2. All of its directors, officers, employees and others dealing
with the money and/or securities of a Portfolio are and shall be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Trust in an amount not less that the minimum coverage required by Rule 17g-1 or
other regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3. It is registered as an open-end management investment company
under the 1940 Act.
4. Each class of shares of the Portfolios of the Trust is
registered under the 1933 Act.
5. It will 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.
6. It will comply, in all material respects, with the 1933 and
1940 Acts and the rules and regulations thereunder.
7. It is currently qualified as a "regulated investment company"
under Subchapter M of the Code, it will make every effort to maintain such
qualification, and will notify you 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.
8. The investments of each Portfolio will comply with the
diversification requirements for variable annuity, endowment or life insurance
contracts set forth in Section 817(h) of the Code, and the rules and regulations
thereunder, including without limitation Treasury Regulation 1.817-5. Upon
having a reasonable basis for believing any Portfolio has ceased to comply and
will not be able to comply within the grace period afforded by Regulation
1.817-5, the Trust will notify you immediately and will take all reasonable
steps to adequately diversify the Portfolio to achieve compliance.
9. [REDACTED]
(c) REPRESENTATIONS AND WARRANTIES BY THE UNDERWRITER
The Underwriter represents and warrants that:
1. It is registered as a broker dealer with the SEC under the 1934
Act, and is a member in good standing of the NASD.
4
<PAGE>
2. Each investment adviser listed on Schedule C (each, an
"Adviser") is duly registered as an investment adviser under the Investment
Advisers Act of 1940, as amended, and any applicable state securities law.
(d) WARRANTY AND AGREEMENT BY BOTH YOU AND US
We received an order from the SEC dated November 16, 1993 (file no.
812-8546), which was amended by a notice and an order we received on September
17, 1999 and October 13, 1999, respectively (file no. 812-11698) (collectively,
the "Shared Funding Order," attached to this Agreement as Schedule H). The
Shared Funding Order grants exemptions from certain provisions of the 1940 Act
and the regulations 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 qualified pension and retirement plans outside the separate account context.
You and we both warrant and agree that both you and we will comply with the
"Applicants' Conditions" prescribed in the Shared Funding Order as though such
conditions were set forth verbatim in this Agreement, including, without
limitation, the provisions regarding potential conflicts of interest between the
separate accounts which invest in the Trust and regarding contract owner voting
privileges.
3. PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
(a) We will make shares of the Portfolios available to the Accounts for
the benefit of the Contracts. The shares will be available for purchase at the
net asset value per share next computed after we (or our agent) receive a
purchase order, as established in accordance with the provisions of the then
current prospectus of the Trust. Notwithstanding the foregoing, the Trust's
Board of Trustees ("Trustees") may refuse to sell shares of any Portfolio to any
person, or may suspend or terminate the offering of shares of any Portfolio if
such action is required by law or by regulatory authorities having jurisdiction
or if, in the sole discretion of the Trustees, they deem such action to be in
the best interests of the shareholders of such Portfolio. Without limiting the
foregoing, the Trustees have determined that there is a significant risk that
the Trust and its shareholders may be adversely affected by investors whose
purchase and redemption activity follows a market timing pattern, and have
authorized the Trust, the Underwriter and the Trust's transfer agent to adopt
procedures and take other action (including, without limitation, rejecting
specific purchase orders) as they deem necessary to reduce, discourage or
eliminate market timing activity. You agree to cooperate with us to assist us in
implementing the Trust's restrictions on purchase and redemption activity that
follows a market timing pattern.
(b) We agree that shares of the Trust will be sold only to life
insurance companies which have entered into fund participation agreements with
the Trust ("Participating Insurance Companies") and their separate accounts or
to qualified pension and retirement plans in accordance with the terms of the
Shared Funding Order. No shares of any Portfolio will be sold to the general
public.
(c) [REDACTED]
5
<PAGE>
(d) [REDACTED]
(e) [REDACTED]
(f) [REDACTED]
(g) We will redeem any full or fractional shares of any Portfolio, when
requested by you on behalf of an Account, at the net asset value next computed
after receipt by us (or our agent) of the request for redemption, as established
in accordance with the provisions of the then current prospectus of the Trust.
We shall make payment for such shares in the manner we establish from time to
time, but in no event shall payment be delayed for a greater period than is
permitted by the 1940 Act. Payments for the purchase or redemption of shares by
you may be netted against one another on any Business Day for the purpose of
determining the amount of any wire transfer on that Business Day.
(h) Issuance and transfer of the Portfolio shares will be by book entry
only. Stock certificates will not be issued to you or the Accounts. Portfolio
shares purchased from the Trust will be recorded in the appropriate title for
each Account or the appropriate subaccount of each Account.
(i) We shall furnish, on or before the ex-dividend date, notice to you
of any income dividends or capital gain distributions payable on the shares of
any Portfolio. You hereby elect to receive all such income dividends and capital
gain distributions as are payable on shares of a Portfolio in additional shares
of that Portfolio, and you reserve the right to change this election in the
future. We will notify you of the number of shares so issued as payment of such
dividends and distributions.
4. FEES, EXPENSES, PROSPECTUSES, PROXY MATERIALS AND REPORTS
(a) [REDACTED]
(b) We 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.
We shall bear the costs of preparation and filing of the documents listed in the
preceding sentence, registration and qualification of the Trust's shares of the
Portfolios.
(c) We shall use reasonable efforts to provide you, on a timely basis,
with such information about the Trust, the Portfolios and each Adviser, in such
form as you may reasonably require, as you shall reasonably request in
connection with the preparation of disclosure documents and annual and
semi-annual reports pertaining to the Contracts.
(d) [REDACTED]
(e) [REDACTED]
6
<PAGE>
(f) You assume sole responsibility for ensuring that the Trust's
prospectuses, shareholder reports and communications, and proxy materials are
delivered to Contract owners in accordance with applicable federal and state
securities laws.
5. VOTING
(a) All Participating Insurance Companies shall have the obligations
and responsibilities regarding pass-through voting and conflicts of interest
corresponding to those contained in the Shared Funding Order.
(b) If and to the extent required by law, you shall: (i) solicit voting
instructions from Contract owners; (ii) vote the Trust shares in accordance with
the instructions received from Contract owners; and (iii) vote Trust shares for
which no instructions have been received in the same proportion as Trust shares
of such 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. You reserve the
right to vote Trust shares held in any Account in your own right, to the extent
permitted by law.
(c) So long as, and to the extent that, the SEC interprets the 1940 Act
to require pass-through voting privileges for Contract owners, you shall provide
pass-through voting privileges to Contract owners whose Contract values are
invested, through the Accounts, in shares of one or more Portfolios of the
Trust. We shall require all Participating Insurance Companies to calculate
voting privileges in the same manner and you shall be responsible for assuring
that the Accounts calculate voting privileges in the manner established by us.
With respect to each Account, you will vote shares of each Portfolio of the
Trust held by an Account and for which no timely voting instructions from
Contract owners are received in the same proportion as those shares held by that
Account for which voting instructions are received. You and your agents will in
no way recommend or oppose or interfere with the solicitation of proxies for
Portfolio shares held to fund the Contracts without our prior written consent,
which consent may be withheld in our sole discretion.
6. SALES MATERIAL, INFORMATION AND TRADEMARKS
(a) [REDACTED]
(b) [REDACTED]
(c) You and your agents shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust,
the Underwriter or an Adviser, other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Trust shares (as such registration statement and prospectus
may be amended or supplemented from time to time), annual and semi-annual
reports of the Trust, Trust-sponsored proxy statements, or in Sales literature
or other Promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the written
permission of the Trust or its designee.
7
<PAGE>
(d) We shall not give any information or make any representations or
statements on behalf of you or concerning you, the Accounts or the Contracts
other than information or representations contained in and accurately derived
from disclosure documents for the Contracts (as such disclosure documents may be
amended or supplemented from time to time), or in materials approved by you for
distribution, including Sales literature or other Promotional materials, except
as required by legal process or regulatory authorities or with your written
permission. We may use the names of you, the Accounts and the Contracts in our
sales literature and disclosure documents.
(e) Except as provided in Section 6(b), you shall not use any
designation comprised in whole or part of the names or marks "Franklin" or
"Templeton" or any logo or other trademark relating to the Trust or the
Underwriter without prior written consent, and upon termination of this
Agreement for any reason, you shall cease all use of any such name or mark as
soon as reasonably practicable.
7. INDEMNIFICATION
(a) INDEMNIFICATION BY YOU
1. You agree to indemnify and hold harmless the Underwriter,
the Trust and each of its Trustees, officers, employees and agents and each
person, if any, who controls the Trust within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" and individually the
"Indemnified Party" for purposes of this Section 7) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with your
written consent, which consent shall not be unreasonably withheld) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common law or
otherwise, insofar as such Losses are related to the sale or acquisition of
shares of the Trust or the Contracts and
a. arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a disclosure
document for the Contracts or in the Contracts themselves or in sales
literature generated or approved by you 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 Section 7),
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 you
by or on behalf of the Trust for use in Company Documents or otherwise
for use in connection with the sale of the Contracts or Trust shares; or
8
<PAGE>
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 below in Section 7(b)) or
wrongful conduct of you or persons under your 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 below in Section 7(b) or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading if such statement or
omission was made in reliance upon and accurately derived from written
information furnished to the Trust by or on behalf of you; or
d. arise out of or result from any failure by you to provide
the services or furnish the materials required under the terms of this
Agreement;
e. arise out of or result from any material breach of any
representation and/or warranty made by you in this Agreement or arise out
of or result from any other material breach of this Agreement by you; or
f. arise out of or result from a Contract failing to be
considered a life insurance policy or an annuity Contract, whichever is
appropriate, under applicable provisions of the Code thereby depriving
the Trust of its compliance with Section 817(h) of the Code.
2. You shall not be liable under this indemnification provision
with respect to any Losses 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 Trust or Underwriter, whichever is applicable.
You shall also not be liable under this indemnification provision with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified you 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 you of any such claim shall not relieve you 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, you shall be entitled to
participate, at your own expense, in the defense of such action. Unless the
Indemnified Party releases you from any further obligations under this Section
7(a), you also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice from you to such
party of the your election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
you 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.
9
<PAGE>
3. The Indemnified Parties will promptly notify you of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Trust shares or the Contracts or the operation of
the Trust.
(b) INDEMNIFICATION BY THE UNDERWRITER
1. The Underwriter agrees to indemnify and hold harmless you, and
each of your directors and officers and each person, if any, who controls you
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually an "Indemnified Party" for purposes of this Section
7(b)) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Underwriter, which
consent shall not be unreasonably withheld) 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, at common law or otherwise, insofar as such Losses
are related to the sale or acquisition of the shares of the Trust or the
Contracts and:
a. 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 sales literature of the Trust (or
any amendment or supplement to any of the foregoing) (collectively, the
"Trust Documents") or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission of such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to us by or on behalf of you for use in the Registration
Statement or prospectus for the Trust or in sales literature (or any
amendment or supplement) or otherwise for use in connection with the sale
of the Contracts or Trust shares; or
b. arise out of or as a result of statements or
representations (other than statements or representations contained in
the disclosure documents or sales literature for the Contracts not
supplied by the Underwriter or persons under its control) or wrongful
conduct of the Trust, Adviser or Underwriter or persons under their
control, with respect to the sale or distribution of the Contracts or
Trust shares; or
c. arise out of any untrue statement or alleged untrue
statement of a material fact contained in a disclosure document 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 you by or on behalf of the
Trust; or
d. arise as a result of any failure by us 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
10
<PAGE>
representation specified above in Section 2(b)(7) and the diversification
requirements specified above in Section 2(b)(8); or
e. 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 7(b)(2) and 7(b)(3) hereof.
2. The Underwriter shall not be liable under this indemnification
provision with respect to any Losses 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 you or the Accounts, whichever
is applicable.
3. 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. Unless the Indemnified
Party releases the Underwriter from any further obligations under this Section
7(b), 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 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.
4. You agree promptly to notify the Underwriter of the commencement
of any litigation or proceedings against you or the Indemnified Parties in
connection with the issuance or sale of the Contracts or the operation of each
Account.
11
<PAGE>
(c) INDEMNIFICATION BY THE TRUST
1. The Trust agrees to indemnify and hold harmless you, and each of
your directors and officers and each person, if any, who controls you within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties"
for purposes of this Section 7(c)) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Trust, which consent shall not be unreasonably withheld) 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 Trust, and
arise out of or result from any material breach of any representation and/or
warranty made by the Trust in this Agreement or arise out of or result from any
other material breach of this Agreement by the Trust; as limited by and in
accordance with the provisions of Sections 7(c)(2) and 7(c)(3) hereof. It is
understood and expressly stipulated that neither the holders of shares of the
Trust nor any Trustee, officer, agent or employee of the Trust shall be
personally liable hereunder, nor shall any resort be had to other private
property for the satisfaction of any claim or obligation hereunder, but the
Trust only shall be liable.
2. The Trust shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against any 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
you, the Trust, the Underwriter or each Account, whichever is applicable.
3. The Trust 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 Trust in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claims 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 Trust of any
such claim shall not relieve the Trust 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 Trust will be entitled to participate, at
its own expense, in the defense thereof. Unless the Indemnified Party releases
the Trust from any further obligations under this Section 7(c), the Trust also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Trust to such party of the
Trust'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 Trust
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
12
<PAGE>
4. You agree promptly to notify the Trust of the commencement of
any litigation or proceedings against you or the Indemnified Parties in
connection with this Agreement, the issuance or sale of the Contracts, with
respect to the operation of the Account, or the sale or acquisition of shares of
the Trust.
8. 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 in Schedule G below or
at such other address as such party may from time to time specify in writing to
the other party.
9. TERMINATION
(a) This Agreement may be terminated by any party in its entirety or with
respect to one, some or all Portfolios for any reason by sixty (60) days advance
written notice delivered to the other parties, and shall terminate immediately
in the event of its assignment, as that term is used in the 1940 Act.
(b) This Agreement may be terminated immediately by us upon written
notice to you if:
1. you notify the Trust or the Underwriter that the exemption from
registration under Section 3(c) of the 1940 Act no longer applies, or
might not apply in the future, to the unregistered Accounts, or that the
exemption from registration under Section 4(2) or Regulation D promulgated
under the 1933 Act no longer applies or might not apply in the future, to
interests under the unregistered Contracts; or
2. either one or both of the Trust or the Underwriter respectively,
shall determine, in their sole judgment exercised in good faith, that you
have suffered a material adverse change in your business, operations,
financial condition or prospects since the date of this Agreement or are
the subject of material adverse publicity; or
3. you give us the written notice specified above in Section 3(c)
and at the same time you give us such notice there was no notice of
termination outstanding under any other provision of this Agreement;
provided, however, that any termination under this Section 9(b)(3) shall
be effective forty-five (45) days after the notice specified in Section
3(c) was given; or
4. upon your assignment of this Agreement without our prior written
approval.
(c) If this Agreement is terminated for any reason, except as required by
the Shared Funding Order or pursuant to Section 9(b)(1), above, we shall, at
your option, continue to make available additional shares of any Portfolio and
redeem shares of any Portfolio pursuant to all of the terms and conditions of
this Agreement for all Contracts in effect on the effective date of
13
<PAGE>
termination of this Agreement. If this Agreement is terminated as required by
the Shared Funding Order, its provisions shall govern.
(d) The provisions of Sections 2 (Representations and Warranties) and 7
(Indemnification) shall survive the termination of this Agreement. All other
applicable provisions of this Agreement 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 9(c), except that we shall have no further obligation
to sell Trust shares with respect to Contracts issued after termination.
(e) You shall not redeem Trust shares attributable to the Contracts (as
opposed to Trust shares attributable to your assets held in the Account) except:
(i) as necessary to implement Contract owner initiated or approved transactions;
(ii) as required by state and/or federal laws or regulations or judicial or
other legal precedent of general application (hereinafter referred to as a
"Legally Required Redemption"); or (iii) as permitted by an order of the SEC
pursuant to Section 26(b) of the 1940 Act. Upon request, you shall promptly
furnish to us the opinion of your counsel (which counsel shall be reasonably
satisfactory to us) 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, you shall not prevent Contract
owners from allocating payments to a Portfolio that was otherwise available
under the Contracts without first giving us ninety (90) days notice of your
intention to do so.
10. MISCELLANEOUS
(a) The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions of this
Agreement or otherwise affect their construction or effect.
(b) This Agreement may be executed simultaneously in two or more
counterparts, all of which taken together shall constitute one and the same
instrument.
(c) 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.
(d) This Agreement shall be construed and its provisions interpreted
under and in accordance with the laws of the State of California. It shall also
be subject to the provisions of the federal securities laws and the rules and
regulations thereunder, to any orders of the SEC on behalf of the Trust granting
it exemptive relief, and to the conditions of such orders. We shall promptly
forward copies of any such orders to you.
(e) 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.
14
<PAGE>
(f) Each party to this Agreement 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.
(g) Each party to this Agreement shall treat as confidential all
information reasonably identified as confidential in writing by any other party
to this Agreement, and, except as permitted by this Agreement or as required by
legal process or regulatory authorities, shall not disclose, disseminate, or use
such names and addresses and other confidential information until such time as
they may come into the public domain, without the express written consent of the
affected party. Without limiting the foregoing, no party to this Agreement shall
disclose any information that such party has been advised is proprietary, except
such information that such party is required to disclose by any appropriate
governmental authority (including, without limitation, the SEC, the NASD, and
state securities and insurance regulators).
(h) 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 to this Agreement are entitled to under
state and federal laws.
(i) The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect, except as provided above in
Section 3(c).
(j) Neither this Agreement nor any rights or obligations created by it
may be assigned by any party without the prior written approval of the other
parties.
(k) 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.
15
<PAGE>
IN WITNESS WHEREOF, each of the parties have caused their duly authorized
officers to execute this Agreement.
The Company:
-------------------------------------------------------
By:
----------------------------------------------------
Name:
--------------------------------------------------
Title:
-------------------------------------------------
The Trust: FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
By:
------------------------------------------------
Name: Karen L. Skidmore
Title: Assistant Vice President, Assistant Secretary
The Underwriter: FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By:
------------------------------------------------
Name: [ ]
Title: [ ]
16
<PAGE>
SCHEDULE A
THE COMPANY
[name]
[address]
[state of incorporation]
[name]
[address]
[state of incorporation]
17
<PAGE>
SCHEDULE B
ACCOUNTS OF THE COMPANY
1. Name: [name]
Date Established: [date]
SEC Registration Number: 811-____
2. Name: [name]
Date Established: [date]
SEC Registration Number: 811-____
...
18
<PAGE>
SCHEDULE C
AVAILABLE PORTFOLIOS AND CLASSES OF SHARES OF THE TRUST; INVESTMENT ADVISERS
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST INVESTMENT ADVISER
19
<PAGE>
SCHEDULE D
CONTRACTS OF THE COMPANY
- --------------------------------------------------------------------------------
CONTRACT 1 CONTRACT 2 CONTRACT 3
- --------------------------------------------------------------------------------
CONTRACT/PRODUCT
NAME
- --------------------------------------------------------------------------------
REGISTERED (Y/N)
- --------------------------------------------------------------------------------
SEC REGISTRATION
NUMBER
- --------------------------------------------------------------------------------
REPRESENTATIVE FORM
NUMBERS
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT
NAME/DATE
ESTABLISHED
- --------------------------------------------------------------------------------
SEC REGISTRATION
NUMBER
- --------------------------------------------------------------------------------
PORTFOLIOS AND
CLASSES - ADVISER
- --------------------------------------------------------------------------------
20
<PAGE>
SCHEDULE D CONT.
CONTRACTS OF THE COMPANY
- --------------------------------------------------------------------------------
CONTRACT 4 CONTRACT 5 CONTRACT 6
- --------------------------------------------------------------------------------
CONTRACT/PRODUCT
NAME
- --------------------------------------------------------------------------------
REGISTERED (Y/N)
- --------------------------------------------------------------------------------
SEC REGISTRATION
NUMBER
- --------------------------------------------------------------------------------
REPRESENTATIVE FORM
NUMBERS
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT
NAME/DATE
ESTABLISHED
- --------------------------------------------------------------------------------
SEC REGISTRATION
NUMBER
- --------------------------------------------------------------------------------
PORTFOLIOS AND
CLASSES - ADVISER
- --------------------------------------------------------------------------------
21
<PAGE>
SCHEDULE E
OTHER PORTFOLIOS AVAILABLE UNDER THE CONTRACTS
[names of other portfolios]
22
<PAGE>
SCHEDULE F
[REDACTED]
23
<PAGE>
SCHEDULE G
ADDRESSES FOR NOTICES
To the Company: [ ] Insurance Company
[address]
[address]
Attention: [name, title]
To the Trust: Franklin Templeton Variable Insurance Products Trust
777 Mariners Island Boulevard
San Mateo, California 94404
Attention: Karen L. Skidmore
[title]
To the Underwriter: Franklin Templeton Distributors, Inc.
777 Mariners Island Boulevard
San Mateo, California 94404
Attention: [name, title]
24
<PAGE>
SCHEDULE H
SHARED FUNDING ORDER
25
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
J. Kendall Huber, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each
of them singly, our true and lawful attorneys, with full power to them and each
of them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by Allmerica Financial Life Insurance and
Annuity Company, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and with any other regulatory agency or state authority that may so require,
granting unto said attorneys and each of them, acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys or any of them may lawfully do or cause to be done by virtue hereof.
Witness our hands on the date set forth below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director and Chairman of the Board 4/2/2000
- --------------------------- --------
John F. O'Brien
/s/ Bruce C. Anderson Director 4/2/2000
- --------------------------- --------
Bruce C. Anderson
/s/ Mark R. Colborn Director and Vice President 4/2/2000
- --------------------------- --------
Mark R.Colborn
/s/ John P. Kavanaugh Director, Vice President and 4/2/2000
- --------------------------- Chief Investment Officer --------
John P. Kavanaugh
/s/ J. Kendall Huber Director, Vice President and 4/2/2000
- --------------------------- General Counsel --------
J. Kendall Huber
/s/ J. Barry May Director 4/2/2000
- --------------------------- --------
J. Barry May
/s/ James R. McAuliffe Director 4/2/2000
- --------------------------- --------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, and Chief Financial 4/2/2000
- --------------------------- Officer --------
Edward J. Parry, III
/s/ Richard M. Reilly Director, President and 4/2/2000
- --------------------------- Chief Executive Officer --------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director 4/2/2000
- --------------------------- --------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 4/2/2000
- --------------------------- --------
Eric A. Simonsen
</TABLE>
<PAGE>
April 10, 2000
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: GROUP VEL ACCOUNT OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FILE NO.'S: 33-82658 AND 811-8704
Gentlemen:
In my capacity as Assistant Vice President and Counsel of Allmerica Financial
Life Insurance and Annuity Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
the Group VEL Account on Form S-6 under the Securities Act of 1933 with respect
to the Company's group flexible premium variable life insurance policies.
I am of the following opinion:
1. The Group VEL Account is a separate account of the Company validly
existing pursuant to the Delaware Insurance Code and the regulations
issued thereunder.
2. The assets held in the Group VEL Account equal to the reserves and other
Policy liabilities of the Policies which are supported by the Group VEL
Account are not chargeable with liabilities arising out of any other
business the Company may conduct.
3. The group flexible premium variable life insurance policies, when issued
in accordance with the Prospectuses contained in the Post-Effective
Amendment to the Registration Statement and upon compliance with
applicable local law, will be legal and binding obligations of the
Company in accordance with their terms and when sold will be legally
issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement of the Group VEL Account
on Form S-6 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
April 10, 2000
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
RE: GROUP VEL ACCOUNT OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FILE NO.'S: 33-82658 AND 811-8704
Gentlemen:
This opinion is furnished in connection with the filing by Allmerica Financial
Life Insurance and Annuity Company of the Post-Effective Amendment to the
Registration Statement on Form S-6 of its group flexible premium variable life
insurance policies ("Policies") allocated to the Group VEL Account under the
Securities Act of 1933. The Prospectuses included in this Post-Effective
Amendment to the Registration Statement describe the Policies. I am familiar
with and have provided actuarial advice concerning the preparation of the
Post-Effective Amendment to the Registration Statement, including exhibits.
In my professional opinion, the illustrations of death benefits and cash values
included in Appendix C of the Prospectuses, based on the assumptions stated in
the illustrations, are consistent with the provisions of the Policy. The rate
structure of the Policies has not been designed so as to make the relationship
between premiums and benefits, as shown in the illustrations, appear more
favorable to a prospective purchaser of a Policy for a person age 30 or a person
age 45 than to prospective purchasers of Policies for people at other ages or
underwriting classes.
I am also of the opinion that the aggregate fees and charges under the Policy
are reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by the Company.
I hereby consent to the use of this opinion as an exhibit to this Post-Effective
Amendment of the Registration Statement.
Sincerely,
/s/ Kevin G. Finneran
Kevin G. Finneran, ASA, MAAA
Assistant Vice President and Actuary
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 13 to the Registration Statement of the Group VEL
Account of Allmerica Financial Life Insurance and Annuity Company on Form S-6 of
our report dated February 1, 2000, relating to the financial statements of
Allmerica Financial Life Insurance and Annuity Company, and our report dated
April 3, 2000, relating to the financial statements of the Group VEL Account of
Allmerica Financial Life Insurance and Annuity Company, both of which appear in
such Prospectus. We also consent to the reference to us under the heading
"Independent Accountants" in such Prospectus.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 24, 2000
