<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
REGISTRATION NO. 33-64879
811-8828
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 2 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 8 [X]
NEW ENGLAND VARIABLE ANNUITY
SEPARATE ACCOUNT
(EXACT NAME OF REGISTRANT)
NEW ENGLAND LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
501 BOYLSTON STREET, BOSTON, MASSACHUSETTS 02117
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
DEPOSITOR'S TELEPHONE NUMBER: 617-578-2000
NAME AND ADDRESS OF AGENT FOR SERVICE: COPY TO:
H. James Wilson Stephen E. Roth, Esquire
General Counsel Sutherland, Asbill & Brennan, L.L.P.
New England Life 1275 Pennsylvania Avenue, N.W.
Insurance Company Washington, D.C. 20004-2404
501 Boylston Street
Boston, Massachusetts 02117
It is proposed that this filing will become effective (check appropriate box)
[x] immediately upon filing pursuant to paragraph (b) of Rule 485
[_] on (date) pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] on May 1, 1997 pursuant to paragraph (a)(1) of Rule 485
[_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[_] on (date) pursuant to paragraph (a)(2) of Rule 485
Title of Securities Being Offered: Individual Variable Annuity Contracts
================================================================================
<PAGE>
CROSS REFERENCE SHEETS
Between information contained in the Prospectus and Statement of Additional
Information and the Required Items of Form N-4.
<TABLE>
<CAPTION>
FORM N-4 CAPTION IN STATEMENT OF
ITEM NO. CAPTION IN PROSPECTUS ADDITIONAL INFORMATION
- -------- --------------------- -----------------------
<C> <S> <C>
1 Cover Page
2 Glossary of Special Terms used in
this Prospectus
3 Highlights; Expense Table
4 Inapplicable
5 The Company; The Variable Account;
Investments of the Variable
Account-The New England Zenith
Fund Series
6 Administrative Charges, Contingent
Deferred Sales Charge and Other
Deductions; Distribution of the
Contracts
7 The Contracts; Investments of the
Variable Account (Substitution of
Investments); The Fixed Account;
8 Annuity Payments; Amount of
Variable Annuity Payments
9 The Contracts
10 The Contracts; Cover Page Net Investment Factor
11 The Contracts;
12 Federal Income Tax Status
(Taxation of the Contracts)
13 Inapplicable
14 Table of Contents of Statement of
Additional Information
15 Cover Page
16 Table of Contents
17 Inapplicable
18 Services to the Variable Account
19 Administration Charges, Contingent
Deferred Sales Charge and Other
Deductions
20 Services to the Variable Account
21(b) Calculation of Performance Data
22 Annuity Payments
23 Financial Statements
</TABLE>
<PAGE>
This filing contains a profile in addition to the prospectus for the American
Forerunner Series variable annuity contract.
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
INDIVIDUAL VARIABLE ANNUITY CONTRACT PROFILE
AMERICAN FORERUNNER SERIES
May 1, 1998
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED IN THE PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE READ
THE PROSPECTUS CAREFULLY.
"We," "us," and "our" refer to New England Life Insurance Company. "You" and
"your" refer to the owner of a Contract.
1. WHAT IS THE CONTRACT? The Contract is an individual variable annuity
contract that provides you with a means of investing on a tax-deferred basis
through the New England Variable Annuity Separate Account (the "Variable
Account") in one or more of eleven series of the New England Zenith Fund (the
"Funds"). The Contract is intended for use with certain retirement plans that
qualify for tax benefited treatment under the Internal Revenue Code (the
"Code"), for individual use, and for use with plans and trusts not qualifying
under the Code for tax benefited treatment. The Company may make the Contract
available for use with Section 401(k) plans. The Contract is not currently
intended for use with Section 403(b) plans subject to ERISA. It provides a
death benefit and annuity payment options, some of which provide guaranteed
income or guaranteed payment periods.
The Funds offer a range of investment objectives, from conservative to
aggressive. Your investment in the Funds is NOT guaranteed and you could lose
some or all of any money you allocate to the Funds.
An option is available in some states under which you may allocate all or
part of the value of your Contract to what we call the "Fixed Account." We
guarantee interest on amounts allocated to the Fixed Account at an effective
annual rate of at least 3%. We may credit a higher rate of interest. The Fixed
Account option offers you an opportunity to protect your principal and earn a
guaranteed rate of interest.
The Contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the annuity phase. During the accumulation phase,
earnings accumulate on a tax-deferred basis and are taxed as income when you
make a withdrawal. The annuity phase begins when you begin receiving payments
under one of the annuity payment options described in Section 2. The amount of
money accumulated under your Contract during the accumulation phase will
determine the amount of your annuity payments during the annuity phase.
2. WHAT ARE MY ANNUITY OPTIONS? The Contract offers the following annuity
payment options, either in a fixed or variable form:
.Income for a specified number of years;
.Income for life;
.Income for life, but guaranteed for at least 10 years (this is your
default option);
.Income for life, but guaranteed for at least 20 years;
.Income to age 100;
.Income for two lives, while either is still living;
.Income for two lives, but guaranteed for at least 10 years; and
.Income for two lives, with full payments while both are living and two-
thirds to the survivor.
We may make other annuity payment options available from time to time. The
Contract, when issued, will provide for the third option in variable form,
beginning at age 95 (or the maximum age allowed by state law). During the
accumulation phase, you may select another option, and/or start annuity
payments (that is, annuitize) at an earlier date by surrendering the Contract.
If annuity payments start less than 4 years after you make an investment in
the Contract, charges may apply.
<PAGE>
3. HOW DO I PURCHASE A CONTRACT? The minimum initial investment is currently
$10,000, and any subsequent investments must be at least $250. We reserve the
right not to accept any purchase payment that, when combined with the value of
all the Contracts that you own, would exceed $1,000,000. Currently, we won't
accept any investment that, when combined with the value of all the Contracts
you own, would exceed $5,000,000.
You are eligible to purchase a Contract if you are an individual, employer,
trust, corporation, partnership, custodian, or any entity specified in an
eligible employee benefit plan. A Contract may have joint owners. The Contract
is intended for use with the following retirement plans which offer Federal
tax benefits under the Internal Revenue Code (the "Code"):
Qualified Plans--plans qualified under Section 401(a) or 403(a) of the
Code.
TSA Plans--certain annuity plans under Section 403(b) of the Code.
IRAs--individual retirement accounts under Section 408(a) of the Code and
individual retirement annuities under Section 408(b) of the Code.
Roth IRAs--Roth individual retirement accounts under Section 408A of the
Code.
SEPs and SARSEPs--simplified employee pension plans and salary reduction
simplified employee pension plans under Section 408(k) of the Code.
SIMPLE IRAs--simple retirement accounts under Section 408(p) of the Code.
457 Plans--eligible deferred compensation plans under Section 457 of the
Code.
Governmental Plans--governmental plans within the meaning of Section 414(d)
of the Code.
The Contract may not yet be available to all of the foregoing plans, pending
appropriate state approvals. You should consult a qualified adviser about
using the Contract with those plans. The Company may make the Contract
available for use with Section 401(k) plans. The Contract is not currently
available for use with other plans, including TSA plans subject to the
Employee Retirement Income Security Act of 1974.
4. WHAT ARE MY INVESTMENT OPTIONS UNDER THE CONTRACT? You can allocate your
investment among subaccounts of the Variable Account, which in turn invest in
the Funds. Your investment can be allocated to any one or a combination
(within limits) of the Funds. The Funds currently available under the Contract
are:
Loomis Sayles Small Cap Series Loomis Sayles Balanced Series
Morgan Stanley International Magnum Salomon Brothers Strategic Bond
Equity Series Opportunities Series
Alger Equity Growth Series Back Bay Advisors Bond Income Series
Salomon Brothers U.S. Government
Goldman Sachs Midcap Value Series Series
Davis Venture Value Series Back Bay Advisors Money Market Series
Westpeak Growth and Income Series
In addition, the Fixed Account is available in some states.
5. WHAT ARE THE EXPENSES UNDER THE CONTRACT?
Administration Charge. Each year, we impose an "administration contract
charge" generally equal to the lesser of 2% of your total contract value or
$30 to help cover the costs of the administrative services that we provide for
the Contracts. We waive this charge in certain circumstances.
Mortality and Expense Risk Charge. As compensation for assuming mortality
and expense risks under the Contract, we impose a daily charge at an annual
rate of 1.00% of the daily net assets attributable to your Contract. This
charge, as a percentage of your contract value, is guaranteed not to increase
over the life of your Contract.
Contingent Deferred Sales Charge. We do not impose any sales charge on
investments when they are made, nor do we impose a contingent deferred sales
charge ("CDSC") on withdrawals up to a certain amount each year (the "free
withdrawal amount"). We do, however, impose a CDSC upon the occurrence of a
"CDSC event," one of which is a withdrawal or surrender (including a surrender
to start annuity payments) in excess of the free withdrawal amount. All of the
CDSC events are described in the Prospectus.
2
<PAGE>
The CDSC is deducted only from the investments that we received from you
within four years of the CDSC event according to the following schedule:
<TABLE>
<CAPTION>
APPLICABLE
NUMBER OF YEARS SINCE WE CDSC CHARGE
RECEIVED THE INVESTMENT -----------
<S> <C>
1............... 4%
2............... 3%
3............... 2%
4............... 1%
Thereafter........ 0%
</TABLE>
We will waive the CDSC in certain circumstances.
Premium Tax Charges. Certain states impose a premium tax on annuity purchase
payments received by insurance companies. Generally, we incur a state premium
tax liability on the date when annuity benefits commence. In those states, we
deduct the premium tax charge from the contract value on that date. However,
for Contracts subject to the premium tax law of states which impose a premium
tax on purchase payments when they are made (currently South Dakota), we
deduct the applicable premium tax charge at the earliest of: a full or partial
surrender of the Contract, the date when annuity benefits commence, or payment
of the death proceeds (including application of the death proceeds to the
beneficiary continuation provision) upon your death. State premium tax charges
currently range from 1/2% to 2.25% of the contract value (or, if applicable,
purchase payments or death proceeds) for Contracts used with retirement plans
qualifying for tax benefited treatment and from 1% to 3 1/2% of the contract
value (or, if applicable, death proceeds) for all other Contracts.
Other Expenses. In addition to our charges under the Contract, each Fund
deducts amounts from its assets to pay for its advisory fees and other
expenses.
The following chart is designed to help you understand the charges in the
Contract. The column "Total Annual Charges" shows the total of the
administration contract charge (which is represented as .06%), the 1.00%
mortality and expense risk charge, and the investment charges for each Fund
for the year ended December 31, 1997 (as a percentage of average net assets
after giving effect to any current expense cap or expense deferral). Charges
and expenses represent anticipated amounts for the Midcap Value Series based
on the management fee approved by shareholders of the Series that became
effective on May 1, 1998, and other expenses actually incurred for the Series
for 1997. The next two columns show the dollar amount of charges you would pay
assuming that you invested $1,000 in a Contract which earns 5% annually and
further assuming that you surrender your Contract or that you elect to
annuitize under a period certain option for a specified period of less than 15
years: (1) at the end of one year, and (2) at the end of ten years. In the
first example, a CDSC will be charged because you would be surrendering or
annuitizing the Contract within four years of making the investment. In the
second example, there would be no CDSC. We are also assuming that no premium
taxes have been assessed in either example. For more detailed information, see
the Fee Table in the Prospectus for the Contract.
<TABLE>
<CAPTION>
TOTAL TOTAL ANNUAL EXAMPLES OF TOTAL EXPENSES
ANNUAL FUND CHARGES TOTAL PAID AT THE END OF:
INSURANCE FOR YEAR ANNUAL ---------------------------
FUND CHARGES ENDED 12/31/97 CHARGES ONE YEAR TEN YEARS
- ---- --------- -------------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Small Cap............... 1.06% 1.00% 2.06% $ 58.02 $ 237.84
International Magnum
Equity................. 1.06% 1.30% 2.36% 60.91 268.26
Equity Growth........... 1.06% .87% 1.93% 56.78 224.35
Midcap Value............ 1.06% .90% 1.99% 57.07 227.48
Venture Value........... 1.06% .90% 1.96% 57.07 227.48
Growth and Income....... 1.06% .82% 1.88% 56.29 219.11
Balanced................ 1.06% .85% 1.91% 56.58 222.25
Strategic Bond
Opportunities.......... 1.06% .85% 1.91% 56.58 222.25
Bond Income............. 1.06% .52% 1.58% 53.39 187.05
U.S. Government......... 1.06% .70% 1.76% 55.13 206.41
Money Market............ 1.06% .45% 1.51% 52.71 179.42
</TABLE>
3
<PAGE>
6. HOW WILL MY INVESTMENT IN THE CONTRACT BE TAXED? You should consult a
qualified tax advisor with regard to your Contract. Generally, taxation of
earnings under variable annuities is deferred until amounts are withdrawn or
distributions are made. The deferral of taxes on earnings under variable
annuities is designed to encourage long-term personal savings and supplemental
retirement plans. Certain penalties may apply if amounts are withdrawn
prematurely. The taxable portion of a withdrawal or distribution is taxed as
ordinary income.
Special rules apply to the owner of a Contract that is not a natural person.
Generally, such an owner must include in income any increase in the excess of
the contract value over the "investment in the contract" during the taxable
year.
7. DO I HAVE ACCESS TO MY MONEY? You have access to your money during the
accumulation phase by surrendering your Contract or withdrawing part of the
value of your Contract at any time. Under Contracts issued under certain tax
benefited retirement plans, you may also take a loan against its value. If you
are making a withdrawal, we require that you withdraw at least $100 and that
the value of your Contract after the withdrawal be at least $2,500.
While you have access to your money during the accumulation phase, certain
charges, such as the administration contract, CDSC, and premium tax charges,
may be deducted on a surrender or withdrawal. Moreover, a withdrawal or
surrender may cause you to incur income taxes or penalties under the Federal
tax laws.
After annuitization, under certain annuity options, you may withdraw the
commuted value of the remaining payments.
8. HOW HAVE THE FUNDS PERFORMED? The following chart shows the total returns
for each Fund for each of the last 10 years (or less if the Fund began less
than 10 years ago), based on a $1,000 purchase payment. The total returns are
adjusted to reflect all Contract expenses and deductions described above
except the CDSC and premium tax charges. If applied, these charges would
reduce the performance figures in the chart. Please remember that past
performance is not a guarantee of future results.
<TABLE>
<CAPTION>
FUND 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ---- ----- ----- ----- ----- ----- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Small Cap............... 21.71% 26.97 % 24.57% N/A
International Magnum
Equity................. -5.14% 2.67 % 2.18% N/A
Equity Growth........... 22.49% 9.96 % 44.22% N/A
Midcap Value............ 13.97% 13.94 % 25.92% (4.26)%
Venture Value........... 30.35% 22.36 % 34.90% N/A
Growth and Income....... 30.05% 14.51 % 31.95% (5.19)%
Balanced................ 12.83% 13.25 % 20.55% N/A
Strategic Bond
Opportunities.......... 7.62% 10.61 % 15.20% N/A
Bond Income............. 8.23% 1.98 % 18.12% (6.08)% 9.56 % 5.08% 14.47% 4.58% 8.55% 4.54%
U.S. Government......... 4.67% (0.43)% 10.88% N/A
Money Market............ 1.96% 1.71 % 2.23% 0.51 % (0.47)% 0.33% 2.66% 4.50% 5.42% 3.60%
</TABLE>
9. DOES THE CONTRACT HAVE A DEATH BENEFIT? Yes. If you, the owner, die (or,
if the owner is not an individual, the annuitant dies) prior to the annuity
phase of the Contract, a death benefit will be payable to a person that you
name as the beneficiary. The death benefit will be the greater of two values:
(1) the value of the Contract next determined after the later of the date when
we receive due proof of death or an election of continuation or payment from
the beneficiary; or (2) the minimum guaranteed death benefit under the
Contract, which we calculate using a formula described in the Prospectus.
10. IS THERE ANYTHING ELSE I SHOULD KNOW? The Contract has several
additional features that you may be interested in, including the following:
Transfer Privilege. You can transfer from $100 to $500,000 of your
Contract's value from one Fund to another free of charge. During the
accumulation phase of the Contract, you can make as many transfers among the
Funds as you like. However, different rules apply to transfers to and from the
Fixed Account. Also, during the annuity phase, if you have
4
<PAGE>
chosen a variable payment option, you can only make one transfer between Funds
per year, without Company consent, and you cannot make transfers to the Fixed
Account. We reserve the right to charge a fee for transfers (although we do
not currently do so) and to limit the number and amount of transfers in
certain circumstances.
Dollar Cost Averaging. We offer an automated transfer privilege that we call
"dollar cost averaging," under which you can instruct us to make monthly
transfers from any one of your investment options to any other investment
options, subject to certain limitations, provided that a minimum of $100 must
be transferred to each investment option that you select under this feature.
Systematic Withdrawals. This feature allows you to have a portion of the
value of your Contract withdrawn automatically on a monthly basis during the
accumulation phase. As long as the amount of each withdrawal is at least $100,
you can elect a fixed dollar amount or elect to have your Contract's
investment gain withdrawn. Certain limitations may apply. Of course, you may
have to pay taxes and a CDSC on these withdrawals.
Free Look Right. You should also know that you have a "free look right";
i.e., the right to return the Contract to us or your sales representative and
have us cancel it within a certain number of days (usually 10, although this
varies from state to state). If you exercise this right, we will cancel the
Contract as of the day we receive your request and send you its value on that
day, which may be more or less than your initial investment in the Contract.
In some states, we are required to refund your initial investment rather than
sending you the value of your Contract.
11. WHO CAN I CONTACT FOR MORE INFORMATION? You can write to us at New
England Annuities, P.O. Box 642, Boston, Massachusetts 02116, or call us at
(800) 777-5897. You can also get a recording of daily unit values by calling
(800) 333-2501. You can also request a copy of the Prospectus or Statement of
Additional Information from New England Securities Corporation, 399 Boylston
Street, Boston, Massachusetts 02116.
5
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
American Forerunner Series Prospectus....................................... A-1
New England Zenith Fund Prospectus.......................................... B-1
Submission Requirements..................................................... C-1
Application
Substitute W9, Registered Representative and NSP-244 Information
Trustee Certification
Dollar Cost Averaging and Settlement Option Election
MSA/ACH and Systematic Withdrawal Election
Transfer Request
Prospectus Receipt
</TABLE>
<PAGE>
AMERICAN FORERUNNER SERIES
Individual Variable Annuity Contracts
Issued By
New England Life Insurance Company
501 Boylston Street
Boston, Massachusetts 02116
(617) 578-2000
This prospectus offers individual flexible and single purchase payment
variable annuity contracts (the "Contracts") that are currently intended for
use with certain retirement plans that qualify for tax benefited treatment
under the Internal Revenue Code (the "Code"), for individual use, and for use
with plans and trusts not qualifying under the Code for tax benefited
treatment. The Contracts are not intended for use with Section 403(b) plans
subject to ERISA. See "Retirement Plans offering Federal Tax Benefits" for
more information. All purchase payments made under the Contracts may be
allocated to New England Variable Annuity Separate Account (the "Variable
Account"), a separate investment account of New England Life Insurance Company
("NELICO" or the "Company"). Assets of the Variable Account are invested in
shares of certain Series of the New England Zenith Fund (collectively, the
"Eligible Funds"). See "Investments of the Variable Account." The owner of a
Contract chooses the Eligible Funds in which the purchase payments are
invested and may change the choice of Eligible Funds at any time. Any one or a
combination of the following Eligible Funds may be selected, within limits:
Loomis Sayles Balanced Series
Loomis Sayles Small Cap Series Salomon Brothers Strategic Bond
Opportunities Series
Back Bay Advisors Bond Income Series
Morgan Stanley International Magnum
Equity Series Salomon Brothers U.S. Government
Series
Alger Equity Growth Series Back Bay Advisors Money Market Series
Goldman Sachs Midcap Value
Davis Venture Value Series
Westpeak Growth and Income Series
A Fixed Account option is also available in states that have approved this
option. (See "The Fixed Account" for more information.) Special limits apply
to transfers of Contract Value to and from the Fixed Account.
This prospectus sets forth concisely the information about the Contracts
that a prospective investor ought to know before investing. The prospectus
should be read carefully and retained for future reference.
Certain additional information about the Contracts is contained in a
Statement of Additional Information ("SAI") dated May 1, 1998, as it may be
supplemented from time to time, which has been filed with the Securities and
Exchange Commission and is incorporated herein by reference. The Table of
Contents of the SAI appears on page A-53 of this prospectus. The SAI is
available without charge and may be obtained by writing to New England
Securities Corporation ("New England Securities"), 399 Boylston St., Boston,
Massachusetts 02116 or telephoning 1-800-356-5015.
New England Securities, an indirect subsidiary of NELICO, serves as
principal underwriter for the Variable Account.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1998.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
THE NEW ENGLAND ZENITH FUND AND SHOULD BE RETAINED FOR FUTURE REFERENCE.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVES RISK, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
A-1
<PAGE>
TABLE OF CONTENTS
OF
THE PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOSSARY OF SPECIAL TERMS USED IN THIS PROSPECTUS......................... A-4
HIGHLIGHTS................................................................ A-5
EXPENSE TABLE............................................................. A-9
HOW THE CONTRACT WORKS.................................................... A-13
THE COMPANY............................................................... A-14
THE VARIABLE ACCOUNT...................................................... A-14
INVESTMENTS OF THE VARIABLE ACCOUNT....................................... A-14
Investment Advice........................................................ A-16
Substitution of Investments.............................................. A-17
GUARANTEED OPTION......................................................... A-17
THE CONTRACTS............................................................. A-17
Purchase Payments........................................................ A-17
Allocation of Purchase Payments.......................................... A-18
Contract Value and Accumulation Unit Value............................... A-18
Payment on Death Prior to Annuitization.................................. A-18
Transfer Privilege....................................................... A-21
Dollar Cost Averaging.................................................... A-22
Surrenders............................................................... A-23
Systematic Withdrawals................................................... A-24
Loan Provision for Certain Tax Benefited Retirement Plans................ A-24
Suspension of Payments................................................... A-27
Ownership Rights......................................................... A-27
Requests and Elections................................................... A-27
Ten Day Right to Review.................................................. A-28
ADMINISTRATION CHARGES, CONTINGENT DEFERRED SALES CHARGE AND OTHER DEDUC-
TIONS.................................................................... A-28
Administration Charges................................................... A-28
Mortality and Expense Risk Charge........................................ A-29
Contingent Deferred Sales Charge......................................... A-29
Premium Tax Charge....................................................... A-32
Other Expenses........................................................... A-32
ANNUITY PAYMENTS.......................................................... A-32
Election of Annuity...................................................... A-32
Annuity Options.......................................................... A-33
AMOUNT OF VARIABLE ANNUITY PAYMENTS....................................... A-34
RETIREMENT PLANS OFFERING FEDERAL TAX BENEFITS............................ A-35
FEDERAL INCOME TAX STATUS................................................. A-36
Introduction............................................................. A-36
Taxation of the Company.................................................. A-36
Tax Status of the Contract............................................... A-37
Taxation of Annuities.................................................... A-38
Qualified Contracts...................................................... A-39
Withholding.............................................................. A-43
Possible Changes in Taxation............................................. A-43
Other Tax Consequences................................................... A-43
General.................................................................. A-44
VOTING RIGHTS............................................................. A-44
DISTRIBUTION OF CONTRACTS................................................. A-45
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE FIXED ACCOUNT.......................................................... A-45
General Description of the Fixed Account.................................. A-45
Contract Value and Fixed Account Transactions............................. A-45
FINANCIAL STATEMENTS....................................................... A-47
INVESTMENT EXPERIENCE INFORMATION.......................................... A-47
APPENDIX A: Consumer Tips.................................................. A-50
APPENDIX B: Contingent Deferred Sales Charge............................... A-51
APPENDIX C: Premium Tax.................................................... A-52
</TABLE>
A-3
<PAGE>
GLOSSARY OF SPECIAL TERMS USED IN THIS PROSPECTUS
ACCOUNT. A sub-account of the Variable Account or the Fixed Account.
ACCUMULATION UNIT. An accounting device used to calculate the Contract Value
prior to annuitization.
ACCUMULATION UNIT VALUE. The value of an Accumulation Unit, determined as of
the close of regular trading on the New York Stock Exchange on each day the
Exchange is open. The Accumulation Unit Value of a sub-account reflects the
net investment experience of the underlying Eligible Fund and daily deductions
for the Mortality and Expense Risk Charge.
ADMINISTRATION CONTRACT CHARGE. A charge deducted annually from the Contract
Value in the Variable Account to cover the Company's cost of providing certain
administrative services relating to the Contracts and the Variable Account.
The charge is the lesser of 2% of the total Contract Value or $30.
ANNUITANT. The person on whose life the Contract is issued.
ANNUITIZATION. Application of proceeds under the Contract to an annuity
option on the Maturity Date or upon an earlier surrender of the Contract.
ANNUITY UNIT. An accounting device used to calculate the dollar amount of
annuity payments.
BENEFICIARY. The person designated to receive Death Proceeds under a
Contract if a Contract Owner (or Annuitant, if the Contract Owner is not a
natural person) dies before annuitization of the Contract.
COMMUTATION RIGHTS. The payee's right, under certain variable annuity
payment options, to withdraw the commuted value of remaining annuity income
payments. The commuted value is calculated based on the assumed interest rate
under the Contract. (See "Annuity Payments--Annuity Options.")
CONTINGENT ANNUITANT. If designated in the application, the person who
becomes the Annuitant under the Contract if the Annuitant dies prior to
annuitization. A Contingent Annuitant must be designated for individually
owned Contracts where the Contract Owner and Annuitant are not the same. The
Contingent Annuitant must be a Contract Owner. The Contingent Annuitant cannot
be changed after the death of the Annuitant.
CONTINGENT DEFERRED SALES CHARGE. A charge deducted upon certain full and
partial surrenders and applications of proceeds to certain annuity payment
options, or, in certain circumstances, upon withdrawal of amounts that were
applied to an annuity payment option. In addition, in states where the maximum
maturity age permitted by law is less than 95, a Contingent Deferred Sales
Charge may apply at the Maturity Date.
CONTRACT DATE. The date shown as the Contract Date in the Contract.
CONTRACT OWNER. The person so designated in the application or as
subsequently changed.
CONTRACT VALUE. On or before annuitization, the value obtained by
multiplying the number of Accumulation Units credited to the Contract by the
appropriate current Accumulation Unit Value. Under Contracts that permit
Contract loans, the Contract Value also includes the amount of Contract Value
transferred to the Company's general account as a result of a loan and any
interest credited on that amount. Under Contracts with the Fixed Account
option, the Contract Value also includes the amount of Contract Value
allocated to the Fixed Account.
CONTRACT YEAR. A twelve month period commencing with the Contract Date and
with each Contract anniversary thereafter.
DEATH PROCEEDS (PRIOR TO ANNUITIZATION). The amount payable by the Company
upon receipt of due proof of the death of the Contract Owner (or of the death
of the first Contract Owner to die under a jointly owned Contract) and
election of payment prior to annuitization. For a Contract that is not owned
by an individual, the Death Proceeds are payable upon receipt of due proof of
the death of the Annuitant (and election of payment) prior to annuitization.
A-4
<PAGE>
The Death Proceeds are guaranteed to be no less than the purchase payments
made, adjusted for any previous surrenders. However, after the first seven
Contract Years, a higher (but never a lower) guarantee may apply, depending on
your Contract Value. In certain states, the Death Proceeds will be reduced by
the applicable premium tax charge.
ELIGIBLE FUNDS. The mutual fund portfolios in which the Variable Account
invests. Eligible Funds currently available consist of 11 Series of the New
England Zenith Fund. Purchase payments allocated to the Variable Account may
be invested in shares of one or more of these Series, as described in
"Investments of the Variable Account."
FIXED ACCOUNT. A part of the Company's general account to which net purchase
payments may be allocated under certain Contracts. The Fixed Account provides
guarantees of principal and interest. Special limits apply to transfers of
Contract Value to and from the Fixed Account. See "Contract Value and Fixed
Account Transactions."
MATURITY DATE. The date on which annuity payments are to commence, unless
the Contract Owner applies the Contract Value to an annuity payment option at
an earlier date. The Maturity Date will be the date when the older of the
Contract Owner(s) and the Annuitant at his or her nearest birthday would be
age 95 (or the maximum age permitted by state law, if less).
MORTALITY AND EXPENSE RISK CHARGE. A charge deducted daily from the assets
of each sub-account of the Variable Account to compensate the Company for
assuming certain mortality and expense risks under the Contracts. On an
annualized basis, the charge equals 1.00% of daily net assets.
PAYEE. Any person or entity entitled to receive payment in one sum or under
an annuity payment option. The term includes (i) an Annuitant, (ii) a
Beneficiary or contingent Beneficiary who becomes entitled to payments upon
death of the Contract Owner (or Annuitant, if the Contract is not owned in an
individual capacity), and (iii) in the event of surrender or partial surrender
of the Contract, the Contract Owner.
PREMIUM TAX CHARGE. A charge to recover premium taxes which the Company pays
to certain states.
PURCHASE PAYMENTS. Amounts paid to the Company for investment in the
Contract.
SYSTEMATIC WITHDRAWALS. A method of distributing your Contract Value which
involves a series of partial surrenders.
TEN DAY RIGHT TO REVIEW. Within 10 days (or more if required by law) of your
receipt of an issued Contract you may return it to the Company or its agent
for cancellation. Upon cancellation of the Contract, the Company will return
to you the Contract Value (or, if required by state law, all purchase payments
made).
VARIABLE ACCOUNT. A separate investment account of the Company designated as
the New England Variable Annuity Separate Account. The Variable Account is
divided into sub-accounts, each of which invests in shares of one of the
Eligible Funds.
VARIABLE ANNUITY. An annuity providing for payments varying in amount in
accordance with the investment experience of the assets of a separate
investment account.
HIGHLIGHTS
This prospectus describes Contracts under which purchase payments are
allocated to the Variable Account. If the Fixed Account is available under
your Contract, you may allocate all or part of your purchase payments or
transfer all or part of your Contract Value to that account. For a description
of the Fixed Account, the rules regarding transactions which involve the Fixed
Account (such as special restrictions on transfers of Contract Value to and
from the Fixed Account), and the way in which the Fixed Account affects the
Contract Value, see "The Fixed
A-5
<PAGE>
Account." You should review "The Fixed Account" carefully before allocating
purchase payments or Contract Value to that account.
TAX DEFERRED VARIABLE ANNUITIES:
Taxation of earnings under variable annuities is generally deferred until
amounts are withdrawn or distributions made. The deferral of taxes on earnings
under variable annuities is designed to encourage long-term personal savings
and supplemental retirement plans.
THE CONTRACT:
The American Forerunner Series is a variable annuity issued by the Company.
The variable annuity provides for variable payments to commence at the
Maturity Date. The Contract Owner may, however, surrender the Contract and
apply the proceeds to an annuity payment option at an earlier date. Annuity
payments generally are made on a monthly basis and will vary in amount
according to the annuity payment option selected and the investment results of
the underlying Eligible Fund(s). (See "Annuity Payments.")
PURCHASE PAYMENTS:
Under current rules, the minimum initial purchase payment is $10,000. The
Company currently reserves the right not to accept any purchase payment that,
when combined with the Contract Value under all Contracts owned by a single
Contract Owner, would exceed $1,000,000. Under current rules, in no event will
the Company accept a purchase payment that, when combined with the Contract
Value under all Contracts owned by a single Contract Owner, would exceed
$5,000,000. If a Contract Owner selects a single purchase payment contract in
the application, the Company reserves the right not to accept any additional
purchase payments. Any subsequent purchase payments must be at least $250. The
Company reserves the right to limit purchase payments made in any Contract
Year or in total under a Contract. No purchase payment may be made (1) within
four years prior to the Contract's Maturity Date (except under Contracts
issued in Pennsylvania or New York), unless the initial purchase payment is
$1,000,000 or more, or (2) after a Contract Owner (or after the Annuitant, if
the Contract is not owned in an individual capacity) reaches age 86. (See
"Purchase Payments.")
OWNERSHIP:
The Contracts may be purchased and owned by an individual, an employer, a
trust, a corporation, a partnership, a custodian or any entity specified in an
eligible employee benefit plan. The Contracts are intended for use with the
following retirement plans which offer Federal tax benefits: plans qualified
under Section 401(a) or 403(a) of the Code ("Qualified Plans"), certain
annuity plans under Section 403(b) of the Code ("TSA Plans"), individual
retirement accounts under Section 408(a) of the Code and individual retirement
annuities under Section 408(b) of the Code (both referred to as "IRAs"), Roth
IRAs under Section 408A of the Code ("Roth IRAs") simplified employee pension
plans and salary reduction simplified employee pension plans under Section
408(k) of the Code ("SEPs" and "SARSEPs"), Simple Retirement Accounts under
Section 408(p) of the Code ("SIMPLE IRAs"), eligible deferred compensation
plans under Section 457 of the Code ("Section 457 Plans"), and governmental
plans within the meaning of Section 414(d) of the Code ("Governmental Plans").
See "Retirement Plans offering Federal Tax Benefits." The Contracts may not
yet be available to all of the foregoing types of plans pending appropriate
state approvals. The Company may make the Contracts available for use with
Section 401(k) plans. The Contracts are not currently available to other
plans, such as TSA plans subject to ERISA, that qualify for tax benefits under
the Code.
A Contract may have joint owners. If the Annuitant is not the Contract Owner
and the Contract Owner is an individual, then the Contract Owner must be the
Contingent Annuitant. Under a jointly owned Contract, if the Annuitant is not
one of the Contract Owners, then one Contract Owner must be the Contingent
Annuitant. Where a Contract is used to fund an IRA or TSA Plan, the Contract
Owner must be the Annuitant, and no Contingent Annuitant will be allowed.
A-6
<PAGE>
The Company relies on instructions from trustees and custodians, as Contract
Owners, who may exercise certain rights under the Contracts on behalf of plan
participants. In any event, references to "you" in this prospectus refer to
the Contract Owner(s) or to plan participants who may be entitled to instruct
their trustee or custodian with regard to the exercise of these rights. (See
"Ownership Rights.")
INVESTMENT OPTIONS:
You may allocate purchase payments to the Eligible Funds or to the Fixed
Account (if available under your Contract). Your Contract Value may be
distributed among no more than 10 accounts (including the Fixed Account) at
any time.
You may change your allocation of future purchase payments. It is the
Company's position that, under current tax law, you may also transfer Contract
Value between Eligible Funds without incurring federal income tax
consequences. The Company reserves the right to limit the number and amount of
transfers and charge a transfer fee. Currently the Company does not charge a
transfer fee or limit the number of transfers prior to annuitization. However,
special limits apply in situations which the Company determines involve
"market-timing." (See "Transfer Privilege" for more information.) Currently,
the Company's rules for transfers prior to annuitization generally require
that the amount transferred to or from any sub-account must be at least $100.
After variable annuity payments begin, the Company allows one transfer per
year in total without Company consent. Special limits apply to transfers of
Contract Value to and from the Fixed Account. (See "The Fixed Account.") The
maximum amount which can be transferred is $500,000 per transaction.
CHARGES:
No sales charges are deducted from purchase payments before they are
invested in the Contract. The Company currently imposes a premium tax charge
under Contracts on the lives of Annuitants residing in states imposing premium
taxes. (See Appendix C.) Generally, the Company deducts any applicable premium
tax charge from the Contract Value on the date when annuity payments begin. In
South Dakota, the Company deducts the premium tax charge at the earliest of: a
full or partial surrender, annuitization or payment of the Death Proceeds
(including application of the Death Proceeds to the Beneficiary Continuation
provision) due to the death of a Contract Owner (or Annuitant under a Contract
not owned in an individual capacity). (See "Premium Tax Charge.") For assuming
mortality and expense risks under the Contract, the Company deducts an amount
equal to an annual rate of 1.00% of the daily net assets of the Variable
Account. (See "Mortality and Expense Risk Charge.") The Company also imposes
an annual administration charge against your Contract Value in the Variable
Account, equal to the lesser of 2% of the total Contract Value (including any
Contract Value you have allocated to the Fixed Account and any Contract Value
held in the Company's general account as the result of a loan) and $30. (The
annual administration charge will be waived for any Contract Year in which the
Contract Value reaches a certain amount established by the Company. In
addition, the charge will not apply if the entire Contract Value is allocated
to the Fixed Account. See "Administration Charges.")
A Contingent Deferred Sales Charge will be imposed on certain full and
partial surrenders and applications of proceeds to certain annuity payment
options, or, in certain circumstances, on withdrawal of amounts that were
applied to an annuity payment option. (See "Contingent Deferred Sales
Charge.") In addition, a Contingent Deferred Sales Charge may apply at the
Maturity Date under Contracts issued in Pennsylvania or New York, if at that
time a purchase payment has been invested less than four years. The Contingent
Deferred Sales Charge is a maximum of 4% of each purchase payment made. No
Contingent Deferred Sales Charge will be imposed if the initial purchase
payment is $1,000,000 or more.
TEN DAY RIGHT TO REVIEW:
Within 10 days (or more where required by state insurance law) after you
receive the Contract you may return it to the Company or the Company's agent
for cancellation. The Company will return to you the Contract Value (or, if
required by state law or regulation, all purchase payments made). (See "Ten
Day Right to Review.")
A-7
<PAGE>
PAYMENT ON DEATH:
The Contract provides for a payment to the Beneficiary if the Contract Owner
dies (or, if a Contract Owner under a jointly owned Contract dies) prior to
annuitization. (In the case of a Contract not owned in an individual capacity,
the Death Proceeds will be paid if the Annuitant dies prior to annuitization.)
The Contract has a minimum guaranteed death benefit, equal to the purchase
payments made under the Contract, adjusted for any previous surrenders.
However, on the seventh Contract Anniversary, and at seven year intervals
thereafter until the Contract Owner's 76th birthday, the minimum guaranteed
death benefit payable is recalculated to determine whether a higher (but never
a lower) guarantee will apply. (Under a jointly owned Contract, the
recalculation of the minimum death benefit will be made at seven year
intervals until the 71st birthday of the older Contract Owner.) Any additional
purchase payments will immediately increase your minimum guaranteed death
benefit and any partial surrenders will immediately decrease your minimum
guaranteed death benefit. The Death Proceeds payable will be the greater of
the minimum guaranteed death benefit amount applicable to the Contract and the
current Contract Value, reduced in either case by the amount of any
outstanding loan plus accrued interest and in certain states, by a premium tax
charge. (See "Payment on Death Prior to Annuitization.")
SURRENDERS:
Generally, you may surrender the Contract for all or a portion of the
Contract Value by written request at any time prior to annuitization so long
as, after a partial surrender, the remaining Contract Value is at least
$2,500. Under the Company's current rules, a partial surrender must be at
least $100. (See "Surrenders." Special rules apply if the Contract is subject
to a loan.) The Federal tax laws impose penalties upon, and in some cases
prohibit, certain premature distributions from the Contracts before or after
the date on which the annuity payments are to begin. (See "Federal Income Tax
Status.") A Contingent Deferred Sales Charge will be imposed in connection
with certain Contract surrenders and applications of proceeds to certain
annuity payment options, or, in certain circumstances, upon subsequent
withdrawal of amounts applied to an annuity payment option. Upon a full
surrender, a pro rata portion of the annual $30 administration charge and, in
certain states, a premium tax charge will also be deducted. In any Contract
Year, an amount may be surrendered without sales charge equal to the greater
of (1) 10% of the Contract Value at the beginning of the Contract Year and (2)
the excess of the Contract Value over purchase payments subject to the
Contingent Deferred Sales Charge on the date of the surrender (the "free
withdrawal amount"). (See "Contingent Deferred Sales Charge" for more
information.)
_______________________________________________________________________________
A-8
<PAGE>
EXPENSE TABLE
<TABLE>
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES(1)
Sales Charge Imposed on Purchase Payments (as a percentage of
purchase payments).................................................. 0%
Maximum Contingent Deferred Sales Charge(2) (as a percentage of each
purchase payment)................................................... 4%
Transfer Fee(3)...................................................... $ 0
ANNUAL CONTRACT FEE
Administration Contract Charge (per Contract)(4)..................... $30
SEPARATE ACCOUNT ANNUAL EXPENSES(5)
(as percentage of average net assets)
Mortality and Expense Risk Charge.................................... 1.00%
----
Total Separate Account Annual Expenses........................... 1.00%
</TABLE>
NEW ENGLAND ZENITH FUND
ANNUAL OPERATING EXPENSES FOR THE YEAR ENDED 12/31/97
(AS A PERCENTAGE OF AVERAGE NET ASSETS AFTER CURRENT EXPENSE CAP OR EXPENSE
DEFERRAL)(6)
<TABLE>
<CAPTION>
MORGAN
LOOMIS STANLEY GOLDMAN
SAYLES INTERNATIONAL SACHS DAVIS WESTPEAK
SMALL MAGNUM ALGER EQUITY MIDCAP VENTURE GROWTH
CAP EQUITY GROWTH VALUE VALUE AND INCOME
SERIES SERIES SERIES SERIES* SERIES SERIES
------ ------------- ------------ ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Management Fee.......... 1.00% .90% .75% .75% .75% .70%
Other Expenses.......... -- .40% .12% .15% .15% .12%
----- ----- ---- ---- ---- ----
Total Series Operating
Expenses............. 1.00% 1.30% .87% .90% .90% .82%
</TABLE>
<TABLE>
<CAPTION>
SALOMON BACK BAY SALOMON BACK BAY
LOOMIS BROTHERS ADVISORS BROTHERS ADVISORS
SAYLES STRATEGIC BOND BOND U.S. MONEY
BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
SERIES SERIES SERIES SERIES SERIES
-------- -------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Management Fee............ .70% .65% .40% .55% .35%
Other Expenses............ .15% .20% .12% .15% .10%
---- ---- ---- ---- ----
Total Series Operating
Expenses............... .85% .85% .52% .70% .45%
</TABLE>
- --------
* Anticipated annual operating expenses for the Goldman Sachs Midcap Value
Series are based on the management fee approved by shareholders of the
Series that became effective on May 1, 1998, and other expenses actually
incurred for the Series for 1997.
A-9
<PAGE>
EXAMPLE (NOTE: The examples shown below are entirely hypothetical. Although
they are based on the expenses shown in the expense tables above, the examples
are not representations of past or future performance or expenses. Actual
performance and/or expenses may be more or less than shown.(7)) For purchase
payments allocated to each of the Series indicated:
You would pay the following expenses on a $1,000
purchase payment assuming
1) 5% annual return on the underlying New
England Zenith Fund Series and 2) that you
surrender your Contract or that you elect to
annuitize under a period certain option for a
specified period of less than 15 years, at the
end of each time period (a contingent deferred
sales charge will apply at the end of 1 year and
3 years):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Loomis Sayles Small Cap................... $58.02 $84.10 $110.55 $237.84
Morgan Stanley International Magnum Equi-
ty....................................... 60.91 92.98 125.69 268.26
Alger Equity Growth....................... 56.78 80.23 103.91 224.35
Goldman Sachs Midcap Value................ 57.07 81.12 105.45 227.48
Davis Venture Value....................... 57.07 81.12 105.45 227.48
Westpeak Growth and Income................ 56.29 78.74 101.35 219.11
Loomis Sayles Balanced.................... 56.58 79.63 102.89 222.25
Salomon Brothers Strategic Bond Opportuni-
ties..................................... 56.58 79.63 102.89 222.25
Back Bay Advisors Bond Income............. 53.39 69.74 85.83 187.05
Salomon Brothers U.S. Government.......... 55.13 75.14 95.17 206.41
Back Bay Advisors Money Market............ 52.71 67.62 82.17 179.42
</TABLE>
You would pay the following expenses on a $1,000
purchase payment assuming
1) 5% annual return on the underlying New
England Zenith Fund Series and 2) that you do
not surrender your Contract or that you elect to
annuitize under a life contingency option, or
under a period certain option for a minimum
specified period of 15 years, at the end of each
time period (no contingent deferred sales charge
will apply)(8):
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Loomis Sayles Small Cap................... $20.88 $64.45 $110.55 $237.84
Morgan Stanley International Magnum Equi-
ty....................................... 23.89 73.51 125.69 268.26
Alger Equity Growth....................... 19.58 60.50 103.91 224.35
Goldman Sachs Midcap Value................ 19.88 61.41 105.45 227.48
Davis Venture Value....................... 19.88 61.41 105.45 227.48
Westpeak Growth and Income................ 19.07 58.98 101.35 219.11
Loomis Sayles Balanced.................... 19.37 59.89 102.89 222.25
Salomon Brothers Strategic Bond Opportuni-
ties..................................... 19.37 59.89 102.89 222.25
Back Bay Advisors Bond Income............. 16.05 49.79 85.83 187.05
Salomon Brothers U.S. Government.......... 17.86 55.31 95.17 206.41
Back Bay Advisors Money Market............ 15.34 47.63 82.17 179.42
</TABLE>
A-10
<PAGE>
- --------
NOTES:
(1) Premium tax charges are not shown. They range from 0% (in most states) to
3.5% of Contract Value. The amount of the premium tax charge, if any, is
generally deducted from Contract Value on the date selected by the
Contract Owner for the commencement of annuity benefits, but in certain
states is deducted at the earliest of: a full or partial surrender,
annuitization, or payment of the Death Proceeds due to the death of the
Contract Owner (or Annuitant if the Contract is not owned in an individual
capacity). (See "Premium Tax Charge.")
(2) The Contingent Deferred Sales Charge applies to each purchase payment
except that no Contingent Deferred Sales Charge will apply if the initial
purchase payment for a Contract is $1,000,000 or more. The Contingent
Deferred Sales Charge declines by 1% annually over the first four year
period the purchase payment is invested in the Contract until it reaches
0% for that purchase payment at the end of four years. Amounts subject to
the Contingent Deferred Sales Charge will be determined by assuming that
purchase payments are withdrawn (whether for a surrender or annuitization)
on a "first in-first out" basis. An amount may be surrendered without
sales charge in any one Contract Year equal to the greater of (1) 10% of
the Contract Value at the beginning of the Contract Year and (2) the
excess of the Contract Value over purchase payments that are subject to
the Contingent Deferred Sales Charge at the time of surrender.
(3) The Company reserves the right to limit the number and amount of transfers
and charge a transfer fee.
(4) This charge is not imposed after annuitization. As a percentage of the
estimated average Contract Value in the Variable Account, this fee equals
.06%, based on an estimated average Contract Value of approximately
$50,981.
(5) These charges are not imposed on the Fixed Account after annuitization if
annuity payments are made on a fixed basis.
(6) Total Series Operating Expenses are based on the amount of such expenses
applied against assets at December 31, 1997, after giving effect to the
applicable voluntary expense cap or expense deferral. For the Loomis
Sayles Small Cap Series, Total Series Operating Expenses take into account
a voluntary cap on expenses by TNE Advisers, Inc. ("TNE Advisers"), the
Series' investment adviser, which will bear all expenses that exceed 1.00%
of average daily net assets. In the absence of this cap or any other
expense reimbursement arrangement, Total Series Operating Expenses for the
Loomis Sayles Small Cap Series for the year ended December 31, 1997 would
have been 1.14%. Total Series Operating Expenses for the Goldman Sachs
Midcap Value (formerly Loomis Sayles Avanti Growth), Westpeak Growth and
Income, Back Bay Advisors Bond Income and Back Bay Advisors Money Market
Series are after giving effect to a voluntary expense cap. For each of
these Series, TNE Advisers bears those expenses (other than the management
fee) that exceed 0.15% of average daily net assets. Without this cap or
any other expense reimbursement arrangement, Total Series Operating
Expenses for the Goldman Sachs Midcap Value Series (formerly Loomis Sayles
Avanti Growth) for the year ending December 31, 1997 would have been
0.86%. Effective May 1, 1998 the Goldman Sachs Midcap Value Series is
subject to the voluntary expense deferral described below for the six
other Series shown, with an annual expense limit of .90% of net assets.
For the six other Series shown, the Total Series Operating Expenses are
after giving effect to a voluntary expense deferral. Under the deferral,
expenses which exceed a certain limit are paid by TNE Advisers in the year
in which they are incurred and transferred to the Series in a future year
when actual expenses of the Series are below the limit. The limit on
expenses for each of these Series is: 1.30% of average daily net assets
for the Morgan Stanley International Magnum Equity Series; .90% of average
daily net assets for the Alger Equity Growth and Davis Venture Value
Series; .85% of average daily net assets for the Loomis Sayles Balanced
and Salomon Brothers Strategic Bond Opportunities Series; and .70% of
average daily net assets for the Salomon Brothers U.S. Government Series.
Absent the expense deferral, Total Series Operating Expenses for these
Series for the year ended December 31, 1997 would have been: 1.59% for
Morgan Stanley International Magnum Equity Series, 0.86% for Loomis Sayles
Balanced Series, .87% for Salomon Brothers Strategic Bond Opportunities
Series and .98% for Salomon Brothers U.S. Government Series. Total Series
Operating Expenses for Davis Venture Value Series would have been 0.85%,
however, pursuant to the expense deferral arrangement, 0.05% was carried
over from a previous year in which operating expenses exceeded the limit.
The expense cap and deferral arrangements are voluntary and may be
terminated at any time. (See the attached prospectus of the New England
Zenith Fund for more complete information.)
(7) In these examples, the average Administration Contract Charge of .06% has
been used. (See (4), above.)
(8) If you subsequently withdraw the commuted value of amounts placed under
any of these options, the Company will deduct from the amount you receive
a portion of the Contingent Deferred Sales Charge amount
A-11
<PAGE>
that would have been deducted when you originally applied the Contract
proceeds to the option. The applicable portion of the Contingent Deferred
Sales Charge will be based on the ratio of (1) the number of whole months
remaining at the time of withdrawal until the date when the Contingent
Deferred Sales Charge would expire, to (2) the number of whole months that
were remaining, when the proceeds were applied to the option, until the
date when the Contingent Deferred Sales Charge would expire.
- -------------------------------------------------------------------------------
The preceding table lists the charges and expenses incurred with respect to
purchase payments invested under the Contracts. The items listed include
charges deducted from purchase payments, charges assessed against Variable
Account assets, and charges deducted from the assets of each of the Eligible
Funds. The examples assume that the entire purchase payment was allocated
initially to a single sub-account without any subsequent transfers. The
purpose of the table is to assist you in understanding the various costs and
expenses you will bear, directly and indirectly, as a Contract Owner.
A-12
<PAGE>
HOW THE CONTRACT WORKS
- --------------------- --------------------- ---------------------
DAILY DEDUCTION FROM
PURCHASE PAYMENT CONTRACT VALUE VARIABLE ACCOUNT
. You can make a . Payments are . Mortality and
one-time allocated to your expense risk
investment or choice, within charge of 1.00%
establish an limits, of on an annualized
ongoing Eligible Funds basis is deducted
investment and/or the Fixed from the Contract
program, subject Account. Value daily.
to the Company's
minimum and . The Contract . Investment
maximum purchase Value reflects advisory fees are
payment purchase deducted from the
guidelines. payments, Eligible Fund
- --------------------- investment assets daily.
experience, ---------------------
- --------------------- interest credited
ADDITIONAL PAYMENTS on Fixed Account ---------------------
. Generally may be allocations, ANNUAL CONTRACT FEE
made at any time, partial
(subject to surrenders, and . $30
Company limits), Contract charges. Administration
but no purchase Contract Charge
payments allowed . The Contract is deducted from
(1) during the Value invested in the Contract
four years the Eligible Value in the
immediately Funds is not Variable Account
preceding the guaranteed. on each
Maturity Date anniversary while
(except under . Earnings are the Contract is
Contracts issued accumulated free in-force, other
in Pennsylvania of any current than under a
or New York), income taxes (see Payment Option.
unless the pages A-37 to A- (May be waived
initial purchase 38). for certain large
payment is Contracts.) A pro
$1,000,000 or . You may change rata portion is
more, or (2) the allocation of deducted on full
after a Contract future payments, surrender and at
Owner (or the within limits, at annuitization.
Annuitant, if not any time. ---------------------
owned in an
individual . Prior to ---------------------
capacity) reaches annuitization, SURRENDER CHARGE
age 86. you may transfer
Contract Value . Consists of
. Minimum $250. among accounts, Contingent
- --------------------- currently free of Deferred Sales
charge. (Special Charge based on
- --------------------- limits apply to purchase payments
LOANS the Fixed Account made (see pages
and to situations A-29 to A-31).
. Are available to that involve ---------------------
participants of "market timing.")
certain tax ---------------------
qualified pension . Allocations of PREMIUM TAX CHARGE
plans (see page payments and
A-24). transfers of . Where applicable,
- --------------------- Contract Value is deducted from
are limited in the Contract
- --------------------- that Contract Value when
SURRENDERS Value may not be annuity benefits
allocated among commence (or, in
. Up to the greater more than ten certain states,
of: 10% of the accounts at the earliest
Contract Value at (including the of: full or
the beginning of Fixed Account) at partial
the Contract any time. surrender;
Year, and the --------------------- annuitization; or
excess of the payment of the
Contract Value --------------------- Death Proceeds
over purchase RETIREMENT BENEFITS due to the death
payments that are of a Contract
subject to the . Lifetime income Owner or, if
Contingent options. applicable, of
Deferred Sales the Annuitant).
Charge on the . Fixed and/or ---------------------
can be withdrawn options.
each year without ---------------------
incurring a . Retirement ADDITIONAL BENEFITS
Contingent benefits may be
Deferred Sales taxable. . You pay no taxes
Charge, subject on your
to any applicable . Premium tax investment as
tax law charge may apply. long as it
restrictions. --------------------- remains in the
Contract.
. Surrenders may be
taxable. . Contract may be
surrendered at
. Prior to age 59 any time for its
1/2 a 10% penalty Contract Value,
tax may apply. (A less any
25% penalty tax applicable
may apply upon Contingent
surrender from a Deferred Sales
SIMPLE IRA within Charge, subject
the first two to any applicable
years.) tax law
restrictions.
. Premium tax
charge may apply. . Contingent
- --------------------- Deferred Sales
Charge may be
- --------------------- waived upon
DEATH PROCEEDS evidence of
terminal illness,
. Guaranteed not to confinement to a
be less than your nursing home, or
total purchase permanent and
payments adjusted total disability,
for any prior if this benefit
surrenders or is available in
outstanding loans your state.
(and, where ---------------------
applicable, net
of premium tax
charges).
. Death proceeds
pass to the
beneficiary
without probate.
. Death proceeds
may be taxable.
. Premium tax
charge may apply.
- ---------------------
A-13
<PAGE>
THE COMPANY
The Company was organized as a stock life insurance company in Delaware in
1980 and is authorized to operate in all states, the District of Columbia and
Puerto Rico. The Company was formerly a wholly-owned subsidiary of New England
Mutual Life Insurance Company. Effective August 30, 1996, New England Mutual
Life Insurance Company merged into Metropolitan Life Insurance Company
("MetLife"), a mutual life insurance company whose principal office is at One
Madison Avenue, New York, N.Y. 10010. With the merger, New England Mutual Life
Insurance Company's separate corporate existence ended, and MetLife became the
parent of the Company. In connection with the merger, the Company changed its
name from "New England Variable Life Insurance Company" to "New England Life
Insurance Company," and changed its domicile from the State of Delaware to the
Commonwealth of Massachusetts. The Company's Home office is at 501 Boylston
Street, Boston, Massachusetts 02116.
THE VARIABLE ACCOUNT
The Variable Account was established by the Company as a separate investment
account under Delaware law on July 1, 1994, and became subject to
Massachusetts law when the Company changed its domicile to Massachusetts on
August 30, 1996. The Variable Account is registered as a unit investment trust
under the Investment Company Act of 1940, and meets the definition of a
"separate account" under Federal securities laws. The Variable Account
supports other variable annuity contracts besides the Contracts. The other
contracts may have different charges, and provide different benefits.
Applicable state insurance law provides that the assets in the Variable
Account equal to the reserves and other contract liabilities of the Variable
Account shall not be chargeable with liabilities arising out of any other
business the Company may conduct. The Company believes this means that the
assets of the Variable Account equal to its reserves and other contract
liabilities are not available to meet the claims of the Company's general
creditors and may only be used to support the Contract Values under the
Contracts and the other variable annuity contracts supported by the Variable
Account. The income and realized and unrealized capital gains or losses of the
Variable Account are, in accordance with the Contracts, credited to or charged
against the Variable Account without regard to other income, gains or losses
of the Company. All obligations arising under the Contracts are, however,
general corporate obligations of the Company.
Purchase payments are allocated to the sub-accounts of the Variable Account
that you elect. The value of Accumulation Units credited to your Contract and
the amount of the variable annuity payments depend on the investment
experience of the Eligible Fund in which each of your selected sub-accounts
invests. The Company does not guarantee the investment performance of the
Variable Account. Thus, you bear the full investment risk for all amounts
contributed to the Variable Account.
INVESTMENTS OF THE VARIABLE ACCOUNT
Purchase payments applied to the Variable Account will be invested in one or
more of the Eligible Funds listed below, at net asset value without deduction
of any sales charge, according to the selection you make in your application.
You may change your selection of Eligible Funds for future purchase payments
at any time without charge. (See "Requests and Elections.") You also may
transfer your Contract Value among the Eligible Funds, subject to certain
conditions. (See "Transfer Privilege.") Your Contract Value may be distributed
among no more than 10 accounts (including the Fixed Account) at any time. The
Company reserves the right to add or remove Eligible Funds from time to time
as investments for the Variable Account. See "Substitution of Investments."
The investment objectives and policies of certain Eligible Funds are similar
to the investment objectives and policies of other funds that may be managed
by the same subadviser. The investment results of the Eligible Funds, however,
may be higher or lower than the results of such other funds. There can be no
assurance, and no
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representation is made, that the investment results of any of the Eligible
Funds will be comparable to the investment results of any other fund, even if
the other fund has the same subadviser.
LOOMIS SAYLES SMALL CAP SERIES
The Loomis Sayles Small Cap Series seeks long-term capital growth from
investments in common stocks or their equivalent. The Series invests primarily
in stocks of small capitalization companies with good earnings growth
potential that its subadviser believes are undervalued by the market.
Normally, the Series will invest at least 65% of its assets in companies with
market capitalization in the range of the market capitalization of those
companies which make up the Russell 2000 Index at the time of investment.
MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SERIES (FORMERLY DRAYCOTT
INTERNATIONAL EQUITY SERIES)
The Morgan Stanley International Magnum Equity Series seeks long-term
capital appreciation through investment primarily in equity securities of non-
U.S. issuers, in accordance with the weightings of countries included in the
Morgan Stanley Capital International EAFE Index, determined by the Series'
subadviser. Under normal circumstances, at least 65% of the Series' total
assets will be invested in equity securities of at least three different
countries outside the United States.
ALGER EQUITY GROWTH SERIES
The Alger Equity Growth Series seeks long-term capital appreciation. The
Series' assets will be invested primarily in a diversified, actively managed
portfolio of equity securities, primarily of companies having a total market
capitalization of $1 billion or greater.
GOLDMAN SACHS MIDCAP VALUE SERIES (FORMERLY LOOMIS SAYLES MIDCAP VALUE
SERIES)
The Goldman Sachs Midcap Value Series seeks long-term capital appreciation.
The Series invests, under normal circumstances, substantially all of its
assets in equity securities and at least 65% of its total assets in equity
securities of companies with public stock market capitalizations within the
range of the market capitalization of companies constituting the Russell
Midcap Index at the time of investment.
DAVIS VENTURE VALUE SERIES (FORMERLY VENTURE VALUE SERIES)
The Davis Venture Value Series seeks growth of capital. The Series will
primarily invest in domestic common stocks that its subadviser believes have
capital growth potential due to factors such as undervalued assets or earnings
potential, product development and demand, favorable operating ratios,
resources for expansion, management abilities, reasonableness of market price,
and favorable overall business prospects. The Series will generally invest
predominantly in equity securities of companies with market capitalizations of
at least $250 million.
WESTPEAK GROWTH AND INCOME SERIES (FORMERLY WESTPEAK VALUE GROWTH SERIES)
The Westpeak Growth and Income Series seeks long-term total return (capital
appreciation and dividend income) through investment primarily in equity
securities. Emphasis will be given to both undervalued securities ("value"
style) and securities of companies with growth potential ("growth" style).
LOOMIS SAYLES BALANCED SERIES
The Loomis Sayles Balanced Series seeks reasonable long-term investment
return from a combination of long-term capital appreciation and moderate
current income. The Series is "flexibly managed" in that sometimes it invests
more heavily in equity securities and at other times it invests more heavily
in fixed-income securities, depending on its subadviser's view of the economic
and investment outlook.
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<PAGE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SERIES
The Salomon Brothers Strategic Bond Opportunities Series seeks a high level
of total return consistent with preservation of capital. Assets will be
allocated among U.S. Government obligations, mortgage backed securities,
domestic and foreign corporate debt and sovereign debt securities rated
investment grade (BBB or higher by S&P or Baa or higher by Moody's) (or
unrated but deemed to be of equivalent quality in the subadviser's judgement)
and domestic and foreign corporate debt and sovereign debt securities rated
below investment grade. Depending on market conditions, the Series may invest
without limit in below investment grade fixed-income securities. Securities of
below investment grade quality are considered high yield, high risk securities
and are commonly known as "junk bonds."
BACK BAY ADVISORS BOND INCOME SERIES
The Back Bay Advisors Bond Income Series seeks to provide a high level of
current income consistent with protection of capital.
SALOMON BROTHERS U.S. GOVERNMENT SERIES
The Salomon Brothers U.S. Government Series seeks to provide a high level of
current income consistent with preservation of capital and maintenance of
liquidity. The Series invests primarily in debt obligations (including
mortgage-backed securities) issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or derivative securities (such as collateralized
mortgage obligations) backed by such securities.
BACK BAY ADVISORS MONEY MARKET SERIES
The Back Bay Advisors Money Market Series seeks the highest possible level
of current income consistent with preservation of capital. The Series invests
in a variety of high quality money market instruments. Money market funds are
neither insured nor guaranteed by the U.S. Government and there can be no
assurance that the Series will maintain a stable net asset value of $100 per
share.
INVESTMENT ADVICE
TNE Advisers, Inc., an indirect subsidiary of NELICO, serves as investment
adviser for the Eligible Funds. Each of the Eligible Funds also has a
subadviser. The Back Bay Advisors Bond Income and Back Bay Advisors Money
Market Series receive investment subadvisory services from Back Bay Advisors,
L.P., an affiliate of NELICO. The Westpeak Growth and Income Series receives
investment subadvisory services from Westpeak Investment Advisors, L.P., an
affiliate of NELICO. The Loomis Sayles Small Cap and Loomis Sayles Balanced
Series receive investment subadvisory services from Loomis Sayles & Company,
L.P., an affiliate of NELICO. The Morgan Stanley International Magnum Equity
Series receives investment subadvisory services from Morgan Stanley Asset
Management Inc. The Alger Equity Growth Series receives investment subadvisory
services from Fred Alger Management, Inc. The Goldman Sachs Midcap Value
Series receives investment subadvisory services from Goldman Sachs Asset
Management. The Davis Venture Value Series receives investment subadvisory
services from Davis Selected Advisers, L.P. Davis Selected Advisers may also
delegate any of its responsibilities to Davis Selected-NY, a wholly-owned
subsidiary. The Salomon Brothers U.S. Government Series and Salomon Brothers
Strategic Bond Opportunities Series receive investment subadvisory services
from Salomon Brothers Asset Management Inc. The Salomon Brothers Strategic
Bond Opportunities Series also receives certain investment subadvisory
services from Salomon Brothers Asset Management Limited, a London based
affiliate of Salomon Brothers Asset Management Inc. Each of the Eligible Funds
is a Series of the New England Zenith Fund (the "Zenith Fund"). More complete
information on each Series is contained in the attached Zenith Fund
prospectus, which you should read carefully before investing, as well as in
the Zenith Fund's Statement of Additional Information, which may be obtained
free of charge by writing to New England Securities, 399 Boylston St., Boston,
Massachusetts, 02116 or telephoning 1-800-356-5015.
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<PAGE>
SUBSTITUTION OF INVESTMENTS
If investment in the Eligible Funds or a particular Series is no longer
possible or in the judgment of the Company becomes inappropriate for the
purposes of the Contract, the Company may substitute another Eligible Fund or
Funds without your consent. Substitution may be made with respect to both
existing investments and the investment of future purchase payments. However,
no such substitution will be made without any necessary approval of the
Securities and Exchange Commission.
GUARANTEED OPTION
Purchase payments may also be allocated to the Fixed Account in states that
have approved the Fixed Account option. The Fixed Account is a part of the
Company's general account and provides guarantees of principal and interest.
(See "The Fixed Account" for more information.)
THE CONTRACTS
The Contracts provide that your purchase payments will be invested by the
Company in the Eligible Fund(s) you select and that, after annuitization, the
Company will make variable annuity payments on a monthly basis unless you
elect otherwise. You assume the risk of investment gain or loss because the
value of your Contract before annuitization and, in the case of a variable
payment option, the annuity payments after annuitization, will vary with the
investment performance of the Eligible Fund(s) in which your Contract is
invested.
PURCHASE PAYMENTS
The minimum initial purchase payment currently required is $10,000. Any
subsequent purchase payments must be at least $250. The Company reserves the
right to limit purchase payments made under a Contract. The Company currently
reserves the right not to accept any purchase payment that, when combined with
the Contract Value under all Contracts owned by a single Contract Owner, would
exceed $1,000,000. Under its current rules, in no event will the Company
accept a purchase payment that, when combined with the Contract Value under
all Contracts owned by a single Contract Owner, would exceed $5,000,000. If a
Contract Owner selects a single purchase payment Contract in the application,
the Company reserves the right not to accept any additional purchase payments.
If a Contract Owner selects a flexible purchase payment Contract in the
application, the Company reserves the right to limit purchase payments in any
Contract Year to three times the amount shown in the application.
NO PURCHASE PAYMENTS MAY BE MADE (1) WITHIN FOUR YEARS PRIOR TO THE
CONTRACT'S MATURITY DATE (EXCEPT UNDER CONTRACTS ISSUED IN PENNSYLVANIA OR NEW
YORK), UNLESS THE INITIAL PURCHASE PAYMENT IS $1,000,000 OR MORE, OR (2) AFTER
A CONTRACT OWNER (OR THE ANNUITANT, IF THE CONTRACT IS NOT OWNED IN AN
INDIVIDUAL CAPACITY) REACHES AGE 86.
The Company will determine whether to approve applications for new
Contracts, and will apply initial purchase payments under new Contracts, not
later than two business days after a completed application (including the
initial purchase payment and any documentation the Company requires to effect
an exchange from another annuity) is received at the Company's Home Office. A
new Contract will not be issued until the Company has received the cash
proceeds of another annuity that is used to purchase the new Contract. If an
application is not complete upon receipt, the Company will apply the initial
purchase payment not later than two business days after it is completed. If an
incomplete application is not completed within five days after the Company
receives it, however, the Company will inform the applicant of the reasons for
the delay and will refund any purchase payment unless the applicant agrees to
have the Company retain the purchase payment until the application is
completed. The Company reserves the right to reject any application.
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<PAGE>
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are converted into Accumulation Units of the sub-accounts
you select (subject to the limitation that the Contract Value may be allocated
among no more than ten accounts, including the Fixed Account, at any time).
The number of Accumulation Units of each sub-account to be credited to the
Contract is determined by dividing the purchase payment by the Accumulation
Unit Value for the selected sub-accounts next determined following receipt of
the purchase payment at the Company's Home Office (or, in the case of the
initial purchase payment, next determined following approval of the Contract
application.
CONTRACT VALUE AND ACCUMULATION UNIT VALUE
The value of a Contract is determined by multiplying the number of
Accumulation Units credited to the Contract by the appropriate Accumulation
Unit Values. As described below, the Accumulation Unit Value of each sub-
account depends on the net investment experience of its corresponding Eligible
Fund and reflects fees and expenses borne by the Eligible Fund as well as
charges assessed against sub-account assets. The Accumulation Unit Value of
each sub-account was set at $1.00 on or about the date on which shares of the
corresponding Eligible Fund were first publicly available. The Accumulation
Unit Value is determined as of the close of regular trading on the New York
Stock Exchange on each day the Exchange is open for trading by multiplying the
most recent Accumulation Unit Value by the net investment factor for that day.
The net investment factor for any sub-account reflects the change in net asset
value per share of the corresponding Eligible Fund as of the close of regular
trading on the Exchange from the net asset value most recently determined, the
amount of dividends or other distributions made by that Eligible Fund since
the previous determination of net asset value per share, and daily deductions
for the Mortality and Expense Risk Charge, equal, on an annual basis, to 1.00%
of the average daily net asset value of the sub-account. The net investment
factor may be greater or less than one. The formula for determining the net
investment factor is described under the caption "Net Investment Factor" in
the Statement of Additional Information.
Under a Contract with the Fixed Account option, the total Contract Value
includes the amount of Contract Value held in the Fixed Account. (See "The
Fixed Account.") Under a Contract that permits Contract loans, the Contract
Value also includes the amount of Contract Value transferred to the Company's
general account (but outside of the Fixed Account) as the result of a loan and
any interest credited on that amount. Interest earned on the amount held in
the general account as the result of a loan will be credited to the Contract's
sub-accounts at least annually in accordance with the allocation instructions
in effect for purchase payments under your Contract on the date of the
crediting. (See "Loan Provision for Certain Tax Benefited Retirement Plans.")
PAYMENT ON DEATH PRIOR TO ANNUITIZATION
The Contract's Death Proceeds are payable to the Beneficiary if the Company
receives due proof of the death, prior to annuitization, of: (1) the Contract
Owner; (2) the first Contract Owner to die, in the case of a Contract with
joint owners; or (3) the Annuitant, in the case of a Contract that is not
owned in an individual capacity. (In situation (2) above, if there is no named
Beneficiary, the Death Proceeds will be paid to the surviving Contract Owner.)
The Contract's Death Proceeds at any time are the greater of the current
Contract Value and the minimum guaranteed death benefit. For this purpose, the
current Contract Value is the value next determined after the later of the
date when the Company receives at the Home Office: (1) due proof of death; or
(2) an election of continuation of the Contract or of payment in one sum or
under an annuity payment option. Death proceeds will be reduced by the amount
of any outstanding loan plus accrued interest (see "Loan Provision for Certain
Tax Benefited Retirement Plans") and, in certain states, by the applicable
premium tax charge.
At the inception of the Contract, the minimum guaranteed death benefit is
equal to your initial purchase payment. Thereafter, until the seventh Contract
Anniversary, any subsequent purchase payment will immediately increase your
minimum guaranteed death benefit by the amount of the purchase payment. Any
partial surrender will immediately decrease your minimum guaranteed death
benefit by the percentage of the Contract Value being withdrawn.
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On the seventh Contract Anniversary, and every seventh year anniversary
thereafter until the Contract Owner's (or, if applicable, the Annuitant's)
76th birthday, the minimum guaranteed death benefit under the Contract is
recalculated to determine whether a higher (but never a lower) guarantee will
apply. (For a jointly owned Contract, this recalculation is made every seven
years until the 71st birthday of the older Contract Owner.) The purpose of the
recalculation is to give you the benefit of any positive investment experience
under your Contract. Your Contract's previous investment experience can cause
the minimum guaranteed death benefit to increase on the recalculation date,
but cannot cause it to decrease. The minimum guaranteed death benefit
determined on a recalculation date is the larger of:
(a)the minimum guaranteed death benefit that applied to your Contract just
before the recalculation; and
(b)the Contract Value on the date of the recalculation.
The new minimum guaranteed death benefit applies to your Contract until the
next recalculation date, or until you make a purchase payment or surrender. In
that case, the same adjustment will be made to the minimum guaranteed death
benefit as is made during the first seven years.
EXAMPLE: Assume that a Contract is issued with a $10,000 purchase
payment on 5/1/98. No further purchase payments are made and,
during the first seven Contract Years, no partial surrenders
are made. During the first seven Contract Years, the minimum
guaranteed death benefit is $10,000. Assume that on the
Contract Anniversary on 5/1/05, the Contract Value is
$25,000. The minimum guaranteed death benefit is reset on
that date to $25,000.
Assume that the Contract Value increases to $27,000 by 1/1/06,
and that you request a partial surrender of 20% of your
Contract Value, or $5,400, on that date. The minimum guaranteed
death benefit immediately following the partial surrender is
$20,000 [$25,000-.20($25,000)].
Assume that on 6/15/06 the Contract Value has decreased to
$18,000. The minimum guaranteed death benefit remains at
$20,000 and the Death Proceeds payable on 6/15/06 is $20,000.
Options for Death Proceeds. The Death Proceeds, reduced by the amount of any
outstanding loan plus accrued interest and by any applicable premium tax
charge, will be paid in a lump sum or will be applied to provide one or more
of the fixed or variable methods of payment available (see "Annuity Options").
(Certain annuity payment options under the Contract are not available for the
Death Proceeds.) The Contract Owner may elect the form of payment during his
or her lifetime (or during the Annuitant's lifetime, if the Contract is not
owned in an individual capacity). Such an election, particularly in the case
of Contracts issued in connection with retirement plans qualifying for tax
benefited treatment, is subject to any applicable requirements of Federal tax
law. If the Contract Owner has not elected a form of payment, the Beneficiary
has 90 days after the Company receives due proof of death to make an election.
Whether and when such an election is made could affect when the Death Proceeds
are deemed to be received under the tax laws. The Beneficiary has a choice of:
(1) receiving payment in a single sum; (2) receiving payment in the form of
certain annuity payment options that begin within one year of the date of
death; or (3) if eligible, continuing the Contract under the Beneficiary
Continuation provision or the Spousal Continuation provision, as further
described below. IF THE BENEFICIARY DOES NOT MAKE AN ELECTION WITHIN 90 DAYS
AFTER THE COMPANY RECEIVES DUE PROOF OF DEATH, AND THE BENEFICIARY IS ELIGIBLE
FOR EITHER THE BENEFICIARY CONTINUATION OR THE SPOUSAL CONTINUATION PROVISION,
THE CONTRACT WILL BE CONTINUED UNDER THE APPLICABLE CONTINUATION PROVISION.
For non-tax qualified plans, the Code requires that if the Contract Owner
(or, if applicable, the Annuitant) dies prior to annuitization, the Death
Proceeds must be either: (1) distributed within five years after the date of
death; or (2) applied to a payment option payable over the life (or over a
period not exceeding the life expectancy) of the Beneficiary, provided further
that payments under the payment option must begin within one year of the date
of death. Special options apply under a non-tax qualified plan for spouses.
See "Special Options for Spouses." There are comparable rules for
distributions on the death of the Annuitant under tax qualified plans;
however, if the
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Beneficiary under a tax qualified Contract is the Annuitant's spouse, the Code
generally allows distributions to begin by the year in which the Annuitant
would have reached age 70 1/2 (which may be more or less than five years after
the Annuitant's death). See "Qualified Contracts--Distributions from the
Contract."
If a Contract Owner (or, if applicable, the Annuitant) dies on or after
annuitization, the remaining interest in the Contract must be distributed at
least as quickly as under the method of distribution in effect on the date of
death.
--BENEFICIARY CONTINUATION
In keeping with the Code's general requirement that Death Proceeds must be
distributed within five years after the death of the Contract Owner (or, if
applicable, the Annuitant), the Beneficiary Continuation provision permits a
Beneficiary to hold his or her share of the Death Proceeds (as determined
after the Death Proceeds have been reduced by the amount of any outstanding
loan plus accrued interest and by any applicable premium tax charge) in the
Contract and to continue the Contract for a period ending five years after the
date of death, provided that the Beneficiary's share of the Death Proceeds
meets the Company's published minimum (currently $10,000). THE CONTRACT CANNOT
BE CONTINUED FOR ANY BENEFICIARY WHOSE SHARE OF THE DEATH PROCEEDS DOES NOT
MEET THE MINIMUM.
The Beneficiary has 90 days after the date the Company receives due proof of
death to make an election with respect to his or her share of the Death
Proceeds. The Beneficiary may elect either: (1) payment in a single sum; (2)
application to a permitted annuity payment option with payments to begin
within one year of the date of death; or (3) Beneficiary Continuation,
provided that the Beneficiary's share of the Death Proceeds meets the
Company's published minimum. IF THE BENEFICIARY DOES NOT MAKE AN ELECTION
WITHIN 90 DAYS AFTER THE COMPANY RECEIVES DUE PROOF OF DEATH, THE CONTRACT
WILL BE CONTINUED UNDER THE BENEFICIARY CONTINUATION PROVISION FOR A PERIOD
ENDING FIVE YEARS AFTER THE DATE OF DEATH. IF BENEFICIARY CONTINUATION IS NOT
AVAILABLE BECAUSE THE BENEFICIARY'S SHARE OF THE DEATH PROCEEDS DOES NOT MEET
THE COMPANY'S PUBLISHED MINIMUM, HOWEVER, THE DEATH PROCEEDS WILL BE PAID IN A
SINGLE SUM UNLESS THE BENEFICIARY ELECTS AN ANNUITY PAYMENT OPTION WITHIN 90
DAYS AFTER THE COMPANY RECEIVES DUE PROOF OF DEATH.
If the Contract is continued under the Beneficiary Continuation provision,
the Death Proceeds (reduced by the amount of any outstanding loan plus accrued
interest and any applicable premium tax charge) become the Contract Value on
the date the continuation is effected, and will be allocated among the
accounts in the same proportion as they had been prior to the continuation. In
addition, the Beneficiary will have the right to make transfers and fully or
partially surrender his or her portion of the Contract Value, but may not make
further purchase payments, take loans, or exercise the dollar cost averaging
feature. No minimum guaranteed death benefit amount or Contingent Deferred
Sales Charge will apply. Five years from the date of death of the Contract
Owner (or, if applicable, the Annuitant), the Company will pay the
Beneficiary's Contract Value to the Beneficiary. If the Beneficiary dies
during that five year period, the Beneficiary's death benefit will be the
Beneficiary's Contract Value on the date when the Company receives due proof
of the Beneficiary's death.
--SPECIAL OPTIONS FOR SPOUSES
Under the Spousal Continuation provision, the Contract may be continued
after the death of a Contract Owner (or the Annuitant, if the Contract is not
owned in an individual capacity) prior to annuitization in certain spousal
arrangements. First, if a Contract has spousal joint owners who are also the
only Beneficiaries under the Contract, then upon the death of one Contract
Owner, the other may elect to continue the Contract under the Spousal
Continuation provision rather than receive the Death Proceeds. In addition, if
only one spouse is the Contract Owner (or, if applicable, the Annuitant) and
the other spouse is the primary Beneficiary, the surviving spouse can elect to
continue the Contract in the event of the Contract Owner's (or Annuitant's)
death. In either of these situations, the surviving spouse may elect one of
the following three options within 90 days after the Company receives due
proof of death of the Contract Owner (or, if applicable, the Annuitant). The
surviving spouse may elect: (1) to receive the Death Proceeds (reduced by the
amount of any outstanding loan plus accrued interest and by any applicable
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premium tax charge) either in one sum or under a permitted payment option; (2)
to continue the Contract under the Beneficiary Continuation provision; or (3)
to continue the Contract under the Spousal Continuation provision with the
surviving spouse as the Contract Owner (or, if applicable, the Annuitant). IF
THE SURVIVING SPOUSE DOES NOT MAKE AN ELECTION WITHIN 90 DAYS AFTER THE
COMPANY RECEIVES DUE PROOF OF DEATH, THE CONTRACT WILL AUTOMATICALLY BE
CONTINUED UNDER THE SPOUSAL CONTINUATION PROVISION, WITH THE RESULT THAT THE
SURVIVING SPOUSE WILL FOREGO THE RIGHT TO RECEIVE THE DEATH PROCEEDS AT THAT
TIME.
Under the Spousal Continuation provision, all terms and conditions of the
Contract that applied prior to the death will continue to apply, regardless of
whether or not the Contract is qualified for tax benefited treatment under the
Code, except that:
a. The surviving spouse will not be permitted to make additional purchase
payments or take loans under Contracts issued in connection with a
retirement plan qualifying for tax benefited treatment under Sections 401
or 403 of the Internal Revenue Code; and
b. The Maturity Date will be reset, if necessary, based on the age of the
surviving spouse.
Except under Contracts issued in New York or Pennsylvania, if the reset
Maturity Date would be less than four years after the date of the most recent
purchase payment made, no Contingent Deferred Sales Charge will apply under
the Contract.
Spousal Continuation will not be available if the reset Maturity Date would
be greater than the Company's permitted maximum, or if, at the time of the
Contract Owner's death, the surviving spouse is older than the maximum
maturity age under applicable state law. In addition, the Spousal Continuation
provision will not be available if, at the original Maturity Date, the
surviving spouse would be older than the maximum maturity age under applicable
state law. In most states, the maximum maturity age is 95, but the maximum age
is 85 in New York and Pennsylvania.
A surviving spouse who elects Beneficiary Continuation under a Contract that
is qualified for tax-benefited treatment under the Code must begin to receive
distributions from the Contract by the earlier of: (1) five years from the
date of death; and (2) the year in which the Contract Owner (or, if
applicable, the Annuitant) would have reached age 70 1/2.
If a Contract is subject to a loan at the time the Contract Owner (or, if
applicable, the Annuitant) dies, and the Contract is continued under the
Spousal Continuation provision, the amount of the outstanding loan plus
accrued interest will be treated as a taxable distribution from the Contract
to the deceased Contract Owner, and the Contract Value will be reduced
accordingly.
TRANSFER PRIVILEGE
It is the position of the Company that you may transfer your Contract Value
among sub-accounts and/or the Fixed Account without incurring federal income
tax consequences. It is not clear, however, whether the Internal Revenue
Service will limit the number of transfers between sub-accounts and/or the
Fixed Account in an attempt to limit the Contract Owner's incidents of
ownership in the assets used to support the Contract. See "Tax Status of the
Contract--Diversification."
The Company currently does not charge a transfer fee or limit the number of
transfers prior to annuitization. The Company reserves the right to limit
transfers and to charge a transfer fee. Currently all transfers prior to
annuitization are subject to a maximum of $500,000 per transfer. The Company's
current rules for transfers prior to annuitization require that the amount
transferred to or from any sub-account must be at least $100. (If the full
amount of Contract Value in a sub-account is less than $100, net of any
transfer fee, the amount may be transferred to a sub-account in which Contract
Value is already invested, or it may be transferred to any sub-account if it
is transferred in combination with Contract Value from another sub-account so
that the total transferred to the new sub-account is at least $100.) After
variable annuity payments begin, the Company allows one transfer per Contract
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year without Company consent, and the Fixed Account is not available under
variable payment options. In applying the $500,000 limit, the Company will
treat as one transfer all transfers requested by a Contract Owner on the same
day for all Contracts he or she owns. If the $500,000 limitation is exceeded
for multiple transfers requested on the same day that are treated as a single
transfer, no amount of the transfer will be executed by the Company. Transfers
will be made at the Accumulation Unit Values next determined after the request
is received. However, Contract Owners should be aware that because transfer
limitations may prevent you from making a transfer on the date you want to,
your future Contract Value may be lower than it would have been had the
transfer been made on the desired date.
For transfers that the Company determines to be based on "market-timing"
(e.g., transfers under different Contracts that are being requested under
Powers of Attorney with a common attorney-in-fact or that are, in the
Company's determination, based on the recommendation of a common investment
adviser or broker/dealer), the current transfer limitation prior to
annuitization is one transfer every 30 days, each transfer subject to a
maximum of $500,000. In applying the limitation of one $500,000 transfer every
30 days, the Company will treat as one transfer all transfers requested under
different Contracts that are being requested under Powers of Attorney with a
common attorney-in-fact or that are, in the Company's determination, based on
the recommendation of a common investment adviser or broker/dealer. If the
$500,000 limitation is exceeded for multiple transfers requested on the same
day that are treated as a single transfer, no amount of the transfer will be
executed by the Company. If a transfer is executed under one Contract and,
within the next 30 days, a transfer request for another Contract is determined
by the Company to be related to the executed transfer under this paragraph's
rules, the transfer request will not be executed by the Company. (In order for
the transfer request to be executed, it would need to be requested again after
the 30-day period and it, along with any other transfer requests that are
collectively treated as a single transfer, would need to total no more than
$500,000.)
The Company's interest in applying these limitations on the maximum number
and size of transfers is to protect the interests of both Contract Owners who
are not engaging in significant transfer activity and Contract Owners who are
engaging in such activity. The Company has determined that the actions of
Contract Owners engaging in significant transfer activity among sub-accounts
may cause an adverse effect on the performance of the underlying Eligible
Funds. The movement of significant sub-account values from one sub-account to
another may prevent the appropriate Eligible Fund from taking advantage of
investment opportunities because it must maintain a significant cash position
in order to handle redemptions. Such movement may also cause a substantial
increase in Eligible Fund transaction costs which must be indirectly borne by
Contract Owners.
The foregoing limitations on transfers that the Company determines to be
based on market-timing do not apply to Contracts issued in New York. In New
York as in all other states, however, transfers can be made under Powers of
Attorney only with the Company's consent.
Contract Owners will be notified, in advance, if a transfer fee or limits on
the number of transfers will be imposed, or of any change in any transfer fee
or limitation on the number or amount of transfers.
See "Requests and Elections" for information regarding transfers made by
written request and by telephone.
For special rules regarding transfers involving the Fixed Account, see "The
Fixed Account." Transfers out of the Fixed Account are limited as to amount.
Your Contract Value may be distributed among no more than 10 accounts
(including the Fixed Account) at any time. Transfer requests not complying
with this rule will not be processed.
DOLLAR COST AVERAGING
The Company offers an automated transfer privilege referred to here as
dollar cost averaging. Under this feature you may request that an amount of
your Contract Value be transferred on the same day each month, prior to
annuitization, from any one account of your choice (including the Fixed
Account, subject to the limitations on
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transfers out of the Fixed Account) to one or more of the other accounts
(including the Fixed Account, subject to the limitations on transfers into the
Fixed Account), subject to the limitation that Contract Value may not be
allocated to more than 10 accounts, including the Fixed Account, at any time.
The Company currently restricts the amount of Contract Value which may be
transferred from the Fixed Account. However, these limits do not apply to new
deposits to the Fixed Account for which the dollar cost averaging program has
been elected within 30 days from the date of the deposit. Therefore, in such
case, the amount of Contract Value which may be transferred from the Fixed
Account will be the greatest of: a) 25% of the Contract Value in the Fixed
Account at the end of the first day of the Contract Year; b) the amount of
Contract Value that was transferred from the Fixed Account in the previous
Contract Year; or c) the amount of Contract Value in the Fixed Account to be
transferred out of the Fixed Account under dollar cost averaging elected on
the new deposits within 30 days from the date of deposit. The Company allows
one dollar cost averaging program to be active at a time. Therefore if you
transfer pre-existing assets (corresponding to Contract Value for which the
dollar cost averaging program was not elected within 30 days from the date of
each deposit) out of the Fixed Account under the dollar cost averaging program
and would like to transfer up to 100% of new deposits under the program, then
the dollar cost averaging program on the pre-existing assets will be canceled
and a new program will begin with respect to new deposits. In this case, the
pre-existing assets may still be transferred out of the Fixed Account,
however, not under a dollar cost averaging program, subject to the limitations
on transfers generally out of the Fixed Account. Currently, a minimum of $100
must be transferred to each account that you select under this feature. If a
transfer fee is imposed, transfers made under the dollar cost averaging
program will be counted against the number of transfers per year permitted
free of charge. You may cancel your use of the dollar cost averaging program
at any time prior to the monthly transfer date. (See Appendix A for more
information about Dollar Cost Averaging.)
SURRENDERS
Prior to annuitization, you may surrender your Contract for all or part of
the Contract Value. You may receive the proceeds in cash or apply them to a
payment option. The proceeds you receive will be the Contract Value reduced by
the following amounts:
. any applicable Contingent Deferred Sales Charge;
. a pro rata portion of the Administration Contract Charge (on a full
surrender only);
. a premium tax charge (in certain states only); and
. any outstanding loan plus accrued interest (on a full surrender only).
See "Administration Charges, Contingent Deferred Sales Charge and Other
Deductions" and "Loan Provision for Certain Tax Benefited Retirement Plans"
for a description of these reductions and when they apply.
Federal tax laws, laws relating to employee benefit plans, or the terms of
benefit plans for which the Contracts may be purchased may restrict your right
to surrender the Contract. No surrender is permitted in connection with a
Contract issued pursuant to the Optional Retirement Program of the University
of Texas System prior to the plan participant's death, retirement, or
termination of employment in all Texas public institutions of higher
education. In addition, Federal tax laws impose penalties on certain premature
distributions from the Contracts. Full and partial surrenders and systematic
withdrawals prior to age 59 1/2 may be subject to a 10% penalty tax (and 25%
in the case of a withdrawal from a SIMPLE IRA within the first two years).
(See "Federal Income Tax Status.") The Company currently waives the Contingent
Deferred Sales Charge on distributions that are intended to satisfy required
minimum distributions, calculated as if this Contract were the participant's
only retirement plan asset. This waiver only applies if the required minimum
distribution exceeds the free withdrawal amount and no previous surrenders
were made during the Contract Year. Because a surrender may result in adverse
tax consequences, you should consult a qualified tax advisor before taking a
distribution from the Contract. (See "Federal Income Tax Status--Qualified
Contracts.")
To surrender, you must submit a request in proper form to the Company's Home
Office. (See "Requests and Elections.") If you are seeking a waiver of the
Contingent Deferred Sales Charge due to terminal illness,
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confinement to a nursing home or permanent and total disability, the request
must include satisfactory evidence of one of these conditions. (See
"Administration Charges, Contingent Deferred Sales Charge and Other
Deductions.") IF YOU WISH TO APPLY THE PROCEEDS TO A PAYMENT OPTION, YOU MUST
SO INDICATE IN YOUR SURRENDER REQUEST; OTHERWISE YOU WILL RECEIVE THE PROCEEDS
IN A LUMP SUM AND MAY BE TAXED ON THEM AS A FULL DISTRIBUTION. The surrender
request must be received at the Home Office before the earlier of the Maturity
Date and a Contract Owner's death (or, for Contracts not owned in an
individual capacity, before the Annuitant's death). Surrender proceeds will
normally be paid within seven days after receipt of a request in proper form
at the Home office, but payment may, by law, be delayed under certain
circumstances. (See "Suspension of Payments.")
The amount of the surrender proceeds will be based on the Accumulation Unit
Values that are next determined after the complete surrender request is
received at the Home Office; however, if you choose to apply the surrender
proceeds to a payment option, the surrender proceeds will be based on
Accumulation Unit Values determined on a later date if you so specify in your
request. Company consent is required if the amount of a partial surrender is
less than the Company's published minimum, which is currently $100. After a
partial surrender, the remaining Contract Value must be at least $2,500,
unless the Company consents to a lower amount or, if the Contract is subject
to an outstanding loan, the remaining unloaned Contract Value must be at least
10% of the total Contract Value after the partial surrender or $2,500,
whichever is greater (unless the Company consents to a lesser amount).
Otherwise, at your option, either the amount of the partial surrender will be
reduced or the transaction will be treated as a full surrender that is subject
to the full amount of any applicable Contingent Deferred Sales Charge. A
partial surrender will reduce your Contract Value in the sub-accounts in
proportion to the amount of your Contract Value in each sub-account, unless
you request otherwise.
SYSTEMATIC WITHDRAWALS
The Systematic Withdrawal feature available in connection with the Contract
allows you to have a portion of the Contract Value withdrawn automatically on
a monthly basis prior to annuitization. You can elect to withdraw each month
either a fixed dollar amount (which you can change periodically) or the
investment gain in the Contract. If you elect to withdraw the investment gain
only, no loans will be permitted. Conversely, if you have a loan, you will not
be able to elect the investment gain only option under the Systematic
Withdrawal feature. Currently a withdrawal must be a minimum of $100; if you
choose to have the investment gain withdrawn and it is less than $100 for a
month, no withdrawal will be made that month. The Company reserves the right
to change the required minimum monthly withdrawal amount. If the New York
Stock Exchange is closed on the day when the withdrawal is to be made, the
withdrawal will be processed on the next business day. The Contingent Deferred
Sales Charge will apply to amounts received under the Systematic Withdrawal
program in the same manner as it applies to other partial surrenders and
surrenders of Contract Value. (See "Contingent Deferred Sales Charge.") If you
make a partial surrender or a purchase payment at the same time that you are
having the investment gain withdrawn under the Systematic Withdrawal feature,
the Systematic Withdrawal will be canceled effective as of the next monthly
withdrawal date; however, at your option, the Company will resume Systematic
Withdrawals on the following monthly withdrawal date (that is, the second
monthly withdrawal date after the purchase payment or partial surrender). The
amount of the Systematic Withdrawals will be adjusted to reflect the purchase
payment or partial surrender. Continuing to make purchase payments under the
Contract while you are making Systematic Withdrawals means that you could
incur any applicable Contingent Deferred Sales Charge on the withdrawals at
the same time that you are making the new purchase payments; however, no
Contingent Deferred Sales Charge will apply if you are having the investment
gain (rather than a fixed dollar amount) withdrawn. The Federal tax laws may
include systematic withdrawals in the Contract Owner's gross income in the
year in which the withdrawal amount is received and will impose a penalty tax
of 10% on certain systematic withdrawals which are premature distributions.
Additional terms and conditions for the systematic withdrawal program are set
forth in the application for the program.
LOAN PROVISION FOR CERTAIN TAX BENEFITED RETIREMENT PLANS
Contract loans are available to participants under TSA Plans that are not
subject to ERISA and to trustees of Qualified Plans (including those subject
to ERISA). Availability of Contract loans will be subject to state insurance
department approval.
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The Department of Labor has issued regulations (the "ERISA regulations")
governing plan participant loans under retirement plans subject to ERISA.
Generally, the ERISA regulations will apply to retirement plans that qualify
under Section 401(a) and certain other employer-sponsored qualified plans. YOU
AND YOUR EMPLOYER ARE RESPONSIBLE FOR DETERMINING WHETHER YOUR PLAN IS SUBJECT
TO AND COMPLIES WITH THE ERISA REGULATIONS ON PARTICIPANT PLAN LOANS.
It is the responsibility of the trustee of a Qualified Plan subject to ERISA
to ensure that the proceeds of a Contract loan are made available to a
participant under a separate plan loan agreement, the terms of which comply
with all the plan qualification requirements including the requirements of the
ERISA regulations on plan loans. Therefore, the plan loan agreement may differ
from the Contract loan provisions and, if you are a participant in a Qualified
Plan subject to ERISA, you should consult with the fiduciary administering the
plan loan program to determine your rights and obligations with respect to
plan loans.
The ERISA regulations contain requirements for plan loans relating to their
maximum amount, availability, and other matters. Among the rules are the
requirements that the loan bear a reasonable rate of interest, be adequately
secured, provide a reasonable repayment schedule, and be made available on a
basis that does not discriminate in favor of employees who are officers or
shareholders or who are highly compensated. These regulations may change from
time to time. Failure to comply with these requirements may result in
penalties under the Code and under ERISA.
One of the current requirements of the ERISA regulations is that the plan
must charge a "commercially reasonable" rate of interest for plan loans. The
Contract loan interest rate may not be considered "commercially reasonable"
within the meaning of the ERISA regulations, and it is the responsibility of
the plan fiduciary to charge the participant any additional interest under the
plan loan agreement which may be necessary to make the overall rate charged
comply with the regulation. The ERISA regulations also currently require that
a loan be adequately secured, but provide that not more than 50% of the
participant's vested account balance under the plan may be used as security
for the loan. A Contract loan is secured by the portion of the Contract Value
which is held in the Company's general account as a result of the loan. The
plan fiduciary must ensure that the Contract Value held as security under the
Contract, plus any additional portion of the participant's vested account
balance which is used as security under the plan loan agreement, does not
exceed 50% of the participant's total vested account balance under the plan.
The amount of any loan may not exceed the maximum loan amount as determined
under the Company's maximum loan formula. The effect of a loan on your
Contract is that a portion of the Contract Value equal to the amount of the
loan will be transferred to the Company's general account and will earn
interest (which is credited to the Contract), currently at the effective rate
of 4 1/2% per year. This earned interest will be credited to the Contract's
sub-accounts (and, if available under your Contract, to the Fixed Account)
annually in accordance with the allocation instructions in effect for purchase
payments under your Contract on the date of the crediting. Under current
rules, interest charged on the loan will be 6 1/2% per year. Depending on the
Company's interpretation of applicable law and on the Company's administrative
procedures, the interest rates charged and earned on loaned amounts may be
changed (for example, to provide for a variable interest rate) with respect to
new loans made. The minimum loan amount is currently $1,000. Because the
amount moved to the general account as a result of the loan does not
participate in the Variable Account's investment experience, a Contract loan
can have a permanent effect on the Contract Value and Death Proceeds. Loans
will not be permitted for Contracts participating in the investment gain only
option of the Systematic Withdrawal feature.
The Company will not permit more than one loan at a time on any Contract
except where state regulators require otherwise. In addition, the maximum
amount for a qualified loan is limited such that the amount of the loan, when
added to the outstanding balance of all other loans, whenever made, from all
other plans of the same employer, does not exceed $50,000 reduced by the
excess of the highest outstanding balance of loans under such plans during the
one-year period, ending on the day before the date on which the loan is made,
over the outstanding balance of loans under such plans on the date the loan is
made; or if less the greater of: (1) $10,000; or (2) 50% of the current value
of your nonforfeitable, accrued benefits under the plan. Loans must be repaid
within
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5 years except for certain loans used for the purchase of a principal
residence, which must be repaid within 20 years. Repayment of the principal
amount and interest on the loan will be required in equal monthly installments
by means of repayment procedures established by the Company. Contract loans
are subject to applicable retirement program laws and their taxation is
determined under the Code. Under current practice, if a Contract loan
installment repayment is not made, the Company may (unless restricted by law)
make a full or partial surrender of the Contract in the amount of the unpaid
installment repayment on the Contract loan or, if there is a default on the
Contract loan, in an amount equal to the outstanding loan balance (plus any
applicable Contingent Deferred Sales Charge and Administration Contract Charge
in each case). (A default on the loan is defined in the loan application and
includes, among other things, nonpayment of three consecutive or a total of
five installment repayments, or surrender of the Contract.) For TSA Plans that
are not subject to ERISA, the current actual distribution will be limited to
pre-1989 money unless you are age 59 1/2 or otherwise comply with the legal
requirements for permitted distributions under the TSA contract. If these
limitations do not apply (i.e. you are under the age of 59 1/2 or no pre-1989
money is in your contract) the Company will report the amount of the unpaid
installment repayment or default as a deemed distribution for tax purposes,
but will postpone an actual distribution from the Contract until the earliest
distribution date permitted under the law. An installment repayment of less
than the amount billed will not be accepted. A full or partial surrender of
the Contract to repay all or part of the loan may result in serious adverse
tax consequences for the plan participant (including penalty taxes) and may
adversely affect the qualification of the plan or Contract. The trustee of a
Qualified Plan subject to ERISA will be responsible for reporting to the IRS
and advising the participant of any tax consequences resulting from the
reduction in the Contract Value caused by the surrender and for determining
whether the surrender adversely affects the qualification of the plan. In the
case of a TSA Plan not subject to ERISA, the Company will report the default
to the IRS as a taxable distribution under the Contract.
The Internal Revenue Service issued proposed regulations in December of
1995, which, if finalized in their present form, would require that if the
repayment terms of a loan are not satisfied after the loan has been made due
to a failure to make a loan repayment as scheduled, including any applicable
grace period, the balance of the loan would be deemed to be distributed. If
the loan is treated as a distribution under Code Section 72(p), the proposed
regulations state that the amount so distributed is to be treated as a taxable
distribution subject to the normal rules of Code Section 72, if the
participant's interest in the plan includes after-tax contributions (or other
tax basis). A deemed distribution would also be a distribution for purposes of
the 10 percent tax in Code Section 72(t). However, a deemed distribution under
Section 72(p) would not be treated as an actual distribution for purposes of
Code Section 401, the rollover and income averaging provisions of Section 402
and the distribution restrictions of Section 403(b).
Partial surrenders will be restricted by the existence of a loan and, after
any partial surrender, the remaining unloaned Contract Value must be at least
10% of the total Contract Value after the partial surrender or $1,000,
whichever is greater (unless the Company consents to a lesser amount). If a
partial surrender by the Company to enforce the loan repayment schedule would
reduce the unloaned Contract Value below this amount, the Company reserves the
right to surrender the entire Contract and apply the Contract Value to the
Contingent Deferred Sales Charge, the Administration Contract Charge and the
amount owed to the Company under the loan. If at any time an excess Contract
loan exists (that is, the Contract loan balance exceeds the Contract Value),
the Company has the right to terminate the Contract.
Unless you request otherwise, Contract loans will reduce the amount of the
Contract Value in the accounts in proportion to the Contract Value then in
each account. If any portion of the Contract loan was attributable to Contract
Value in the Fixed Account, then an equal portion of each loan repayment will
have to be allocated to the Fixed Account. (For example, if 50% of the loan
was attributable to your Fixed Account Contract Value, then 50% of each loan
repayment will be allocated to the Fixed Account). Unless you request
otherwise, a repayment will be allocated to the sub-accounts in the same
proportions to which the loan was attributable to the sub-accounts.
The amount of the death proceeds, the amount payable upon surrender of the
Contract and the amount applied on the Maturity Date to provide annuity
payments will be reduced by the amount of any outstanding
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Contract loan plus accrued interest. In these circumstances, the amount of the
outstanding Contract loan plus accrued interest generally will be taxed as a
taxable distribution.
The tax and ERISA rules relating to participant loans under tax benefited
retirement plans are complex and in some cases unclear, and they may vary
depending on the individual circumstances of each loan. The Company strongly
recommends that you, your employer and your plan fiduciary consult a qualified
tax advisor regarding the currently applicable tax and ERISA rules before
taking any action with respect to loans.
The Company will provide further information regarding loans upon request.
SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the payment of any
amounts due under the Contract or transfers of Contract Values between sub-
accounts or to the Fixed Account when permitted under applicable Federal laws,
rules and regulations. Current Federal law permits such suspension or
postponement if: (a) the New York Stock Exchange is closed (other than for
customary weekend and holiday closings); (b) trading on the Exchange is
restricted; (c) an emergency exists such that it is not reasonably practicable
to dispose of securities held in the Variable Account or to determine the
value of its assets; or (d) the Securities and Exchange Commission by order so
permits for the protection of securities holders.
OWNERSHIP RIGHTS
During the Annuitant's lifetime, all rights under the Contract belong solely
to the Contract Owner unless otherwise provided. These rights include the
right to change the Beneficiary, to change the payment option, to assign the
Contract (subject to the restrictions referred to below), and to exercise all
other rights, benefits, options and privileges conferred by the Contract or
allowed by the Company. Transfer of ownership of the Contract under an ERISA
"Pension Plan" to a non-spousal beneficiary may require spousal consent.
Qualified Plans and certain TSA Plans and IRAs with sufficient employer
involvement are deemed to be "Pension Plans" under ERISA and may, therefore,
be subject to rules under the Retirement Equity Act of 1984. These rules
require that benefits from annuity contracts purchased by a Pension Plan and
distributed to or owned by a participant be provided in accordance with
certain spousal consent, present value and other requirements which are not
enumerated in the Contract. Thus, the tax consequences of the purchase of the
Contracts by Pension Plans should be considered carefully.
Those Contracts offered by the prospectus which are designed to qualify for
the favorable tax treatment described below under "Federal Income Tax Status"
contain restrictions on transfer or assignment, reflecting requirements of the
Code which must be satisfied in order to assure continued eligibility for such
tax treatment. In accordance with such requirements, ownership of such a
Contract may not be changed and the Contract may not be sold, assigned or
pledged as collateral for a loan or for any other purpose except under certain
limited circumstances. A Contract Owner contemplating a sale, assignment or
pledge of the Contract should carefully review its provisions and consult a
qualified tax advisor.
If Contracts offered by this prospectus are used in connection with deferred
compensation plans or retirement plans not qualifying for favorable Federal
tax treatment, such plans may also restrict the exercise of rights by the
Contract Owner. A Contract Owner should review the provisions of any such
plan.
REQUESTS AND ELECTIONS
Requests for sub-account transfers or reallocation of future purchase
payments may be made by telephone or written request (which may be telecopied)
to the Company at its Home Office. Written requests for such transfers or
changes of allocation must be in a form acceptable to the Company. Such
written requests may be telecopied to 617-578-5412. To request a transfer or
change of allocation by telephone, please contact your registered
representative, or contact the Company's Home Office at 1-800-435-4117 between
the hours of 9:00 a.m. and 4:00 p.m., Eastern Time. Requests for transfer
(that are within the Company's current limits applicable to
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transfers) or reallocation by telephone will be automatically permitted. The
Company will use reasonable procedures such as requiring certain identifying
information from the caller, tape recording the telephone instructions, and
providing written confirmation of the transaction, in order to confirm that
instructions communicated by telephone are genuine. Any telephone instructions
reasonably believed by the Company to be genuine will be your responsibility,
including losses arising from any errors in the communication of instructions.
As a result of this policy, you will bear the risk of loss. If the Company
does not employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, the Company may be liable for any
losses due to unauthorized or fraudulent transactions. All other requests and
elections under a Contract must be in writing signed by the proper party, must
include any necessary documentation and must be received at the Company's Home
Office to be effective. If acceptable to the Company, requests or elections
relating to Beneficiaries and ownership will take effect as of the date signed
unless the Company has already acted in reliance on the prior status. The
Company is not responsible for the validity of any written request or
election.
TEN DAY RIGHT TO REVIEW
Within 10 days (or more where required by applicable state insurance law)
after you receive your Contract you may return it to the Company or its agent
for cancellation. Upon cancellation of the Contract, the Company will return
to you the Contract Value. If required by the insurance law or regulations of
the state in which your Contract is issued, however, the Company will refund
all purchase payments made.
ADMINISTRATION CHARGES, CONTINGENT
DEFERRED SALES CHARGE AND OTHER DEDUCTIONS
The Company deducts various charges from Contract Value for the services
provided, expenses incurred and risks assumed in connection with the
Contracts. For example, the Company incurs costs and expenses in connection
with issuing Contracts, maintaining Contract Owner records and providing
accounting, valuation, regulatory and reporting services. The Company also
incurs costs and expenses associated with the marketing, sale and distribution
of the Contracts. In addition, the Company assumes mortality and expense risks
under the Contracts. In particular, the Company guarantees that the dollar
amount of the Administration Contract Charge will not increase over the life
of a Contract, regardless of the actual expenses. Also, the Company guarantees
that, although annuity payments will vary according to the performance of the
investments you select, annuity payments will not be affected by the mortality
experience (death rate) of persons receiving such payments or of the general
population. The Company assumes this mortality risk by virtue of annuity rates
in the Contract that cannot be changed. The Company also assumes the risk of
making a minimum death benefit payment if the Contract Owner (or, if
applicable, the Annuitant) dies prior to annuitization. (See "Payment on Death
Prior to Annuitization.") The amount and manner of deduction of Contract
charges is described below. The amount of a charge may not necessarily
correspond to the costs associated with providing the services or benefits
indicated by the designation of the charge or associated with the particular
Contract. For example, the Contingent Deferred Sales Charge may not fully
cover all of the sales and distribution expenses actually incurred by the
Company, and proceeds from other charges, including the mortality and expense
risk charge, may be used in part to cover such expenses.
ADMINISTRATION CHARGES
The Company deducts an Administration Contract Charge generally equal to the
lesser of: 2% of the total Contract Value (including any Contract Value you
have allocated to the Fixed Account and any Contract Value held in the
Company's general account as the result of a loan) and $30. In addition, the
Company may (but does not currently) charge a transfer fee for certain
transfers of Contract Value among the sub-accounts and/or the Fixed Account.
The Company will notify Contract Owners in advance of imposing any such fee.
(See "Transfer Privilege.")
The annual Administration Contract Charge is deducted from the Contract
Value on each Contract anniversary for the prior Contract Year and will be
deducted on a pro rata basis at annuitization or at the time of a full
surrender if it is not on a Contract anniversary. Currently, the charge is not
imposed after annuitization. If two
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Contracts are issued to permit the funding of a spousal IRA, the
Administration Contract Charge will be imposed only on the Contract to which
the larger purchase payments have been allocated in the Contract application.
The charge is deducted entirely from the Contract Value in the Variable
Account, and not from the Contract Value in the Fixed Account or the Company's
general account as the result of a loan. The charge will be waived for a
Contract Year if (1) the Contract Value at the end of the year was at least
$50,000, OR (2) you made at least $1,000 in net deposits (purchase payments
minus partial surrenders) during that Contract Year and the Contract Value at
the end of the previous Contract Year was at least $25,000. (A pro rata charge
will always be made on a full surrender and at annuitization, however,
regardless of the amount of your Contract Value.) The Administration Contract
Charge will be deducted from each sub-account in the ratio of your interest
therein to your total Contract Value in the Variable Account.
MORTALITY AND EXPENSE RISK CHARGE
The Company deducts a Mortality and Expense Risk Charge from the Variable
Account. This charge is computed and deducted on a daily basis from the assets
in each sub-account attributable to the Contracts. The charge is at an annual
rate of 1.00% of the daily net assets of each such sub-account, of which .70%
represents a mortality risk charge and .30% represents an expense risk charge.
The Mortality and Expense Risk Charge as a percentage of Contract Value will
not increase over the life of a Contract. The Mortality and Expense Risk
Charge will continue to be assessed if annuity payments are made on a variable
basis after annuitization. (See "Annuity Payments.")
CONTINGENT DEFERRED SALES CHARGE
No charge for sales expenses is deducted from purchase payments when they
are made. However, a Contingent Deferred Sales Charge may apply on certain
events ("CDSC events"), except that no Contingent Deferred Sales Charge will
apply if the initial purchase payment is $1,000,000 or more. CDSC events are:
(a) a full or partial surrender of your Contract (including surrenders where
you apply the proceeds to certain payment options); (b) in certain
circumstances, a withdrawal of the commuted value of amounts that you applied
to an annuity payment option; or (c) under Contracts issued in Pennsylvania or
New York, the Maturity Date if at that date a purchase payment has been
invested for less than four years.
The Contingent Deferred Sales Charge is taken into account in calculating
the proceeds payable on a full surrender. On a partial surrender, the
Contingent Deferred Sales Charge is deducted from the Contract Value remaining
after deduction of the surrender amount requested and is taken from the
Contract Value in the sub-accounts and the Fixed Account in the same
proportion as the Contract Value surrendered.
The Contingent Deferred Sales Charge equals a percentage of each purchase
payment. Each purchase payment is subject to the charge for four years (12
month periods) from the date it is received by the Company, as follows:
<TABLE>
<CAPTION>
IF WITHDRAWN DURING YEAR CHARGE
------------------------ ------
<S> <C>
1................................... 4%
2................................... 3%
3................................... 2%
4................................... 1%
Thereafter............................ 0%
</TABLE>
Whether amounts surrendered, withdrawn or applied to an annuity payment
option are considered to include purchase payments subject to the Contingent
Deferred Sales Charge depends on the following rules.
In any Contract Year you may surrender a portion of your Contract Value, the
free withdrawal amount, without incurring the Contingent Deferred Sales
Charge. The free withdrawal amount for each Contract Year is equal to the
greater of: (1) 10% of the Contract Value at the beginning of the Contract
Year; and (2) the excess of the Contract Value over purchase payments subject
to the Contingent Deferred Sales Charge on the date of surrender. If not used,
the free withdrawal amount does not carry over to the next Contract Year.
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<PAGE>
In the event that tax law requires you to take distributions of Contract
Value prior to the Maturity Date, they may be subject to the Contingent
Deferred Sales Charge to the extent they exceed the free withdrawal amount, as
described above, in any Contract Year. However, the Company currently waives
this charge on IRA required minimum distributions (on the portion of assets
held under the IRA in your Contract). See "Federal Income Tax Status--Tax
Status of the Contract" and "--Qualified Plans."
EXAMPLE: Assume that a single purchase payment of $10,000 is made into the
Contract. The following illustrates the free withdrawal amount
available under two hypothetical situations.
<TABLE>
<CAPTION>
HYPOTHETICAL CONTRACT VALUE 10% OF
------------------------------ BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 1:............ $12,500 $14,000 $4,000 $1,250 $4,000
Situation 2:............ $11,000 $10,000 $ 0 $1,100 $1,100
</TABLE>
A surrender will be attributed first to the free withdrawal amount. If you
surrender an amount greater than the free withdrawal amount, the excess will
be attributed to purchase payments on a "first-in, first-out" basis. That is,
your purchase payments will be withdrawn in the order they were made.
EXAMPLE: Assume that a $10,000 purchase payment is made into the Contract on
6/1/98 and another $10,000 purchase payment is made on 2/1/99. The
following illustrates the Contingent Deferred Sales Charge that
would apply on partial surrenders in two hypothetical situations.
<TABLE>
<CAPTION>
HYPOTHETICAL CONTRACT VALUE 10% OF
------------------------------ BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 1: $7,000 par-
tial surrender on
12/1/99................ $22,000 $25,000 $5,000 $2,200 $5,000
</TABLE>
The first $5,000 withdrawn would be free of the Contingent Deferred Sales
Charge. The remaining $2,000 of the withdrawal would be made from the oldest
purchase payment (i.e. the 6/1/98 purchase payment). A 3% Contingent
Deferred Sales Charge would apply to the $2,000, because the withdrawal
would be taking place in the second year following the date of the purchase
payment.
<TABLE>
<CAPTION>
HYPOTHETICAL CONTRACT VALUE 10% OF
------------------------------ BEGINNING OF MAXIMUM FREE
AT BEGINNING ON WITHDRAWAL YEAR CONTRACT WITHDRAWAL
OF CONTRACT YEAR DATE CONTRACT GAIN VALUE AMOUNT
---------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Situation 2: $25,000
surrender on 12/1/01... $30,000 $33,000 $13,000 $3,000 $13,000
</TABLE>
The first $13,000 withdrawn would be free of the Contingent Deferred Sales
Charge. The remaining $12,000 of the withdrawal would be made by withdrawing
the $10,000 purchase payment made on 6/1/98 and $2,000 of the $10,000
purchase payment that was made on 2/1/99. The Contingent Deferred Sales
Charge that would apply is: 1% X $10,000 + 2% X $2,000, or $140. The
remaining amount of purchase payments that could be subject to the
Contingent Deferred Sales Charge (assuming no further purchase payments were
made) would be $8,000.
Amounts surrendered under the free withdrawal provision do not reduce the
total purchase payments that are potentially subject to the Contingent
Deferred Sales Charge under your Contract.
If your Contract Value is less than your total purchase payments due to a
free withdrawal, negative investment performance or deduction of the
Administration Contract Charge, the following rules apply for calculating the
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<PAGE>
Contingent Deferred Sales Charge: the deficiency will be attributed to your
most recent purchase payment first, and subsequent earnings will be credited
to that deficiency (and not treated as earnings) until Contract Value exceeds
purchase payments.
Waiver of Contingent Deferred Sales Charge. No Contingent Deferred Sales
Charge will apply:
. After 30 days from issue of the Contract if you apply the proceeds to a
variable or fixed payment option involving a life contingency (described
under "Annuity Options"), or, for a minimum specified period of 15 years, to
either the Variable Income for a Specified Number of Years Option or the
Variable Income Payments to Age 100 Option (described under "Annuity
Options"), or a comparable fixed option. However, if you subsequently
withdraw the commuted value of amounts placed under any of those options,
the Company will deduct from the amount you receive a portion of the
Contingent Deferred Sales Charge amount that would have been deducted when
you originally applied the Contract proceeds to the option, taking into
account the lapse of time from annuitization to surrender. The applicable
portion of the Contingent Deferred Sales Charge will be based on the ratio
of (1) the number of whole months remaining, on the date of the withdrawal,
until the date when the Contingent Deferred Sales Charge would expire, to
(2) the number of whole months that were remaining, when the proceeds were
applied to the option, until the date when the Contingent Deferred Sales
Charge would expire. (See example in Appendix B.)
. On full or partial surrenders if the Contract Owner submits satisfactory
evidence to the Company that the Contract Owner (or one Contract Owner under
a jointly owned Contract, or the Annuitant, if the Contract is not owned in
an individual capacity) is terminally ill (as defined in the Contract), has
been confined to a nursing home for more than 90 continuous days, or is
permanently and totally disabled (as defined in the Contract). This benefit
is only available to an original owner of the Contract who was not over age
65 at issue of the Contract, and may not be available in every state.
. If under the Spousal Continuation provision the Contract's Maturity Date is
reset to a date that is less than four years after the most recent purchase
payment made under the Contract. The Contingent Deferred Sales Charge will
not apply to the Contract in these circumstances. This waiver of the
Contingent Deferred Sales Charge will not apply, however, to Contracts
issued in New York or Pennsylvania.
. If the initial purchase payment is $1,000,000 or more.
. On minimum distributions required by tax law. The Company currently waives
the Contingent Deferred Sales Charge on distributions that are intended to
satisfy required minimum distributions, calculated as if this Contract were
the participant's only retirement plan asset. This waiver only applies if
the required minimum distribution exceeds the free withdrawal amount and no
previous surrenders were made during the Contract Year. (See "Federal Income
Tax Status--Qualified Contracts.")
The Contracts may be sold directly, without compensation, to a registered
representative, to employees, officers, directors, and trustees of the Company
and its affiliated companies, and spouses and immediate family members (i.e.
children, siblings and parents (including siblings and parents of spouses) and
grandparents) of the foregoing, and to employees, officers, directors,
trustees and registered representatives of any broker-dealer authorized to
sell the Contracts or any bank affiliated with such a broker-dealer and of any
sub-adviser to the Eligible Funds, and spouses and immediate family members of
the foregoing. If consistent with applicable state insurance law, the
Contracts may also be sold, without compensation, to the Company or MetLife
for use with deferred compensation plans for agents, employees, officers,
directors, and trustees of the Company and its affiliated companies, subject
to any restrictions imposed by the terms of such plans, or to persons who
obtain their Contracts through a bank, adviser or consultant to whom they pay
a fee for investment or planning advice. If sold under these circumstances,
the Contracts will be credited with an additional percentage of premium to
reflect in part or in whole any cost savings associated with the direct sale,
but only if such credit will not be unfairly discriminatory to any person. No
additional premium will be credited to Contracts purchased by persons
described above in exchange for another variable annuity contract issued by
the Company or its affiliated companies.
A-31
<PAGE>
PREMIUM TAX CHARGE
Certain states impose a premium tax on annuity purchase payments received by
insurance companies. The Company pays this tax when incurred, and recovers
this tax by imposing a premium tax charge on affected Contracts in accordance
with the following rules. Generally, the Company incurs a state premium tax
liability on the date when annuity benefits commence. In those states, the
Company deducts the premium tax charge from the Contract Value on that date.
However, for Contracts subject to the premium tax law of states which impose a
premium tax on purchase payments when they are made (currently South Dakota),
the Company deducts the applicable premium tax charge at the earliest of: a
full or partial surrender of the Contract, the date when annuity benefits
commence, or payment of the Death Proceeds (including application of the Death
Proceeds to the Beneficiary Continuation provision) upon the death of a
Contract Owner (or of the Annuitant, if the Contract is not owned in an
individual capacity). To determine whether and when a premium tax charge will
be imposed on a Contract, the Company looks to the state of residence of the
Annuitant when a surrender is made, annuity benefits commence or Death
Proceeds are paid. The Company reserves the right to impose a premium tax
charge when a premium tax is incurred or at a later date.
Deductions for state premium tax charges currently range from 1/2% to 2.25%
of the Contract Value (or, if applicable, purchase payments or Death Proceeds)
for Contracts used with retirement plans qualifying for tax benefited
treatment under the Code and from 1% to 3.5% of the Contract Value (or, if
applicable, Death Proceeds) for all other Contracts. See Appendix C for a list
of premium tax rates. Premium tax rates are subject to being changed by law,
administrative interpretations or court decisions.
OTHER EXPENSES
A deduction for an investment advisory fee is made from, and certain other
expenses are paid out of, the assets of each Eligible Fund. (See "Expense
Table.") The prospectus and Statement of Additional Information of the
Eligible Funds describe these deductions and expenses.
ANNUITY PAYMENTS
ELECTION OF ANNUITY
The Maturity Date of the Contract is based on the older of the Contract
Owner(s) and the Annuitant and is the date when that person, at his or her
nearest birthday, would be age 95 (or the maximum age allowed by state law).
The Contract Owner may not change the Maturity Date to an earlier date.
However, the Contract Owner may surrender the Contract at any time before the
Maturity Date and apply the surrender proceeds to an annuity payment option.
If the Contract Owner and Annuitant are not the same and the Annuitant dies
prior to the Maturity Date, the Contract will continue for the benefit of the
Contingent Annuitant. The Maturity Date will be reset, if necessary, based on
the age of the older Contract Owner.
Ownership of the Contract may not be changed without Company consent. If
ownership is changed, a change in the Maturity Date may be required, based on
the new Contract Owner's age. The new Maturity Date will be based on the older
of the new Contract Owner and the Annuitant and will be the date when that
person, at his or her nearest birthday, would be age 95 (or the maximum age
allowed by state law).
The Contract that is issued to you will provide for variable annuity
payments to begin at the Maturity Date for the life of the Payee, but for at
least ten years. If you wish to change this annuity payment option you may do
so at any time prior to the Maturity Date. You may elect to have annuity
payments under a Contract made on a variable basis or on a fixed basis, or you
may designate a portion to be paid on a variable basis and a portion on a
fixed basis. If you select payments on a fixed basis, the amount of Contract
Value applied to the fixed payment option (net of any applicable charges
described under "Administration Charges, Contingent Deferred Sales Charge and
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<PAGE>
Other Deductions") will be transferred to the general account of the Company,
and the annuity payments will be fixed in amount and duration by the annuity
payment option selected, the age of the Payee and, for Contracts issued in New
York or Oregon for use in situations not involving an employer-sponsored plan,
by the sex of the Payee. (See "Amount of Variable Annuity Payments.")
Contracts acquired by retirement plans qualifying for tax benefited
treatment may be subject to various requirements concerning the time by which
benefit payments must commence, the period over which such payments may be
made, the annuity payment options that may be selected, and the minimum annual
amounts of such payments. Penalty taxes or other adverse tax consequences may
occur upon failure to meet such requirements.
ANNUITY OPTIONS
The Contract provides several annuity payment options. Prior to the Maturity
Date you may elect to have the Contract Value applied to one of these payment
options at maturity. If you make a full or partial surrender of the Contract,
you may elect in your surrender request to apply the surrender proceeds to an
annuity payment option. You may also elect to have the Contract's Death
Proceeds applied to an annuity payment option, or, if the Death Proceeds
become payable and you have not previously elected a payment option, the
Beneficiary can elect to apply the Death Proceeds to an annuity payment
option; however, the Variable Income Payments to Age 100 Option and the
Variable Life Income for Two Lives Option, described below, and comparable
fixed options, are not available for this purpose.
The selection of an annuity payment option must be made by written request
to the Company and is subject to any applicable Federal tax law restrictions.
The amount of the Death Proceeds or of the Contract Value at the Maturity Date
that is applied to an annuity payment option will be reduced by any applicable
premium tax charge. The Contract Value at the Maturity Date is also reduced by
a pro rata portion of the Administration Contract Charge and by any applicable
Contingent Deferred Sales Charge. The amount of Contract Value applied to an
annuity payment option at a full or partial surrender will be reduced by any
applicable Contingent Deferred Sales Charge and premium tax charge, and, on a
full surrender, by a pro rata portion of the Administration Contract Charge.
For Contracts with an outstanding loan, the amount of Contract Value or Death
Proceeds applied to an annuity payment option will be reduced by the amount of
the loan outstanding plus accrued interest.
The Contract offers the variable annuity payment options listed below.
Variable Income for a Specified Number of Years. The Company will make
variable monthly payments for the number of years elected, which may not be
more than 30 except with the consent of the Company.
Variable Life Income. The Company will make variable monthly payments
which will continue: while the Payee is living*; while the Payee is living
but for at least ten years; or while the Payee is living but for at least
twenty years. (The latter two alternatives are referred to as Variable Life
Income with Period Certain Option.)
Variable Income Payments to Age 100 ("American Income Advantage"). The
Company will make variable monthly payments for the number of whole years
until the Payee is age 100. THIS OPTION CANNOT BE SELECTED FOR DEATH
PROCEEDS.
Variable Life Income for Two Lives. The Company will make variable
monthly payments which will continue: while either of two Payees is living
(Joint and Survivor Variable Life Income)*, while either of two Payees is
living but for at least 10 years (Joint and Survivor Variable Life Income,
10 Years Certain); while two Payees are living, and, after the death of one
while the other is still living, two-thirds to the survivor (Joint and 2/3
to Survivor Variable Life Income).* THIS OPTION CANNOT BE SELECTED FOR
DEATH PROCEEDS.
- --------
* IT IS POSSIBLE UNDER THIS OPTION TO RECEIVE ONLY ONE VARIABLE ANNUITY
PAYMENT IF THE PAYEE DIES (OR PAYEES DIE) BEFORE THE DUE DATE OF THE SECOND
PAYMENT OR TO RECEIVE ONLY TWO VARIABLE ANNUITY PAYMENTS IF THE PAYEE DIES
(OR PAYEES DIE) BEFORE THE DUE DATE OF THE THIRD PAYMENT, AND SO ON.
A-33
<PAGE>
Comparable fixed payment options are also available for all of the options
described above. In addition, other annuity payment options (including other
periods certain) may be available from time to time, and you should consult
the Company as to their availability. If you do not elect an annuity payment
option by the Maturity Date, variable payments under the Contract will be made
while the Payee is living but for at least ten years. (This is the Variable
Life Income with Period Certain Option.) If installments under an annuity
payment option would be less than the Company's published minimum, then the
Contract proceeds can be applied to an annuity payment option only with the
consent of the Company.
The Payee under the Variable Income for a Specified Number of Years Option
or the Variable Income Payments to Age 100 Option may withdraw the commuted
value of the remaining payments. The Payee (or Payees) under the Variable Life
Income with Period Certain Option or the Joint and Survivor Variable Life
Income, 10 Years Certain Option may withdraw the commuted value of the
remaining period certain portion of the payment option. The commuted value of
such payments is calculated based on the assumed interest rate under the
Contract. The life income portion of the payment option cannot be commuted,
and variable annuity payments based on that portion will resume at the
expiration of the period certain if the Annuitant is alive at that time. (See
"Amount of Variable Annuity Payments.") Amounts applied to a fixed payment
option may not be withdrawn.
The section of the prospectus entitled "Administration Charges, Contingent
Deferred Sales Charge and Other Deductions" describes whether a Contingent
Deferred Sales Charge will be deducted upon application of the Contract's
proceeds to a particular annuity payment option or upon withdrawal of the
commuted value of any payments certain under a variable payment option.
Payees under the Variable Income for a Specified Number of Years Option or
the Variable Income Payments to Age 100 Option may convert to a variable
annuity payment option involving a life contingency.
The availability of certain annuity payment options may be restricted on
account of Company policy and Federal tax law, which among other things, may
restrict payment to the life expectancy of the payee.
The Company continues to assess the Mortality and Expense Risk Charge if
annuity payments are made under any variable annuity payment option (either
before or after the Maturity Date), including an option not involving a life
contingency and under which the Company bears no mortality risk.
AMOUNT OF VARIABLE ANNUITY PAYMENTS
At the Maturity Date (or any other application of proceeds to a payment
option), the Contract Value (reduced by any applicable charges and by any
outstanding loan plus accrued interest) is applied toward the purchase of
monthly annuity payments. The amount of monthly variable annuity payments will
be determined on the basis of (i) annuity purchase rates not lower than the
rates set forth in the Life Income Tables contained in the Contract that
reflect the Payee's age, (ii) the assumed interest rate selected, (iii) the
type of payment option selected, and (iv) the investment performance of the
Eligible Funds selected. The Fixed Account is not available under variable
payment options. Current annuity purchase rates used to determine the amount
of monthly payments will generally be more favorable if the Maturity Date is
at least two Contract Years after the Contract Date. Current annuity purchase
rates may be changed by the Company periodically, and will be applied
prospectively on a non-discriminatory basis.
The annuity purchase rates are used to calculate the basic payment level
purchased by the Contract Value. These rates vary according to the age of the
Payee. The higher the Payee's age at annuitization, the greater the basic
payment level under options involving life contingencies, because the Payee's
life expectancy and thus the period of anticipated income payments will be
shorter. With respect to Contracts issued in New York or Oregon for use in
situations not involving an employer-sponsored plan, purchase rates used to
calculate the basic payment level will also reflect the sex of the Payee.
Under such Contracts, a given Contract Value will produce a higher basic
payment level for a male Payee than for a female Payee, reflecting the longer
life expectancy of the female
A-34
<PAGE>
Payee. If the Contract Owner has selected an annuity payment option that
guarantees that payments will be made for a certain number of years regardless
of whether the Payee remains alive, the Contract Value will purchase lower
monthly benefits than under a life contingent option.
The dollar amount of the initial variable annuity payment will be at the
basic payment level. The assumed interest rate under the Contract will affect
both this basic payment level and the amount by which subsequent payments
increase or decrease. Each payment after the first will vary with the
difference between the net investment performance of the sub-accounts selected
and the assumed interest rate under the Contract. If the actual net investment
rate exceeds the assumed interest rate, the dollar amount of the annuity
payments will increase. Conversely, if the actual rate is less than the
assumed interest rate, the dollar amount of the annuity payments will
decrease. If actual investment performance is equal to the assumed interest
rate, the monthly payments will remain level.
Unless otherwise provided, the assumed interest rate will be at an annual
effective rate of 3.5%. You may select as an alternative an assumed interest
rate equal to an annual effective rate of 0% or, if allowed by applicable law
or regulation, 5%. A higher assumed interest rate will produce a higher first
payment, a more slowly rising series of subsequent payments when the actual
net investment performance exceeds the assumed interest rate, and a more rapid
drop in subsequent payments when the actual net investment performance is less
than the assumed interest rate. A lower assumed interest rate will produce a
lower first payment, a more rapidly rising series of subsequent payments when
the actual net investment performance exceeds the assumed interest rate, and a
less rapid drop in subsequent payments when the actual net investment
performance is less than the assumed interest rate.
You may, even after variable annuity payments have commenced, direct that
all or a portion of your investment in one sub-account be transferred to
another sub-account of the Variable Account in the manner provided under
"Transfer Privilege."
The Company may require proof of age, sex (if applicable) and survival of
any person upon the continuation of whose life annuity payments depend.
For more information regarding annuity payment options, you should refer to
the Statement of Additional Information and also to the Contract, which
contains detailed information about the various forms of annuity payment
options available, and other matters also of importance.
RETIREMENT PLANS OFFERING FEDERAL TAX BENEFITS
The Federal tax laws provide for a variety of retirement plans offering tax
benefits. These plans, which may be funded through the purchase of the
individual variable annuity contracts offered in this prospectus, include:
1. Plans qualified under Section 401(a) or 403(a) of the Code ("Qualified
Plans");
2. Annuity purchase plans adopted by public school systems and certain
tax-exempt organizations pursuant to Section 403(b) of the Code ("TSA
Plans") which are funded solely by salary reduction contributions and which
are not otherwise subject to ERISA;
3. Individual retirement accounts, including Roth IRAs, adopted by or on
behalf of individuals pursuant to Section 408(a) of the Code and individual
retirement annuities purchased pursuant to Section 408(b) of the Code (both
of which may be referred to as "IRAs"), including simplified employee
pension plans and salary reduction simplified employee pension plans, which
are specialized IRAs that meet the requirements of Section 408(k) of the
Code ("SEPs" and "SARSEPs") Simple Retirement Accounts under Section 408(p)
of the Code ("SIMPLE IRAs") and Roth Individual Retirement Accounts under
Section 408A of the Code ("Roth IRAs");
4. Eligible deferred compensation plans (within the meaning of Section
457 of the Code) for employees of state and local governments and tax-
exempt organizations ("Section 457 Plans"); and
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<PAGE>
5. Governmental plans (within the meaning of Section 414(d) of the Code)
for governmental employees, including Federal employees ("Governmental
Plans").
An investor should consult a qualified tax or other advisor as to the
suitability of a Contract as a funding vehicle for retirement plans qualifying
for tax benefited treatment, as to the rules underlying such plans and as to
the state and Federal tax aspects of such plans. In particular, the Contract
is not intended for use with TSA Plans that are subject to ERISA. The Company
will not provide all the administrative support appropriate for such plans.
Accordingly, the Contract should NOT be purchased for use with such plans. The
Company may make the Contract available for use with Section 401(k) plans.
A summary of the Federal tax laws regarding contributions to, and
distributions from, the above tax benefited retirement plans may be found
below under "Federal Income Tax Status--Qualified Contracts." It should be
understood that should a tax benefited retirement plan lose its qualification
for tax-exempt status, employees will lose some of the tax benefits described
herein.
In the case of certain TSA Plans under Section 403(b)(1) of the Code and
IRAs purchased under Section 408(b) of the Code and Roth IRAs under Section
408A of the Code the individual variable annuity contracts offered in this
prospectus comprise the retirement "plan" itself. These Contracts will be
endorsed, if necessary, to comply with Federal and state legislation governing
such plans, and such endorsements may alter certain Contract provisions
described in this prospectus. Refer to the Contracts and any endorsements for
more complete information.
FEDERAL INCOME TAX STATUS
INTRODUCTION
The following discussion is a general discussion of federal income tax
considerations relating to the Contract and is not intended as tax advice.
This discussion is not intended to address the tax consequences resulting from
all of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax advisor before initiating any
transaction. This discussion is based upon NELICO's understanding of the
present federal income tax laws as they are currently interpreted by the
Internal Revenue Service ("IRS"). No representation is made as to the
likelihood of the continuation of the present federal income tax laws or of
the current interpretation by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
The Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased and used in connection with certain plans entitled to
special income tax treatment ("Qualified Contracts") under Sections 401, 403,
408A and 457 of the Internal Revenue Code of 1986, as amended (the "Code").
For purposes of this prospectus, Qualified Contracts are Contracts that fund
Qualified Plans, TSA Plans, IRAs, Roth IRAs, SEPs and SARSEPs, SIMPLE IRAs,
Section 457 Plans, and Governmental Plans, as defined above under "Retirement
Plans Offering Federal Tax Benefits." The ultimate effect of federal income
taxes on the amounts held under a Contract, on annuity payments, and on the
economic benefit to the Contract Owner, the Annuitant, or the Beneficiary may
depend on the type of retirement plan, and on the tax status of the individual
concerned. In addition, certain requirements must be satisfied in purchasing a
Qualified Contract and receiving distributions from a Qualified Contract in
order to continue receiving favorable tax treatment. Therefore, purchasers of
Qualified Contracts should seek competent legal and tax advice regarding the
suitability of the Contract for their situation, the applicable requirements,
and the tax treatment of the rights and benefits of the Contract. The
following discussion assumes that a Qualified Contract is purchased with
proceeds from and/or contributions under retirement plans that qualify for the
intended special federal income tax treatment.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under Part I of Subchapter
L of the Code. Since the Variable Account is not an entity separate from the
Company, and its operations form a part of the Company, it
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<PAGE>
will not be taxed separately as a "regulated investment company" under
Subchapter M of the Code. Investment income and realized capital gains arising
from the operation of the Variable Account are automatically applied to
increase reserves under the Contracts. Under existing federal income tax law,
the Company believes that the Variable Account's investment income and
realized net capital gains will not be taxed to the extent that such income
and gains are applied to increase the reserves under the Contracts.
Accordingly, the Company does not anticipate that it will incur any federal
income tax liability attributable to the Variable Account and, therefore, the
Company does not intend to make provisions for any such taxes. However, if
changes in the federal tax laws or interpretations thereof result in the
Company being taxed on income or gains attributable to the Variable Account,
then the Company may impose a charge against the Variable Account (with
respect to some or all Contracts) in order to set aside amounts to pay such
taxes.
TAX STATUS OF THE CONTRACT
The Company believes that the Contract will be subject to tax as an annuity
contract under the Code, which generally means that any increase in a
Contract's Account Value will not be taxable until amounts are received from
the Contract, either in the form of Annuity payments or in some other form. In
order to be subject to annuity contract treatment for tax purposes, the
Contract must meet the following Code requirements:
Diversification. Section 817(h) of the Code requires that with respect to
Non-Qualified Contracts, the investments of the Funds must be "adequately
diversified" in accordance with Treasury regulations in order for the
Contracts to qualify as annuity contracts under federal tax law. The Variable
Account, through the Eligible Funds, intends to comply with the
diversification requirements prescribed by the Treasury in Reg. Sec. 1.817-5,
which affect how the Eligible Funds' assets may be invested.
Owner Control. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for federal income tax purposes, of
the assets of the separate accounts used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includible in the variable contract owner's gross income. The IRS has stated
in published rulings that a variable contract owner will be considered the
owner of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection
with the issuance of regulations concerning diversification, that those
regulations "do not provide guidance concerning the circumstances in which
investor control for the investments of a segregated asset account may cause
the investor [i.e., the Contract Owner], rather than the insurance company, to
be treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular Sub-
Accounts without being treated as owners of the underlying assets."
The ownership rights under the Contract are similar to, but also different
in certain respects from, those described by the IRS in rulings in which it
was determined that contract owners were not owners of separate account
assets. For example, a Contract Owner has additional flexibility in allocating
premium payments and account values. These differences could result in a
Contract Owner being treated as the owner of a pro rata portion of the assets
of the Variable Account. In addition, the Company does not know what standards
will be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves the
right to modify the Contract as necessary to attempt to prevent a Contract
Owner from being considered the owner of a pro rata share of the assets of the
Variable Account.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires Non-Qualified
Contracts to provide that (a) if any Owner dies on or after the annuity date
but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at
least as rapidly as under the method of distribution being used as of the date
of such owner's death; and (b) if any Owner dies prior to the annuity date,
the entire interest in the Contract will be distributed within five years
after the date of such Owner's death. These requirements will be considered
satisfied
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as to any portion of an owner's interest which is payable to or for the
benefit of a "designated beneficiary" and which is distributed over the life
of such "designated beneficiary" or over a period not extending beyond the
life expectancy of that beneficiary, provided that such distributions begin
within one year of the owner's death. The "designated beneficiary" refers to a
natural person designated by the owner as a Beneficiary and to whom ownership
of the contract passes by reason of death. However, if the "designated
beneficiary" is the surviving spouse of a deceased owner, the contract may be
continued with the surviving spouse as the new owner.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Company intends to
review such provisions when they are issued and modify the contracts in
question if necessary to assure that they comply with the requirements of Code
Section 72(s). Other rules may apply to Qualified Contracts.
The following discussion is based on the assumption that the Contract
qualifies as an annuity contract for federal income tax purposes.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in general.
The Company believes that a Contract Owner who is a natural person generally
is not taxed on increases in the value of a Contract until distribution occurs
by withdrawing all or part of the Contract Value (e.g., withdrawals or annuity
payments under the Annuity Option elected). For this purpose, the assignment,
pledge, or agreement to assign or pledge any portion of the Contract Value
(and in the case of a Qualified Contract, any portion of an interest in the
qualified plan) generally will be treated as a distribution. The taxable
portion of a distribution (in the form of a single sum payment or an annuity)
is taxable as ordinary income.
The owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the Contract Value over the
"investment in the contract" (discussed below) during the taxable year. There
are some exceptions to this rule and prospective Contract Owners that are not
natural persons may wish to discuss these with a competent tax advisor.
The following discussion generally applies to a Contract owned by a natural
person.
Surrenders. In the case of a surrender under a Qualified Contract, including
Systematic Withdrawals, a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the contract" to the
individual's total accrued benefit under the retirement plan. The "investment
in the contract" generally equals the amount of any non-deductible purchase
payments paid by or on behalf of any individual. For a Contract issued in
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distributions from a Qualified
Contract.
With respect to Non-Qualified Contracts, partial surrenders, including
Systematic Withdrawals, are generally treated as taxable income to the extent
that the Contract Value immediately before the surrender exceeds the
"investment in the contract" at that time. Full surrenders are treated as
taxable income to the extent that the amount received exceeds the "investment
in the contract".
Annuity Payments. Although the tax consequences may vary depending on the
annuity payment elected under the Contract, in general, only the portion of
the annuity payment that represents the amount by which the Contract Value
exceeds the "investment in the contract" will be taxed; after the "investment
in the contract" is recovered, the full amount of any additional annuity
payments is taxable. For variable annuity payments, the taxable portion is
generally determined by an equation that establishes a specific dollar amount
of each payment that is not taxed. The dollar amount is determined by dividing
the "investment in the contract" by the total number of expected periodic
payments. However, the entire distribution will be taxable once the recipient
has recovered the dollar amount of his or her "investment in the contract".
For fixed annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the
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total expected value of the annuity payments for the term of the payments;
however, the remainder of each annuity payment is taxable. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional annuity payments is taxable. If annuity payments cease as a result
of an Annuitant's death before full recovery of the "investment in the
contract," consult a competent tax advisor regarding deductibility of the
unrecovered amount.
Penalty Tax. In the case of a distribution pursuant to a Non-Qualified
Contract, there may be imposed a federal income tax penalty equal to 10% of
the amount treated as taxable income. In general, however, there is no penalty
tax on distributions: (1) made on or after the date on which the taxpayer
attains age 59 1/2; (2) made as a result of death or disability of an owner;
(3) received in substantially equal periodic payments as a life annuity or a
joint and survivor annuity for the lives or life expectancies of the owner and
a "designated beneficiary". Other tax penalties may apply to certain
distributions pursuant to a Qualified Contract.
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Contract because of the death of a Contract Owner (or Annuitant if the
Contract Owner is not an individual). Generally, such amounts are includible
in the income of the recipient as follows: (1) if distributed in a lump sum,
they are taxed in the same manner as a full surrender as described above, or
(2) if distributed under an Annuity Option, they are taxed in the same manner
as annuity payments, as described above. For these purposes, the investment in
the Contract is not affected by the Owner's (or Annuitant's) death. That is,
the investment in the Contract remains the amount of any purchase payments
paid which were not excluded from gross income.
Transfers, Assignments, Exchanges and Maturity Dates. A transfer of
ownership of a Contract, the designation of an Annuitant, Payee or other
Beneficiary who is not also an Owner, the selection of certain Maturity Dates,
the exchange of a Contract, or the receipt of a Contract in an exchange may
result in certain tax consequences that are not discussed herein. Anyone
contemplating any such designation, transfer, assignment, selection, or
exchange should contact a competent tax advisor with respect to the potential
tax effects of such a transaction.
Multiple Contracts. All deferred non-qualified annuity contracts that are
issued by the Company (or its affiliates) to the same owner during any
calendar year are treated as one annuity contract for purposes of determining
the amount includible in gross income under section 72(e) of the Code. In
addition, the Treasury Department has specific authority to issue regulations
that prevent the avoidance of section 72(e) through the serial purchase of
annuity contracts or otherwise. Congress has also indicated that the Treasury
Department may have authority to treat the combination purchase of an
immediate annuity contract and separate deferred annuity contracts as a single
annuity contract under its general authority to prescribe rules as may be
necessary to enforce the income tax laws.
QUALIFIED CONTRACTS
The Contract is designed for use with certain retirement plans that qualify
for Federal tax benefits. Such plans are defined above under the heading
"Retirement Plans Offering Federal Tax Benefits." The tax rules applicable to
participants and beneficiaries in these retirement plans vary according to the
type of plan and the terms and conditions of the plan. Special favorable tax
treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in
excess of specified limits; distributions prior to age 59 1/2 (subject to
certain exceptions); distributions that do not conform to specified
commencement and minimum distribution rules; and in other specified
circumstances.
The Company makes no attempt to provide more than general information about
use of the Contracts with the various types of retirement plans. Contract
Owners and participants under retirement plans as well as Annuitants and
Beneficiaries are cautioned that the rights of any person to any benefits
under these Contracts may be subject to the terms and conditions of the plans
themselves, regardless of the terms and conditions of the Contract issued in
connection with such a plan. Some retirement plans are subject to distribution
and other requirements that are not incorporated in the administration of the
Contracts. Adverse tax or other legal
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consequences to the plan, to the participant or to both may result if the
Contract is assigned or transferred to any individual as a means to provide
benefit payments, unless the plan complies with all legal requirements
applicable to such benefits prior to transfer of the Contract. Contract Owners
are responsible for determining that contributions, distributions and other
transactions with respect to the Contracts satisfy applicable law. Purchasers
of Contracts for use with any retirement plan should consult their legal
counsel and tax advisor regarding the suitability of the Contract under
applicable federal and state tax laws and ERISA.
The sale of a Contract for use with an IRA may be subject to special
disclosure requirements of the Internal Revenue Service. Purchasers of a
Contract for use with IRAs will be provided with supplemental information
required by the Internal Revenue Service or other appropriate agency. Such
purchasers will have the right to revoke their purchase within seven days of
the earlier of the establishment of the IRA or their purchase. A Contract
issued in connection with an IRA will be amended as necessary to conform to
the requirements of the Code. Purchasers should seek competent advice as to
the suitability of the Contract for use with IRAs.
(i) Plan Contribution Limits
Statutory limitations on contributions to retirement plans that qualify for
federal tax benefits may limit the amount of money that may be contributed to
the Contract in any Contract Year. Any purchase payments attributable to such
contributions may be tax deductible to the employer and are not currently
taxable to the Annuitants for whom the Contracts are purchased. The
contributions to the Contract and any increase in Contract Value attributable
to such contributions are not subject to taxation until payments from the
Contract are made to the Annuitant or his/her Beneficiaries.
TSA PLANS
Purchase payments attributable to TSA Plans are not includible within the
Annuitant's income to the extent such purchase payments do not exceed certain
statutory limitations, including the "exclusion allowance." The exclusion
allowance is a calculation which takes into consideration the Annuitant's
includible compensation, number of years of service, and prior years of
contributions. For more information about all the applicable limitations, the
Annuitant should obtain a copy of IRS Publication 571 on TSA Programs for
Employees of Public Schools and Certain Tax Exempt Organizations which will
better assist the Annuitant in calculating the exclusion allowance and other
limitations to which he or she may be subject for any given tax year. Any
purchase payments attributable to permissible contributions under Code Section
403(b) (and earnings thereon) are not taxable to the Annuitant until amounts
are distributed from the Contract. However, these payments may be subject to
FICA (Social Security) taxes.
The Contract includes a Death benefit that in some cases may exceed the
greater of the Purchase Payments or the Contract Value. The Death benefit
could be characterized as an incidental benefit, the amount of which is
limited in any tax-sheltered annuity under section 403(b). Because the Death
benefit may exceed this limitation, employers using the Contract in connection
with such plans should consult their tax adviser.
IRAS, SEPS, SARSEPS AND SIMPLE IRAS
The maximum tax deductible purchase payment which may be contributed each
year to an IRA is the lesser of $2,000 or 100 percent of includible
compensation if the taxpayer is not covered under an employer plan. A spousal
IRA is available if the taxpayer and spouse file a joint return and the spouse
is not yet age 70 1/2. The maximum tax deductible purchase payment which a
taxpayer may make to a spousal IRA is $2,000. If covered under an employer
plan, taxpayers are permitted to make deductible purchase payments; however,
for 1998 the deductions are phased out and eventually eliminated, on a pro
rata basis, for adjusted gross income between $30,000 and $40,000 for an
individual, between $50,000 and $60,000 for the covered spouse of a married
couple filing jointly; between $150,000 and $160,000 for the non-covered
spouse of a married couple filing jointly, and between $0 and $10,000 for a
married person filing separately. A taxpayer may also make nondeductible
purchase payments. However, the total of deductible and nondeductible purchase
payments may not exceed the limits
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described above for deductible payments. An IRA is also the vehicle that
receives contributions to SEPs, SARSEPs and SIMPLE IRAs. Maximum contributions
(including elective deferrals) to SEPs and SARSEPs are currently limited to
the lesser of 15% of compensation (generally up to $160,000 for 1998) or
$30,000. The maximum salary reduction contribution currently permitted to a
SIMPLE IRA is $6,000. In addition, an employer may make a matching
contribution to a SIMPLE IRA, typically of 2% or 3% of the compensation (as
limited by the Code) of the employee. For more information concerning the
contributions to IRAs, SEPs, SARSEPs and SIMPLE IRAs, you should obtain a copy
of IRS Publication 590 on Individual Retirement Accounts. In addition to the
above, an individual may make a "rollover" contribution into an IRA with the
proceeds of a "lump sum" distribution (as defined in the Code) from a
Qualified Plan.
ROTH IRAS
Effective January 1, 1998, section 408A of the Code permits certain eligible
individuals to contribute to a Roth IRA. Contributions to a Roth IRA, which
are subject to certain limitations, are not deductible and must be made in
cash or as a rollover or transfer from another Roth IRA or other IRA. A
rollover from or conversion of an IRA to a Roth IRA may be subject to tax and
other special rules may apply. The maximum purchase payment which may be
contributed each year to a Roth IRA is the lesser of $2,000 or 100 percent of
includible compensation. A spousal Roth IRA is available if the taxpayer and
spouse file a joint return. The maximum purchase payment that a taxpayer may
make to a spousal Roth IRA is $2,000. Except in the case of a rollover or a
transfer, no more than $2,000 can be contributed in aggregate to all IRAs and
Roth IRAs of either spouse during any tax year. The Roth IRA contribution may
be limited to less than $2,000 depending on the taxpayer's adjusted gross
income ("AGI"). The maximum contribution begins to phase out if the taxpayer
is single and the taxpayer's AGI is more than $95,000 or if the taxpayer is
married and files a joint tax return and the taxpayer's AGI is more than
$150,000. The taxpayer may not contribute to a Roth IRA if the taxpayer's AGI
is over $110,000 (if the taxpayer is single), $160,000 (if the taxpayer is
married and files a joint tax return), or $10,000 (if the taxpayer is married
and files separate tax returns). You should consult a tax adviser before
combining any converted amounts with any other Roth IRA contributions,
including any other conversion amounts from other tax years.
QUALIFIED PLANS
Code section 401(a) permits employers to establish various types of
retirement plans for employees, and permit self-employed individuals to
establish retirement plans for themselves and their employees. These
retirement plans may permit the purchase of the Contracts to accumulate
retirement savings under the plans. Adverse tax consequences to the plan, to
the participant or to both may result if this Contract is assigned or
transferred to any individual as a means to provide benefit payments.
The Contract includes a Death benefit that in some cases may exceed the
greater of the Purchase Payments or the Contract Value. The Death benefit
could be characterized as an incidental benefit, the amount of which is
limited in any pension or profit-sharing plan. Because the Death benefit may
exceed this limitation, employers using the Contract in connection with such
plans should consult their tax adviser.
SECTION 457 PLANS
Generally, under a Section 457 Plan, an employee or executive may defer
income under a written agreement in an amount equal to the lesser of 33 1/3%
of includible compensation or $8,000. The amounts so deferred (including
earnings thereon) by an employee or executive electing to contribute to a
Section 457 Plan are includible in gross income only in the tax year in which
such amounts are paid or made available to that employee or executive or
his/her Beneficiary. With respect to a Section 457 Plan for a nonprofit
organization other than a governmental entity, (i) once contributed to the
plan, any Contracts purchased with employee contributions remain the sole
property of the employer and may be subject to the general creditors of the
employer and (ii) the employer retains all ownership rights to the Contract
including voting and redemption rights which may accrue to the Contract(s)
issued under the plan. The plans may permit participants to specify the form
of investment for their deferred compensation accounts. Depending on the terms
of the particular plan, a non-governmental employer may be entitled to draw on
deferred amounts for purposes unrelated to its Section 457 Plan obligations.
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(ii) Distributions from the Contract
MANDATORY WITHHOLDING ON CERTAIN DISTRIBUTIONS
Distributions called "eligible rollover distributions" from Qualified Plans
and from many TSA Plans are subject to mandatory withholding by the plan or
payor at the rate of 20%. An eligible rollover distribution is the taxable
portion of any distribution from a Qualified Plan or a TSA Plan, except for
certain distributions such as distributions required by the Code or in a
specified annuity form. Withholding can be avoided by arranging a direct
transfer of the eligible rollover distribution to a Qualified Plan, TSA or
IRA.
QUALIFIED PLANS, TSA PLANS, IRAS, ROTH IRAS, SEPS, SARSEPS, SIMPLE IRAS AND
GOVERNMENTAL PLANS
Payments made from the Contracts held under a Qualified Plan, TSA Plan, IRA,
SEP, SARSEP, SIMPLE IRA or Governmental Plan are taxable under Section 72 of
the Code as ordinary income, in the year of receipt. Any amount received in
surrender of all or part of the Contract Value prior to annuitization will,
subject to restrictions and penalties discussed below, also be included in
income in the year of receipt. If there is any "investment" in the Contract, a
portion of each amount received is excluded from gross income as a return of
such investment. Distributions or withdrawals prior to age 59 1/2 may be
subject to a penalty tax of 10% of the amount includible in income. This
penalty tax does not apply: (i) to distributions of excess contributions or
deferrals; (ii) to distributions made on account of the Annuitant's death,
retirement, disability or early retirement at or after age 55; (iii) when
distribution from the Contract is in the form of an annuity over the life or
life expectancy of the Annuitant (or joint lives or life expectancies of the
Annuitant and his or her Beneficiary); or (iv) when distribution is made
pursuant to a divorce (in the case of IRAs) or a qualified domestic relations
order. In the case of IRAs, SEPs, SARSEPs and SIMPLE IRAs, the exceptions for
distributions on account of early retirement at or after age 55 or made
pursuant to a qualified domestic relations order do not apply. A tax-free
rollover may be made once each year among individual retirement arrangements
subject to the conditions and limitations described in the Code.
Distributions from a Roth IRA generally are not taxed, except that, once
aggregate distributions exceed contributions to the Roth IRA, income tax and a
10% penalty tax may apply to distributions made (1) before age 59 1/2 (subject
to certain exceptions) or (2) during the five taxable years starting with the
year in which the first contribution is made to the Roth IRA.
Except under a Roth IRA, if the Annuitant dies before distributions begin,
distributions must be completed within five years after death, unless payments
begin within one year after death and are made over the life (or life
expectancy) of the Beneficiary. if the Annuitant's spouse is the Beneficiary,
distributions need not begin until the Annuitant would have reached age 70
1/2. If the Annuitant dies after annuity payments have begun, payments must
continue to be made at least as rapidly as payments made before death.
With respect to TSA Plans, elective contributions to the Contract made after
December 31, 1988 and any increases in Contract Value after that date may not
be distributed prior to attaining age 59 1/2, termination of employment, death
or disability. Contributions (but not earnings) made after December 31, 1988
may also be distributed by reason of financial hardship. These restrictions on
withdrawal will not apply to the Contract Value as of December 31, 1988. These
restrictions are not expected to change the circumstances under which
transfers to other investments which qualify for tax free treatment under
Section 403(b) of the Code may be made.
With respect to a SIMPLE IRA, the 10% penalty tax described above is
increased to 25% with respect to withdrawals made during the first two years
of participation. With respect to Roth IRAs, distributions representing
amounts attributable to contributions to a Roth IRA which has been established
for five years or more are generally not taxed.
Except under a Roth IRA, annuity payments, periodic payments or annual
distributions generally must commence by April 1 of the calendar year
following the year in which the Annuitant attains age 70 1/2. In the case of a
Qualified Plan or a Governmental Plan, if the Annuitant is not a "five percent
owner" as defined in the Code, these distributions
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must begin by the later of the date determined by the preceding sentence or
the year in which the Annuitant retires. Each annual distribution must equal
or exceed a "minimum distribution amount" which is determined by minimum
distribution rules under the plan. A penalty tax of up to 50% of the amount
which should have been distributed may be imposed by the IRS for failure to
distribute the required minimum distribution amount. The Company currently
waives the Contingent Deferred Sales Charge on distributions that are intended
to satisfy required minimum distributions calculated as if this Contract were
the participant's only retirement plan asset. This waiver only applies if the
required minimum distribution exceeds the free withdrawal amount and no
previous surrenders were made during the Contract Year. Rules regarding
required minimum distributions apply to IRAs (including SEP, SARSEPs and
SIMPLEs), Qualified Plans, TSA Plans and Governmental Plans. Roth IRAs under
Section 408A do not require distributions at any time prior to the Contract
Owner's death.
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under the Contracts or under the terms of
the Qualified Plans in respect of which the Contracts are issued.
SECTION 457 PLANS
When a distribution under a Contract held under a Section 457 Plan is made
to the Annuitant, such amounts are taxed as ordinary income in the year in
which received. The plan must not permit distributions prior to the
Annuitant's separation from service (except in the case of unforeseen
emergency).
Generally, annuity payments, periodic payments or annual distributions must
commence by the later of April 1 of the calendar year following the year in
which the Annuitant attains age 70 1/2 or the year of retirement, and meets
other distribution requirements. Minimum distributions under a Section 457
Plan may be further deferred if the Annuitant remains employed with the
sponsoring employer. Each annual distribution must equal or exceed a "minimum
distribution amount" which is determined by distribution rules under the plan.
If the Annuitant dies before distributions begin, the same special
distribution rules generally apply in the case of Section 457 Plans as apply
in the case of Qualified Plans, TSA Plans, IRAs, SEPs, SARSEPs, SIMPLE IRAs
and Governmental Plans. These rules are discussed above in the immediately
preceding section of this prospectus.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for
the recipient's federal income tax liability at rates that vary according to
the type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. The Company is required to withhold taxes from certain
distributions under certain qualified contracts.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always
the possibility that the tax treatment of the Contracts could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Contracts. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax
adviser should be consulted with respect to legislative developments and their
effect on the Contract.
OTHER TAX CONSEQUENCES
As noted above, the foregoing discussion of the federal income tax
consequences is not exhaustive and special rules are provided with respect to
other tax situations not discussed in this Prospectus. Further, the federal
income tax consequences discussed herein reflect the Company's understanding
of the current law and the law may change. Federal estate and gift tax
consequences of ownership or receipt of distributions under the Contract
depend on the individual circumstances of each Contract Owner or recipient of
a distribution. A competent tax advisor should be consulted for further
information.
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GENERAL
At the time the initial purchase payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Non-Qualified Contract or a
Qualified Contract. If the initial premium is derived from an exchange or
surrender of another annuity contract, the Company may require that the
prospective purchaser provide information with regard to the federal income
tax status of the previous annuity contract. The Company will require that
persons purchase separate Contracts if they desire to invest monies qualifying
for different annuity tax treatment under the Code. Each such separate
Contract would require the minimum initial purchase payment stated above.
Additional purchase payments under a Contract must qualify for the same
federal income tax treatment as the initial purchase payment under the
Contract; the Company will not accept an additional purchase payment under a
Contract if the federal income tax treatment of such purchase payment would be
different from that of the initial purchase payment.
VOTING RIGHTS
The Company is the legal owner of the Eligible Fund shares held in the
Variable Account and has the right to vote those shares at meetings of the
Eligible Fund shareholders. However, to the extent required by Federal
securities law, the Company will give you, as Contract Owner, the right to
instruct the Company how to vote the shares that are attributable to your
Contract.
Prior to annuitization, the number of votes as to which you have a right of
instruction is determined by applying your percentage interest in a sub-
account to the total number of votes attributable to the sub-account. After
annuitization, the number of votes attributable to your Contract is determined
by applying the percentage interest reflected by the reserve for your Contract
to the total number of votes attributable to the sub-account. After
annuitization the votes attributable to your Contract decrease as reserves
underlying the Contract decrease.
Contract Owners who are entitled to give voting instructions and the number
of shares as to which they have a right of instruction will be determined as
of the record date for the meeting. All Eligible Fund shares held in any sub-
account of the Variable Account or any other registered (or to the extent
voting privileges are granted by the issuing insurance company, unregistered)
separate accounts of the Company or any affiliate for which no timely
instructions are received will be voted for, against, or withheld from voting
on any proposition in the same proportion as the shares held in that sub-
account for all policies or contracts for which voting instructions are
received.
All Eligible Fund shares held by the general investment account (or any
unregistered separate account for which voting privileges are not extended) of
the Company or its affiliates will be voted in the same proportion as the
aggregate of (i) the shares for which voting instructions are received and
(ii) the shares that are voted in proportion to such voting instructions.
The SEC requires the Eligible Funds' Board of Trustees to monitor events to
identify conflicts that may arise from the sale of shares to variable life and
variable annuity separate accounts of affiliated and, if applicable,
unaffiliated insurance companies. Conflicts could arise as a result of changes
in state insurance law or Federal income tax law, changes in investment
management of any portfolio of the Eligible Funds, or differences between
voting instructions given by variable life and variable annuity contract
owners, for example. If there is a material conflict, the Boards of Trustees
will have an obligation to determine what action should be taken, including
the removal of the affected sub-account(s) from the Eligible Fund(s), if
necessary. If the Company believes any Eligible Fund action is insufficient,
the Company will consider taking other action to protect Contract Owners.
There could, however, be unavoidable delays or interruptions of operations of
the Variable Account that the Company may be unable to remedy.
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DISTRIBUTION OF CONTRACTS
New England Securities, the principal underwriter of the Contracts, is a
broker-dealer registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of the National Association of Securities
Dealers, Inc. New England Securities may enter into selling agreements with
other broker-dealers registered under the Exchange Act whose registered
representatives are authorized under applicable law to sell variable annuity
contracts. The Company will pay compensation to the New England Securities
registered representatives or other broker-dealers involved in the sale of a
Contract. Such compensation generally will have a present value that does not
exceed 4% of purchase payments under the Contract (although a lower amount may
be paid in certain limited circumstances (such as sales of the Contracts to
persons over age 75) and such compensation may be paid either as a percentage
of purchase payments at the time the Company receives them, as a percentage of
Contract Value on an ongoing basis, or in some combination of both. The
Company will generally pay compensation with a lower present value as a
percentage of purchase payments for Contracts purchased with an initial
purchase payment of $1,000,000 or more.
THE FIXED ACCOUNT
A Fixed Account option is included under Contracts issued in those states
where it has been approved by the state insurance department. In these states,
you may allocate net purchase payments and may transfer Contract Value in the
Variable Account to the Fixed Account, which is part of the Company's general
account. The Fixed Account offers diversification to a Variable Account
contract, allowing the Contract Owner to protect principal and earn, at least,
a guaranteed rate of interest.
Because of exemptive and exclusionary provisions, interests in the Fixed
Account have not been registered under the Securities Act of 1933, and neither
the Fixed Account nor the general account has been registered as an investment
company under the Investment Company Act of 1940. Therefore, neither the
general account, the Fixed Account nor any interests therein are generally
subject to the provisions of these Acts, and the Company has been advised that
the staff of the Securities and Exchange Commission does not review
disclosures relating to the general account. Disclosures regarding the Fixed
Account may, however, be subject to certain generally applicable provisions of
the Federal securities laws relating to the accuracy and completeness of
statements made in prospectuses.
GENERAL DESCRIPTION OF THE FIXED ACCOUNT
The Company's general account consists of all assets owned by the Company
other than those in the Variable Account and the Company's other separate
accounts. The Company has sole discretion over the investment of assets in the
general account, including those in the Fixed Account. Contract Owners do not
share in the actual investment experience of the assets in the Fixed Account.
Instead, the Company guarantees that Contract Values in the Fixed Account will
be credited with interest at an effective annual rate of at least 3%. The
Company is not obligated to credit interest at a rate higher than 3%, although
in its sole discretion it may do so. Contract Values in the Fixed Account will
be credited with interest daily.
Any purchase payment or portion of Contract Value ("deposit") allocated to
the Fixed Account will earn interest at an annual rate determined by the
Company for that deposit for a 12 month period. At the end of each succeeding
12 month period, the Company will determine the interest rate that will apply
to that deposit plus accrued interest for the next 12 months. This renewal
rate may differ from the interest rate that is applied to new deposits made to
the Fixed Account on that same day. (See "Contract Value and Fixed Account
Transactions" below for a description of the interest rate that will be
applied to Contract loan repayments allocated to the Fixed Account.)
CONTRACT VALUE AND FIXED ACCOUNT TRANSACTIONS
A Contract's total Contract Value will include its Contract Value in the
Variable Account, in the Fixed Account, and, for Contracts under which
Contract loans are available, any of its Contract Value held in the Company's
general account (but outside the Fixed Account) as the result of a Contract
loan.
A-45
<PAGE>
Unless you request otherwise, a partial surrender will reduce the Contract
Value in the sub-accounts of the Variable Account and the Fixed Account
proportionately. The annual Administration Contract Charge will be deducted
entirely from the Contract Value in the Variable Account, and not from the
Contract Value in the Fixed Account or the Company's general account as the
result of a loan. (However, that charge is limited to the lesser of $30 and 2%
of the total Contract Value, including Contract Value you have allocated to
the Fixed Account and any Contract Value held in the Company's general account
as the result of a loan.) Except as described below, amounts in the Fixed
Account are subject to the same rights and limitations as are amounts in the
Variable Account with respect to transfers, surrenders and partial surrenders.
The following special rules apply to transfers involving the Fixed Account.
The amount of Contract Value which may be transferred from the Fixed Account
is limited to the greater of: 25% of the Contract Value in the Fixed Account
at the end of the first day of the Contract Year, and the amount of Contract
Value that was transferred from the Fixed Account in the previous Contract
Year, except with the consent of the Company. However, these limits do not
apply to new deposits to the Fixed Account for which the dollar cost averaging
program has been elected within 30 days from the date of the deposit. In such
case, the amount of Contract Value which may be transferred from the Fixed
Account will be the greatest of: a) 25% of the Contract Value in the Fixed
Account at the end of the first day of the Contract Year; b) the amount of
Contract Value that was transferred from the Fixed Account in the previous
Contract Year; or c) the amount of Contract Value in the Fixed Account to be
transferred out of the Fixed Account under dollar cost averaging elected on
new deposits within 30 days from the date of deposit. The Company allows one
dollar cost averaging program to be active at a time. Therefore, if you
transfer pre-existing assets (corresponding to Contract Value for which the
dollar cost averaging program was not elected within 30 days from the date of
each deposit) out of the Fixed Account under the dollar cost averaging program
and would like to transfer up to 100% of new deposits under the program, then
the dollar cost averaging program on the pre-existing assets will be canceled
and a new program will begin with respect to new deposits. In this case, the
pre-existing assets may still be transferred out of the Fixed Account,
however, not under a dollar cost averaging program, subject to the limitations
on transfers generally out of the Fixed Account. (Also, after the transfer is
made, the Contract Value may not be allocated among more than ten of the sub-
accounts and/or the Fixed Account.) The Company intends to restrict purchase
payments and transfers of Contract Value into the Fixed Account: (1) if the
interest rate which would be credited to the deposit would be equivalent to an
annual effective rate of 3%; or (2) if the total Contract Value in the Fixed
Account equals or exceeds a maximum amount published by the Company (currently
$500,000). (For Contracts issued in Maryland this maximum amount will not be
less than $500,000.) In addition, the Company intends to restrict transfers of
Contract Value into the Fixed Account, and reserves the right to restrict
purchase payments and loan prepayments into the Fixed Account, for 180 days
following a transfer or loan out of the Fixed Account.
Amounts transferred to the sub-accounts from the Fixed Account will be on a
"last-in, first-out" basis; that is, they will be made in the reverse order in
which the deposits into the Fixed Account were made. Amounts surrendered from
the Fixed Account will be on a "first-in, first-out" basis. Amounts withdrawn
from the Fixed Account due to a contract loan will be on a "last-in, first-
out" basis.
If any portion of a Contract loan was attributable to Contract Value in the
Fixed Account, then an equal portion of each loan repayment must be allocated
to the Fixed Account. (For example, if 50% of the loan was attributable to
your Fixed Account Contract Value, then 50% of each loan repayment will be
allocated to the Fixed Account.) Similarly, unless you request otherwise, the
balance of the loan repayment will be allocated to the sub-accounts in the
same proportions in which the loan was attributable to the sub-accounts. See
"Loan Provision for Certain Tax Benefited Retirement Plans." The rate of
interest for each loan repayment applied to the Fixed Account will be the
lesser of: (1) the rate the borrowed money was receiving at the time the loan
was made from the Fixed Account; and (2) the interest rate set by the Company
in advance for that date. If the loan is being prepaid, however, and
prepayments into the Fixed Account are restricted as described above, the
portion of the loan prepayment that would have been allocated to the Fixed
Account will be allocated to the Zenith Back Bay Advisors Money Market Sub-
account instead.
The Company reserves the right to delay transfers, surrenders, partial
surrenders and Contract loans from the Fixed Account for up to six months.
A-46
<PAGE>
Like all financial services providers, NELICO utilizes systems that may be
affected by Year 2000 transition issues, and it relies on a number of third
parties, including banks, custodians, and investment managers, that also may
be affected. NELICO and its affiliates have developed, and are in the process
of implementing, a Year 2000 transition plan, and are confirming that their
service providers are also so engaged. The resources that are being devoted to
this effort are substantial. It is difficult to predict with precision whether
the amount of resources ultimately devoted, or the outcome of these efforts,
will have any negative impact on NELICO. However, as of the date of this
prospectus, it is not anticipated that Owners will experience negative effects
on their investment, or on the services provided in connection therewith, as a
result of Year 2000 transition implementation. NELICO currently anticipates
that its systems will be Year 2000 compliant on or about December 31, 1998,
with systems testing and compliance verification to follow. There can,
however, be no assurance that the other service providers have anticipated
every step necessary to avoid any adverse effect on the Variable Account
attributable to Year 2000 transition.
FINANCIAL STATEMENTS
The financial statements of the Company and the Variable Account may be
found in the Statement of Additional Information. Please note that the
financial statements of the Variable Account are dated prior to the time the
Company began selling the Contracts described in this prospectus. Accordingly,
the financial statements of the Variable Account do not reflect the expenses
or unit information applicable to the Contracts described herein.
INVESTMENT EXPERIENCE INFORMATION
The Company may advertise performance by illustrating hypothetical average
annual total returns for each sub-account of the Variable Account, based on
the actual investment experience of the Eligible Funds since their inception
and for the year-to-date, one, three, five, and ten year periods ending with
the date of the illustration. Such performance information will be accompanied
by SEC standard performance information for each sub-account, based on the
actual investment experience of the sub-account since its inception for the
one, five and ten year periods ending with the date of the information shown.
Calculations of average annual total return are based on the assumption that a
single investment of $1,000 was made at the beginning of each period
illustrated. Average annual total return calculations reflect changes in the
net asset values of the Eligible Funds plus the reinvestment of dividends from
net investment income and of distributions from net realized gains, if any.
The calculations also reflect the deduction of the Mortality and Expense Risk
Charge and the Administration Asset Charge. They also reflect annual
deductions for the Administration Contract Charge, and the deduction of any
Contingent Deferred Sales Charge applicable at the end of the period
illustrated. The calculations do not reflect the effect of any premium tax
charge, which applies in certain states, and which would reduce the results
shown. The average annual total return is the annual compounded rate of return
which would produce the surrender value at the end of the period illustrated.
See "Calculation of Performance Data" in the Statement of Additional
Information for average annual total returns as of December 31, 1997 and more
information about how they are calculated.
The Company may also illustrate how the average annual total return for a
five year period was determined by illustrating the average annual total
return for each year in the five year period ending with the date of the
illustration. Such illustrations are based on the same assumptions and reflect
the same expenses and deductions described in the preceding paragraph. See
"Calculation of Performance Data" in the Statement of Additional Information
for an example of this type of illustration and more information about how
average annual total returns are calculated.
The Company may illustrate what would have been the growth and value of a
single $10,000 purchase payment for the Contract if it had been invested in
each of the Eligible Funds on the first day of the first month after those
Eligible Funds commenced operations. These illustrations show Contract Value
and surrender value, calculated in the same manner as when they are used to
arrive at average annual total return, as of the end of each year, ending with
the date of the illustration. The surrender values reflect the deduction of
any applicable Contingent
A-47
<PAGE>
Deferred Sales Charge, but do not reflect the deduction of any premium tax
charge. These illustrations may also show annual percentage changes in
Contract Value and surrender value, cumulative returns, and annual effective
rates of return. The difference between the Contract Value or surrender value
at the beginning and at the end of each year is divided by the beginning
Contract Value or surrender value to arrive at the annual percentage change.
The cumulative return is determined by taking the difference between the
$10,000 investment and the ending Contract Value or surrender value and
dividing it by $10,000. The annual effective rate of return is calculated in
the same manner as average annual total return. See "Calculation of
Performance Data" in the Statement of Additional Information for examples of
these illustrations and more information about how they are calculated.
The Variable Account may update the performance history of one or more of
its sub-accounts on a quarterly basis by illustrating the one, three, five,
and ten year values (or since inception, if less) of a single $10,000 purchase
payment invested at the beginning of such periods using the same method of
calculation described in the preceding paragraph, but using the periods ending
with the date of the quarterly illustration. Such illustrations will show the
Contract Value at the end of the period and the cumulative return and annual
effective rate of return for the period. The illustration may also include the
cumulative return and annual effective rate of return of an appropriate
securities index and the Consumer Price Index for the same period.
The Company may illustrate what would have been the change in value of a
$250 monthly purchase payment plan if the monthly payments had been invested
in each of the Eligible Funds on the first day of each month starting with the
first day of the first month after those Eligible Funds commenced operations.
These illustrations show cumulative payments, Contract Value and surrender
value as of the end of each year, ending with the date of the illustration.
Surrender values reflect the deduction of any applicable Contingent Deferred
Sales Charge. The illustrations also show annual effective rates of return,
which represent the compounded annual rates that the hypothetical purchase
payments would have had to earn in order to produce the Contract Value and
surrender value as of the date of the illustration. See "Calculation of
Performance Data" in the Statement of Additional Information for examples of
these illustrations and more information about how they are calculated.
The Variable Account may make available illustrations showing historical
Contract Values and the annual effective rate of return, based upon
hypothetical purchase payment amounts and frequencies, which can be selected
by the client. The method of calculation described in the preceding paragraph
will be used, but the illustration will reflect the effect of any premium tax
charge applicable in the state where the illustration is delivered. The
beginning date of the illustration can be selected by the client. Contract
Values will be shown as of the end of each calendar year in the period and as
of the end of the most recent calendar quarter.
Historical investment performance may also be illustrated by showing the
percentage change in the Accumulation Unit Value and annual effective rate of
return of a sub-account without reflecting the deduction of any Contingent
Deferred Sales Charge, premium tax charge, or the annual $30 Administration
Contract Charge, all of which have the effect of reducing historical
performance. The percentage change in unit value and annual effective rate of
return of each sub-account may be shown from inception of the Eligible Fund to
the date of the report and for the year-to-date, one, three, five, and ten
year periods ending with the date of the report. The percentage change in unit
value and annual effective rate of return also may be compared with the
percentage change and annual effective rate for the Dow Jones Industrial
Average and S&P 500 Stock Index, as well as other unmanaged indices of stock
and bond performance described in the Statement of Additional Information in
the Notes to the illustration of Annual Percentage Change in Contract Value
and Annual Percentage Change in Surrender Value for a $10,000 Single Purchase
Payment Contract. The percentage change is calculated by dividing the
difference in unit or index values at the beginning and end of the period by
the beginning unit or index value. See the Statement of Additional Information
for a description of the method for calculating the annual effective rate of
return in this illustration.
In addition, the Company may illustrate how variable annuity income payments
under the Contract and commuted values of annuity income options change with
investment performance over periods of time; such illustrations may be
hypothetical (based on assumed uniform annual rates of return) or historical
(based on historical annual returns of the sub-accounts). See "Hypothetical
Illustrations of Annuity Income Payouts" and
A-48
<PAGE>
"Historical Illustrations of Annuity Income Payouts" in the Statement of
Additional Information for a description of these illustrations.
From time to time the Company may advertise (in sales literature or
advertising material) performance rankings of the sub-accounts of the Variable
Account assigned by independent services, such as Variable Annuity Research
and Data Services ("VARDS"). VARDS monitors and ranks the performance of
variable annuity accounts on an industry-wide basis in each of the major
categories of investment objectives. The performance analysis prepared by
VARDS ranks accounts on the basis of total return calculated using
Accumulation Unit Values. Thus, the effect of the Contingent Deferred Sales
Charge and Administration Contract Charge assessed under the Contracts is not
taken into consideration.
From time to time, articles discussing the Variable Account's investment
experience, performance rankings and other characteristics may appear in
national publications. Some or all of these publishers or ranking services
(including, but not limited to, Lipper Analytical Services, Inc. and
Morningstar) may publish their own rankings or performance reviews of variable
contract separate accounts, including the Variable Account. References to,
reprints or portions of reprints of such articles or rankings may be used by
the Company as sales literature or advertising material and may include
rankings that indicate the names of other variable contract separate accounts
and their investment experience.
The Company is a member of the Insurance Marketplace Standards Association
("IMSA"), and as such may include the IMSA logo and information about IMSA
membership in its advertisements. Companies that belong to IMSA subscribe to a
set of ethical standards covering the various aspects of sales and service for
individually sold life insurance and annuities.
A-49
<PAGE>
APPENDIX A
CONSUMER TIPS
DOLLAR COST AVERAGING
Dollar cost averaging allows a person to take advantage of the long-term
stock market results, assuming that they continue, although it does not
guarantee a profit or protect against a loss. If an investor follows a program
of dollar cost averaging on a long-term basis and the stock fund selected
performs at least as well as the S&P 500 has historically, it is likely
although not guaranteed that the price at which shares are surrendered, for
whatever reason, will be higher than the average cost per share.
An investor using dollar cost averaging invests the same amount of money in
the same professionally managed fund at regular intervals over a long period
of time. Dollar cost averaging keeps an investor from investing too much when
the price of shares is high and too little when the price is low. When the
price of shares is low, the money invested buys more shares. When it is high,
the money invested buys fewer shares. If the investor has the ability and
desire to maintain this program over a long period of time (for example, 20
years), and the stock fund chosen follows the historical upward market trends,
the price at which the shares are sold should be higher than their average
cost. The price could be lower, however, if the fund chosen does not follow
these historical trends.
Investors contemplating the use of dollar cost averaging should consider
their ability to continue the on-going purchases so that they can take
advantage of periods of low price levels.
DIVERSIFICATION
Diversifying investment choices can enhance returns, by providing a wider
opportunity for safe returns, and reduce risks, by spreading the chance of
loss. Holding a single investment requires of that investment a safe return
because a loss may risk the entire investment. By diversifying, on the other
hand, an investor can more safely take a chance that some investments will
under-perform and that others will over-perform. Thus an investor can
potentially earn a better-than-average rate of return on a diversified
portfolio than on a single safe investment. This is because, although portions
of a diversified investment may be totally lost, other portions may perform at
above-average rates that more than compensate for the loss.
MISCELLANEOUS
Toll-free telephone service:
--A recording of daily unit values is available by
calling 1-800-333-2501.
--Fund transfers and changes of future purchase payment
allocations can be made by calling 1-800-435-4117.
Written Communications:
--All communications and inquiries regarding address
changes, premium payments, billing, fund transfers,
surrenders, maturities and any other processing
matters relating to your Contract should be directed
to:
New England Annuities
P.O. Box 642
Boston, Mass 02116
A-50
<PAGE>
APPENDIX B
CONTINGENT DEFERRED SALES CHARGE
The following example illustrates how the Contingent Deferred Sales Charge
would apply if the commuted value of amounts that have been placed under
certain payment options is later withdrawn. As described in the prospectus in
the section "Contingent Deferred Sales Charge," no Contingent Deferred Sales
Charge will apply if at any time more than 30 days from issue of the Contract
you apply the proceeds to a variable or fixed payment option involving a life
contingency or, for a minimum specified period of 15 years, to either the
Variable Income for a Specified Number of Years Option or the Variable Income
Payments to Age 100 Option, or a comparable fixed option. However, if you
subsequently withdraw the commuted value of amounts placed under any of those
options, the Company will deduct from the amount you receive a portion of the
Contingent Deferred Sales Charge that was waived, based on the ratio of: (1)
the number of whole months remaining on the date of withdrawal until the date
when the Contingent Deferred Sales Charge would expire, to (2) the number of
whole months that were remaining when the proceeds were applied to the option,
until the date when the Contingent Deferred Sales Charge would expire.
As an example, assume that $100,000 of Contract Value (net of any premium
tax charge and Administration Contract Charge) is applied to the Variable
Income for a Specified Number of Years Option for a 20 year period. Assume
further that the proceeds are derived from a $30,000 purchase payment made ten
years ago, a $30,000 purchase payment made exactly two years ago, and
investment earnings, and that the Contingent Deferred Sales Charge waived on
application of the proceeds to the payment option was $600. If the Payee
surrenders the commuted value of the proceeds under option six months later,
the Contingent Deferred Sales Charge would be $450 (representing the $600
waived at annuitization multiplied by 18/24, where 18 is the number of whole
months currently remaining until the Contingent Deferred Sales Charge would
expire, and 24 is the number of whole months that remained at the time of
annuitization until the Contingent Deferred Sales Charge would expire).
A-51
<PAGE>
APPENDIX C
PREMIUM TAX
Premium tax rates are subject to change. At present the Company pays premium
taxes in the following jurisdictions at the rates shown:
<TABLE>
<CAPTION>
CONTRACTS USED WITH TAX
JURISDICTION QUALIFIED RETIREMENT PLANS ALL OTHER CONTRACTS
- ------------ -------------------------- -------------------
<S> <C> <C>
California....................... 0.50% 2.35%
District of Columbia............. 2.25% 2.25%
Kentucky......................... 2.00% 2.00%
Maine............................ -- 2.00%
Nevada........................... -- 3.50%
Puerto Rico...................... 1.00% 1.00%
South Dakota..................... -- 1.25%
West Virginia.................... 1.00% 1.00%
Wyoming.......................... -- 1.00%
</TABLE>
See "Premium Tax Charges" in the prospectus for more information about how
premium taxes affect the Contracts.
A-52
<PAGE>
TABLE OF CONTENTS
OF
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Company............................................................... II-3
Services to the Variable Account.......................................... II-3
Performance Comparisons................................................... II-3
Calculation of Performance Data........................................... II-4
Net Investment Factor..................................................... II-17
Annuity Payments.......................................................... II-17
Hypothetical Illustrations of Annuity Income Payouts...................... II-19
Historical Illustrations of Annuity Income Payouts........................ II-22
Experts................................................................... II-25
Legal Matters............................................................. II-25
Appendix A................................................................ II-26
Financial Statements...................................................... F-1
</TABLE>
If you would like to obtain a copy of the Statement of Additional
Information, please complete the request form below and mail to:
New England Securities Corporation
399 Boylston Street
Boston, Massachusetts 02116
Please send a copy of the Statement of Additional
Information for New England Variable Annuity Separate
Account (American Forerunner Series) to:
--------------------------------------------------------
Name
--------------------------------------------------------
Street
--------------------------------------------------------
City State Zip
A-53
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
AMERICAN FORERUNNER SERIES
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
(PART B)
MAY 1, 1998
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the Prospectus dated May 1, 1998 and
should be read in conjunction therewith. A copy of the Prospectus may be
obtained by writing to New England Securities Corporation ("New England
Securities") 399 Boylston Street, Boston, Massachusetts 02116.
II-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Company............................................................... II-3
Services to the Variable Account.......................................... II-3
Performance Comparisons................................................... II-3
Calculation of Performance Data........................................... II-4
Net Investment Factor..................................................... II-17
Annuity Payments.......................................................... II-17
Hypothetical Illustrations of Annuity Income Payouts...................... II-19
Historical Illustrations of Annuity Income Payouts........................ II-22
Experts................................................................... II-25
Legal Matters............................................................. II-25
Appendix A................................................................ II-26
Financial Statements...................................................... F-1
</TABLE>
II-2
<PAGE>
THE COMPANY
New England Life Insurance Company ("The Company") is an indirect, wholly-
owned subsidiary of Metropolitan Life Insurance Company ("MetLife").
SERVICES RELATING TO THE VARIABLE ACCOUNT AND THE CONTRACTS
The Company maintains the books and records of the Variable Account and
provides issuance and other administrative services for the Contracts.
Auditors. Deloitte & Touche LLP, located at 125 Summer Street, Boston,
Massachusetts 02110, conducts an annual audit of the Variable Account's
financial statements.
Principal Underwriter. New England Securities Corporation ("New England
Securities"), an indirect subsidiary of the Company, serves as principal
underwriter for the Variable Account pursuant to a distribution agreement with
the Company. The Contracts are offered continuously and may be sold by
registered representatives of broker-dealers that have selling agreements with
New England Securities as well as by the Company's life insurance agents and
insurance brokers who are registered representatives of New England
Securities. The Company pays commissions, none of which are retained by New
England Securities, in connection with sales of the Contracts.
PERFORMANCE COMPARISONS
Articles and releases, developed by the Company, the Eligible Funds (as
defined in the Prospectus) and other parties, about the Account or the
Eligible Funds regarding performance, rankings, statistics and analyses of the
Account's, the individual Eligible Funds' and fund groups' asset levels and
sales volumes, statistics and analyses of industry sales volumes and asset
levels, and other characteristics may appear in publications, including, but
not limited to, those publications listed in Appendix A to this Statement of
Additional Information. In particular, some or all of these publications may
publish their own rankings or performance reviews including the Account or the
Eligible Funds. References to or reprints of such articles may be used in the
Company's promotional literature. Such literature may refer to personnel of
the advisers, who have portfolio management responsibility, and their
investment style. The references may allude to or include excerpts from
articles appearing in the media.
The advertising and sales literature of the Contract and the Account may
refer to historical, current and prospective economic trends and may include
historical and current performance and total returns of investment
alternatives.
In addition, sales literature may be published concerning topics of general
investor interest for the benefit of registered representatives and
prospective Contractholders. These materials may include, but are not limited
to, discussions of college planning, retirement planning, reasons for
investing and historical examples of the investment performance of various
classes of securities, securities markets and indices.
II-3
<PAGE>
CALCULATION OF PERFORMANCE DATA
The tables below illustrate hypothetical average annual total returns for
each sub-account for the periods shown, based on the actual investment
experience of the New England Zenith Fund (the "Zenith Fund") during those
periods. The tables do not represent what may happen in the future.
The Variable Account was not established until July, 1994. The Contracts
were not available before October, 1996. The Back Bay Advisors Bond Income and
Back Bay Advisors Money Market Series commenced operations on August 26, 1983.
The Westpeak Growth and Income and Goldman Sachs Midcap Value Series (formerly
the Loomis Sayles Avanti Growth Series) commenced operations on April 30,
1993. The Loomis Sayles Small Cap Series commenced operations on May 2, 1994.
The six other Eligible Funds did not commence operations until October 31,
1994.
Calculations of average annual total return are based on the assumption that
a single investment of $1,000 was made at the beginning of each period shown.
The figures do not reflect the effect of any premium tax charge, which applies
in certain states, and which would reduce the results shown.
The average annual total return is related to surrender value and is
calculated as follows. The amount of the assumed $1,000 purchase payment for a
Contract issued at the beginning of the period is divided by the Accumulation
Unit Value of each sub-account at the beginning of the period shown to arrive
at the number of Accumulation Units purchased. The number of Accumulation
Units is reduced on each Contract anniversary to reflect deduction of the
annual $30 Administration Contract Charge from the Contract Value. For
purposes of this calculation, the maximum Administration Contract Charge of
$30 is deducted, although the actual charge will be the lesser of 2% of
Contract Value and $30 (and may be waived for certain large Contracts). Each
such $30 deduction reduces the number of units held under the Contract by an
amount equal to $30 divided by the Accumulation Unit Value on the date of the
deduction. The total number of units held under the Contract at the beginning
of the last Contract Year covered by the period shown is multiplied by the
Accumulation Unit Value on December 31, 1997 to arrive at the Contract Value
on that date. This Contract Value is then reduced by the applicable Contingent
Deferred Sales Charge and the portion of the $30 Administration Contract
Charge which would be deducted upon surrender on December 31, 1997 to arrive
at the surrender value. The average annual total return is the annual
compounded rate of return which would produce the surrender value on December
31, 1997. In other words, the average annual total return is the rate which,
when added to 1, raised to a power reflecting the number of years in the
period shown, and multiplied by the initial $1,000 investment, yields the
surrender value at the end of the period. The average annual total returns
assume that no premium tax charge has been deducted.
FUND TOTAL RETURN ADJUSTED FOR CONTRACT CHARGES
For purchase payment allocated to the Loomis Sayles Small Cap Series:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 17.61%
Since Inception of the Fund......................................... 17.33%
For purchase payment allocated to the Morgan Stanley International Magnum
Equity Series:*
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. -7.84%
Since Inception of the Fund......................................... .18%
For purchase payment allocated to the Alger Equity Growth Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 18.38%
Since Inception of the Fund......................................... 21.18%
</TABLE>
- --------
* The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
II-4
<PAGE>
For purchase payment allocated to the Goldman Sachs Midcap Value Series**:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 10.16%
Since Inception of the Fund......................................... 13.00%
For purchase payment allocated to the Davis Venture Value Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 26.17%
Since Inception of the Fund......................................... 25.39%
For purchase payment allocated to the Westpeak Growth and Income Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 26.14%
Since Inception of the Fund......................................... 17.16%
For purchase payment allocated to the Loomis Sayles Balanced Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 9.02%
Since Inception of the Fund......................................... 14.06%
For purchase payment allocated to the Salomon Brothers Strategic Bond
Opportunities Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 4.08%
Since Inception of the Fund......................................... 9.45%
For purchase payment allocated to the Back Bay Advisors Bond Income Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 3.90%
5 Years............................................................. 5.03%
10 years............................................................ 6.50%
Since Inception of the Fund......................................... 7.45%
For purchase payment allocated to the Salomon Brothers U.S. Government
Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. 1.57%
Since Inception of the Fund......................................... 4.36%
For purchase payment allocated to the Back Bay Advisors Money Market Series:
<CAPTION>
PERIOD ENDING DECEMBER 31, 1997
-------------------------------
<S> <C>
1 Year.............................................................. -1.44%
5 Years............................................................. .57%
10 years............................................................ 2.08%
Since Inception of the Fund......................................... 3.11%
</TABLE>
- --------
** The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998, when Goldman Sachs Asset Management became
the subadviser.
Information is available illustrating the impact of fund performance on
annuity payouts. For examples, see "Historical Illustrations of Annuity Income
Payments" and "Hypothetical Illustrations of Annuity Income Payments" in this
Statement of Additional Information.
II-5
<PAGE>
The following chart illustrates how the average annual total return was
determined for the five year period ending December 31, 1997 for the sub-
account investing in the Back Bay Advisors Bond Income Series based on the
assumptions used in the above table. The units column below shows the number
of accumulation units hypothetically purchased by the $1000 investment in the
Series in the first year. The units are reduced on each Contract anniversary
to reflect the deduction of the $30 Administration Contract Charge. The
illustration assumes no premium tax charge is deducted.
The unit values of the sub-accounts reflect the change in the net asset
value of the underlying Eligible Funds plus the reinvestment of dividends from
net investment income and of distributions from net realized gains, if any.
The unit values also reflect the deduction of the Mortality and Expense Risk
Charge as well as the Administration Asset Charge.
<TABLE>
<CAPTION>
AVERAGE
UNIT CONTRACT SURRENDER ANNUAL TOTAL
DATE UNITS VALUE VALUE VALUE RETURN
- ---- -------- -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1992............ 403.6424 2.477440 $1,000.00
December 31, 1993............ 392.7811 2.762110 1,084.90 $1,055.61 5.56%
December 31, 1994............ 381.4292 2.642721 1,008.01 989.87 -.51%
December 31, 1995............ 371.9689 3.171150 1,179.57 1,169.57 5.36%
December 31, 1996............ 362.8339 3.284075 1,191.57 1,191.57 4.48%
December 31, 1997............ 354.5132 3.605446 1,278.18 1,278.18 5.03%
</TABLE>
The following charts illustrate what would have been the growth and value of
a $10,000 purchase payment if it had been invested in each of the Eligible
Funds on the first day of the first month after those Eligible Funds became
available: September 1, 1983 for the Back Bay Advisors Money Market and Back
Bay Advisors Bond Income Series; May 1, 1993 for the Westpeak Growth and
Income and Goldman Sachs Midcap Value Series; May 2, 1994 for the Loomis
Sayles Small Cap Series; and November 1, 1994 for the other series of the
Zenith Fund. The figures shown do not reflect the deduction of any premium tax
charge on surrender. During the period when the Contingent Deferred Sales
Charge applies, the percentage return on surrender value from year to year
(after the 1st year) will be greater than the percentage return on Contract
Value for the same years. This is because the percentage return on surrender
value reflects not only investment experience but also the annual reduction in
the applicable Contingent Deferred Sales Charge. In the first chart, the
Contract Value and surrender value on each date shown are calculated in the
manner described in the preceding illustrations of average annual total
return, assuming that no premium tax charge is deducted on surrender.
In the second and third charts, the difference between the Contract Value or
surrender value at the beginning and at the end of each year is divided by the
beginning Contract Value or surrender value to arrive at the annual percentage
change. The cumulative return information set forth in these charts is
determined by taking the difference between the $10,000 investment and the
ending Contract Value or surrender value and dividing it by $10,000. The
annual effective rate of return in this illustration is calculated in the same
manner as the average annual total return described in the preceding
illustration, assuming that no premium tax charge is deducted on surrender.
II-6
<PAGE>
$10,000 SINGLE PURCHASE PAYMENT CONTRACT
BACK BAY ADVISORS BOND INCOME AND BACK BAY ADVISORS MONEY MARKET SERIES ISSUED
SEPTEMBER 1, 1983 WESTPEAK GROWTH AND INCOME AND GOLDMAN SACHS MIDCAP VALUE
SERIES ISSUED MAY 1, 1993 LOOMIS SAYLES SMALL CAP SERIES ISSUED MAY 2, 1994
OTHER ZENITH FUND SERIES ISSUED NOVEMBER 1, 1994 INVESTMENT RESULTS
<TABLE>
<CAPTION>
CONTRACT VALUE(1)
--------------------------------------------------------------------------------------------------------
MORGAN SALOMON
LOOMIS STANLEY GOLDMAN BROTHERS BACK BAY
SAYLES INTERNATIONAL ALGER SACHS DAVIS WESTPEAK LOOMIS STRATEGIC ADVISORS
SMALL MAGNUM EQUITY MIDCAP VENTURE GROWTH AND SAYLES BOND BOND
CAP EQUITY(2) GROWTH VALUE(3) VALUE INCOME BALANCED OPPORTUNITIES INCOME
---------- ------------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983............ $10,351.26
1984............ 11,507.34
1985............ 13,498.13
1986............ 15,315.56
1987............ 15,476.33
1988............ 16,573.59
1989............ 18,396.11
1990............ 19,653.55
1991............ 22,920.11
1992............ 24,517.44
1993............ $11,397.11 $11,347.71 27,304.55
1994............ $ 9,613.26 $10,243.62 $ 9,700.49 11,222.50 $ 9,634.41 11,069.10 $ 9,973.92 $ 9,844.44 26,094.74
1995............ 12,227.33 10,742.23 14,251.70 14,447.98 13,254.98 14,919.25 12,291.89 11,604.89 31,281.00
1996............ 15,784.66 11,313.70 15,936.61 16,789.71 16,480.87 17,409.10 14,195.49 13,107.39 32,363.23
1997............ 19,474.27 11,026.22 19,791.42 19,467.10 21,751.76 22,967.87 16,297.39 14,383.63 35,498.96
<CAPTION>
SALOMON BACK BAY
BROTHERS ADVISORS
U.S. MONEY
GOVERNMENT MARKET
---------- ----------
<S> <C> <C>
As of December 31:
1983............ $10,270.39
1984............ 11,227.73
1985............ 12,003.81
1986............ 12,662.45
1987............ 13,324.15
1988............ 14,152.61
1989............ 15,278.22
1990............ 16,334.13
1991............ 17,145.98
1992............ 17,589.42
1993............ 17,901.77
1994............ $10,043.75 18,397.52
1995............ 11,407.18 19,222.62
1996............ 11,636.91 19,975.60
1997............ 12,466.59 20,802.21
<CAPTION>
SURRENDER VALUE(1)
--------------------------------------------------------------------------------------------------------
MORGAN SALOMON
LOOMIS STANLEY GOLDMAN BROTHERS BACK BAY
SAYLES INTERNATIONAL ALGER SACHS DAVIS WESTPEAK LOOMIS STRATEGIC ADVISORS
SMALL MAGNUM EQUITY MIDCAP VENTURE GROWTH AND SAYLES BOND BOND
CAP EQUITY(2) GROWTH VALUE(3) VALUE INCOME BALANCED OPPORTUNITIES INCOME
---------- ------------- ---------- ---------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983............ $ 9,967.21
1984............ 11,197.34
1985............ 13,288.13
1986............ 15,205.56
1987............ 15,466.33
1988............ 16,563.59
1989............ 18,386.11
1990............ 18,643.55
1991............ 22,910.11
1992............ 24,507.44
1993............ $10,977.11 $10,927.71 27,294.55
1994............ $ 9,251.23 $ 9,868.87 $ 9,347.47 10,902.50 $ 9,284.03 10,749.81 $ 9,609.96 $ 9,485.66 26,084.74
1995............ 11,909.83 10,445.35 13,946.70 14,227.98 12,949.96 14,699.25 11,986.89 11,299.89 31,271.00
1996............ 15,567.16 11,108.70 15,731.61 16,669.71 16,275.87 17,289.10 13,990.49 12,902.39 32,353.23
1997............ 19,356.77 10,922.22 19,686.42 19,447.10 21,646.76 22,947.87 16,192.39 14,278.63 35,488.96
<CAPTION>
SALOMON BACK BAY
BROTHERS ADVISORS
U.S. MONEY
GOVERNMENT MARKET
---------- ----------
<S> <C> <C>
As of December 31:
1983............ $ 9,899.58
1984............ 10,917.73
1985............ 11,793.81
1986............ 12,552.45
1987............ 13,314.15
1988............ 14,142.61
1989............ 15,268.22
1990............ 16,324.13
1991............ 17,135.98
1992............ 17,579.42
1993............ 17,891.77
1994............ $ 9,677.00 18,387.52
1995............ 11,102.18 19,212.62
1996............ 11,431.91 19,965.60
1997............ 12,361.59 20,792.21
</TABLE>
II-7
<PAGE>
ANNUAL PERCENTAGE CHANGE IN CONTRACT VALUE(1)
<TABLE>
<CAPTION>
MORGAN SALOMON
LOOMIS STANLEY GOLDMAN BROTHERS
SAYLES INTERNATIONAL ALGER SACHS DAVIS WESTPEAK LOOMIS STRATEGIC
SMALL MAGNUM EQUITY MIDCAP VENTURE GROWTH SAYLES BOND
CAP EQUITY(2) GROWTH VALUE(3) VALUE AND INCOME BALANCED OPPORTUNITIES
------ ------------- ------ -------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983...................
1984...................
1985...................
1986...................
1987...................
1988...................
1989...................
1990...................
1991...................
1992...................
1993................... 13.97% 13.48%
1994................... -3.87% 2.44% -3.00% -1.53 -3.66% -2.46 -0.26% -1.56%
1995................... 27.19 4.87 46.92 28.74 37.58 34.78 23.24 17.88
1996................... 29.09 5.32 11.82 16.21 24.34 16.69 15.49 12.95
1997................... 23.37 -2.54 24.19 15.95 31.98 31.93 14.81 9.74
Cumulative Return....... 94.74 10.26 97.91 94.67 117.52 129.68 62.97 43.84
Annual Effective Rate of
Return................. 19.94 3.14 24.09 15.34 27.84 19.50 16.69 12.17
</TABLE>
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
BACK BAY SALOMON BACK BAY GOVERNMENT/
ADVISORS BROTHERS ADVISORS DOW JONES S&P 500 CORPORATE CONSUMER
BOND U.S. MONEY INDUSTRIAL STOCK BOND PRICE
INCOME GOVERNMENT MARKET AVERAGE(4) INDEX(5) INDEX(6) INDEX(7)
-------- ---------- -------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... 3.51% 2.70% 5.11% 1.79% 4.51% 1.07%
1984................... 11.17 9.32 1.35 6.27 14.37 3.95
1985................... 17.30 6.91 33.62 31.73 18.06 3.77
1986................... 13.46 5.49 27.25 18.66 13.13 1.13
1987................... 1.05 5.23 5.55 5.25 3.66 4.41
1988................... 7.09 6.22 16.21 16.61 6.67 4.42
1989................... 11.00 7.95 32.24 31.69 12.77 4.65
1990................... 6.84 6.91 -.54 -3.10 9.16 6.11
1991................... 16.62 4.97 24.25 30.47 14.62 3.06
1992................... 6.97 2.59 7.40 7.62 7.17 2.90
1993................... 11.37 1.78 16.97 10.08 8.79 2.75
1994................... -4.43 0.44% 2.77 5.02 1.32 -1.93 2.67
1995................... 19.87 13.57 4.48 36.94 37.58 15.33 2.54
1996................... 3.46 2.01 3.92 28.91 22.96 4.05 3.32
1997................... 9.69 7.13 4.14 24.91 33.36 7.87 1.83
Cumulative Return....... 254.99 24.67 108.02 1,166.71 1,026.38 283.07 65.47
Annual Effective Rate of
Return................. 9.24 7.22 5.24 18.44 17.52 9.37 3.41
</TABLE>
ANNUAL PERCENTAGE CHANGE IN SURRENDER VALUE(1)
<TABLE>
<CAPTION>
MORGAN SALOMON
LOOMIS STANLEY GOLDMAN BROTHERS
SAYLES INTERNATIONAL ALGER SACHS DAVIS WESTPEAK LOOMIS STRATEGIC
SMALL MAGNUM EQUITY MIDCAP VENTURE GROWTH SAYLES BOND
CAP EQUITY(2) GROWTH VALUE(3) VALUE AND INCOME BALANCED OPPORTUNITIES
------ ------------- ------ -------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983...................
1984...................
1985...................
1986...................
1987...................
1988...................
1989...................
1990...................
1991...................
1992...................
1993................... 9.77% 9.28%
1994................... -7.49% -1.31% -6.53% -0.68 -7.16% -1.63 -3.90% -5.14%
1995................... 28.74 5.84 49.20 30.50 39.49 36.74 24.73 19.13
1996................... 30.71 6.35 12.80 17.16 25.68 17.62 16.71 14.18
1997................... 24.34 -1.68 25.14 16.66 33.00 32.73 15.74 10.67
Cumulative Return....... 93.57 9.22 96.86 94.47 116.47 129.48 61.92 42.79
Annual Effective Rate of
Return................. 19.74 2.83 23.87 15.31 27.64 19.47 16.45 11.91
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
LEHMAN
INTERMEDIATE
BACK BAY SALOMON BACK BAY GOVERNMENT/
ADVISORS BROTHERS ADVISORS DOW JONES S&P 500 CORPORATE CONSUMER
BOND U.S. MONEY INDUSTRIAL STOCK BOND PRICE
INCOME GOVERNMENT MARKET AVERAGE(4) INDEX(5) INDEX(6) INDEX(7)
-------- ---------- -------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... -0.33% -1.10% 5.11% 1.79% 4.51% 1.07%
1984................... 12.34 10.40 1.35 6.27 14.38 3.95
1985................... 18.67 8.02 33.62 31.73 18.06 3.77
1986................... 14.43 6.43 27.25 18.66 13.13 1.13
1987................... 1.71 6.07 5.55 5.25 3.66 4.41
1988................... 7.09 6.22 16.21 16.61 6.67 4.42
1989................... 11.00 7.96 32.24 31.69 12.77 4.65
1990................... 6.84 6.92 -.54 -3.10 9.16 6.11
1991................... 16.63 4.97 24.25 30.47 14.62 3.06
1992................... 6.97 2.59 7.40 7.62 7.17 2.90
1993................... 11.37 1.78 16.97 10.08 8.79 2.75
1994................... -4.43 -3.23% 2.77 5.02 1.32 -1.93 2.67
1995................... 19.88 14.73 4.49 36.94 37.58 15.33 2.54
1996................... 3.46 2.97 3.92 28.91 22.96 4.05 3.32
1997................... 9.69 8.13 4.14 24.91 33.36 7.87 1.83
Cumulative Return....... 254.89 22.62 107.92 1,166.71 1,026.38 283.07 65.47
Annual Effective Rate of
Return................. 9.24 6.93 5.24 18.44 17.52 9.37 3.41
</TABLE>
- --------
NOTES:
(1) The Contract Values, surrender values, and annual percentage change
figures assume reinvestment of dividends and capital gain distributions.
The Contract Values are net of all deductions and expenses other than any
applicable Contingent Deferred Sales Charge or premium tax charge. Each
surrender value equals the Contract Value less any applicable Contingent
Deferred Sales Charge and a pro rata portion of the annual $30
Administration Contract Charge, but does not reflect a deduction for the
premium tax charge. (See "Administration Charges, Contingent Deferred
Sales Charge and Other Deductions."). 1983 figures for the Back Bay
Advisors Bond Income and Back Bay Advisors Money Market Series are from
September 1 through December 31, 1983. 1993 figures for the Westpeak
Growth and Income and Goldman Sachs Midcap Value Series are from May 1
through December 31, 1993. 1994 figures for the Loomis Sayles Small Cap
Series are from May 2 through December 31, 1994. 1994 figures for all
other series of the Zenith Fund are from November 1 through December 31,
1994.
(2) The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
(3) The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998 when Goldman Sachs Asset Management became
the subadviser.
(4) The Dow Jones Industrial Average is a market value-weighted and unmanaged
index of 30 large industrial stocks traded on the New York Stock Exchange.
The annual percentage change figures have been adjusted to reflect
reinvestment of dividends. 1983 figures are from September 1 through
December 31, 1983.
(5) The S&P 500 Stock Index is an unmanaged weighted index of the stock
performance of 500 industrial, transportation, utility and financial
companies. The annual percentage change figures have been adjusted to
reflect reinvestment of dividends. 1983 figures are from September 1
through December 31, 1983.
(6) The Lehman Intermediate Government/Corporate Bond Index is a subset of the
Lehman Government/ Corporate Bond Index covering all issues with
maturities between 1 and 10 years which is composed of taxable, publicly-
issued, non-convertible debt obligations issued or guaranteed by the U.S.
Government or its agencies and another Lehman index that is composed of
taxable, fixed rate publicly-issued, investment grade non-convertible
corporate debt obligations. 1983 figures are from September 1 through
December 31, 1983.
(7) The Consumer Price Index, published by the U.S. Bureau of Labor
Statistics, is a statistical measure of changes, over time, in the prices
of goods and services. 1983 figures are from September 1 through December
31, 1983.
II-9
<PAGE>
The chart below illustrates what would have been the change in value of a
$250 monthly investment under a Contract in each of the Eligible Funds if
purchase payments had been made on the first day of each month starting with
September 1, 1983 for the Back Bay Advisors Bond Income and Back Bay Advisors
Money Market Series, May 1, 1993 for the Westpeak Growth and Income and
Goldman Sachs Midcap Value Series, May 2, 1994 for the Loomis Sayles Small Cap
Series and November 1, 1994 for the other series of the Zenith Fund. The
figures shown do not reflect the deduction of any premium tax charge on
surrender, and only surrender values, not Contract Values, reflect the
deduction of any applicable Contingent Deferred Sales Charge. Each purchase
payment is divided by the Accumulation Unit Value of each sub-account on the
date of the investment to calculate the number of Accumulation Units
purchased. The total number of units under the Contract is reduced on each
Contract anniversary to reflect the $30 Administration Contract Charge, in the
same manner as described in the illustrations of average annual total return.
The Contract Value and the surrender value are calculated according to the
methods described in the preceding examples. The annual effective rate of
return in this illustration represents the compounded annual rate that the
hypothetical purchase payments shown would have had to earn in order to
produce the Contract Value and surrender value illustrated on December 31,
1997. The annual effective rate of return is the rate which, when added to 1
and raised to a power equal to the number of months for which the payment is
invested divided by twelve, and multiplied by the payment amount, for all
monthly payments, would yield the Contract Value or surrender value on the
ending date of the illustration.
INVESTMENT RESULTS
SEPTEMBER 1, 1983--DECEMBER 31, 1997 FOR BACK BAY ADVISORS BOND INCOME AND
BACK BAY ADVISORS MONEY MARKET SERIES MAY 1, 1993--DECEMBER 31, 1997 FOR
WESTPEAK GROWTH AND INCOME AND LOOMIS SAYLES AVANTI GROWTH SERIESMAY 2, 1994--
DECEMBER 31, 1997 FOR LOOMIS SAYLES SMALL CAP SERIES NOVEMBER 1, 1994--
DECEMBER 31, 1997 FOR OTHER ZENITH FUND SERIES
<TABLE>
<CAPTION>
CONTRACT VALUE
----------------------------------------------------------
MORGAN
LOOMIS STANLEY GOLDMAN
SAYLES INTERNATIONAL ALGER SACHS DAVIS
CUMULATIVE SMALL MAGNUM EQUITY MIDCAP VENTURE
PAYMENTS(1) CAP EQUITY(2) GROWTH VALUE(3) VALUE
----------- ---------- ------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $ 1,000
1984................... 4,000
1985................... 7,000
1986................... 10,000
1987................... 13,000
1988................... 16,000
1989................... 19,000
1990................... 22,000
1991................... 25,000
1992................... 28,000
1993................... 31,000 $ 2,125.09
1994................... 34,000 $ 1,956.63 $ 511.62 $ 497.92 5,115.79 $ 495.14
1995................... 37,000 5,897.75 3,646.54 4,233.52 9,930.80 4,136.90
1996................... 40,000 11,030.05 6,891.00 7,903.51 14,748.59 8,577.96
1997................... 43,000 17,045.93 9,614.33 13,096.06 20,339.73 14,740.51
Annual Effective Rate of
Return................. 24.52% .74% 20.73% 16.05% 28.90%
</TABLE>
- --------
(1) For the Westpeak Growth and Income and Goldman Sachs Midcap Value series
cumulative payments of December 31, 1993 would be $2,000, as of December
31, 1994 would be $5,000, as of December 31, 1995 would be $8,000 as of
December 31, 1996 would be $11,000 and as of December 31, 1997 would be
$14,000. For the Loomis Sayles Small Cap Series cumulative payments as of
December 31, 1994 would be $2,000, as of December 31, 1995 would be $5,000
as of December 31, 1996 would be $8,000 and as of December 31, 1997 would
be $11,000. For the other Zenith Fund Series, cumulative payments as of
December 31, 1994 would be $500, as of December 31, 1995 would be $3,500
as of December 31, 1996 would be $6,500 and as of December 31, 1997 would
be $9,500.
(2) The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
(3) The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998 when Goldman Sachs Asset Management became
the subadviser.
II-10
<PAGE>
<TABLE>
<CAPTION>
CONTRACT VALUE
------------------------------------------------------------------------
SALOMON
BROTHERS BACK BAY SALOMON BACK BAY
WESTPEAK LOOMIS STRATEGIC ADVISORS BROTHERS ADVISORS
CUMULATIVE GROWTH SAYLES BOND BOND U.S. MONEY
PAYMENTS(1) AND INCOME BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
----------- ---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $ 1,000 $ 1,013.55 $ 1,016.83
1984................... 4,000 4,360.19 4,241.06
1985................... 7,000 8,402.33 7,627.78
1986................... 10,000 12,703.24 11,121.55
1987................... 13,000 15,865.00 14,791.57
1988................... 16,000 20,068.30 18,822.80
1989................... 19,000 25,450.73 23,459.07
1990................... 22,000 30,372.07 28,210.29
1991................... 25,000 38,766.70 32,711.68
1992................... 28,000 44,628.94 36,625.42
1993................... 31,000 $ 2,123.78 52,847.29 40,339.74
1994................... 34,000 5,067.22 $ 502.44 $ 492.42 53,498.02 $ 502.65 44,548.95
1995................... 37,000 10,317.07 3,914.86 3,823.97 67,450.71 3,744.38 49,664.32
1996................... 40,000 15,361.29 7,815.88 7,514.40 72,948.46 6,881.60 54,723.55
1997................... 43,000 23,719.80 12,200.17 11,394.88 83,237.32 10,496.95 60,111.05
Annual Effective Rate of
Return................. 22.86% 15.99% 11.50% 8.70% 6.23% 4.52%
</TABLE>
<TABLE>
<CAPTION>
SURRENDER VALUE
-----------------------------------------------------------------
MORGAN
LOOMIS STANLEY GOLDMAN
SAYLES INTERNATIONAL ALGER SACHS DAVIS
CUMULATIVE SMALL MAGNUM EQUITY MIDCAP VENTURE
PAYMENTS(1) CAP EQUITY(2) GROWTH VALUE(3) VALUE
----------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $ 1,000
1984................... 4,000
1985................... 7,000
1986................... 10,000
1987................... 13,000
1988................... 16,000
1989................... 19,000
1990................... 22,000
1991................... 25,000
1992................... 28,000
1993................... 31,000 $ 2,025.09
1994................... 34,000 $ 1,803.92 $ 487.16 $ 474.00 4,924.01 $ 471.34
1995................... 37,000 5,550.25 3,513.46 4,093.52 9,660.80 3,996.90
1996................... 40,000 10,522.55 6,676.42 7,678.51 14,438.59 8,352.96
1997................... 43,000 16,738.43 9,368.02 12,816.06 20,019.73 14,460.51
Annual Effective Rate of
Return ................ 23.46% -.86% 9.28% 15.36% 27.55%
</TABLE>
<TABLE>
<CAPTION>
SURRENDER VALUE
------------------------------------------------------------------------
SALOMON
BROTHERS BACK BAY SALOMON BACK BAY
WESTPEAK LOOMIS STRATEGIC ADVISORS BROTHERS ADVISORS
CUMULATIVE GROWTH SAYLES BOND BOND U.S. MONEY
PAYMENTS(1) AND INCOME BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
----------- ---------- ---------- ------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31:
1983................... $ 1,000 $ 964.01 $ 967.16
1984................... 4,000 4,200.19 4,084.91
1985................... 7,000 8,162.33 7,389.54
1986................... 10,000 12,413.24 10,831.55
1987................... 13,000 15,555.00 14,481.57
1988................... 16,000 19,758.30 18,512.80
1989................... 19,000 25,140.73 23,149.07
1990................... 22,000 30,062.07 27,900.29
1991................... 25,000 38,456.70 32,401.68
1992................... 28,000 44,318.94 36,315.42
1993................... 31,000 $ 2,023.78 52,537.29 40,029.74
1994................... 34,000 4,877.50 $ 478.35 $ 468.73 53,188.02 $ 478.54 44,238.95
1995................... 37,000 10,047.07 3,774.86 3,684.90 67,140.71 3,608.30 49,354.32
1996................... 40,000 15,051.29 7,590.88 7,289.40 72,638.46 6,667.73 54,413.55
1997................... 43,000 23,399.80 11,920.17 11,114.88 82,927.30 10,217.64 59,801.05
Annual Effective Rate of
Return................. 22.26% 14.45% 9.89% 8.66% 4.53% 4.45%
</TABLE>
- -------
(1) For the Westpeak Growth and Income and Goldman Sachs Midcap Value Series,
cumulative payments as of December 31, 1993 would be $2,000, as of
December 31, 1994 would be $5,000, as of December 31, 1995 would be
$8,000, as of December 31, 1996 would be $11,000 and as of December 31,
1997 would be $14,000. For the Loomis Sayles Small Cap Series, cumulative
payments as of December 31, 1994 would be $2,000, as of December 31, 1995
would be $5,000, as of December 31, 1996 would be $8,000 and as of
December 31, 1997 would be $11,000. For the other Zenith Fund Series,
cumulative payments as of December 31, 1994 would be $500, as of December
31, 1995 would be $3,500, as of December 31, 1996 would be $6,500 and as
of December 31, 1997 would be $9,500.
(2) The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
(3) The Goldman Sachs Midcap Value Series' subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998 when Goldman Sachs Asset Management became
the subadviser.
II-11
<PAGE>
As discussed in the prospectus in the third to the last paragraph of the
section entitled "Investment Experience Information," the Variable Account may
illustrate historical investment performance by showing the percentage change
in unit value and the annual effective rate of return of each sub-account of
the Variable Account for every calendar year since inception of the
corresponding Eligible Funds to the date of the illustration and for the 10, 5
and 1 year periods and the year-to-date period ending with the date of the
illustration. Examples of such illustrations follow. Such illustrations do not
reflect the impact of any Contingent Deferred Sales Charge or the annual $30
Administration Contract Charge. The method of calculating the percentage
change in unit value is described in the prospectus under "Investment
Experience Information." The annual effective rate of return in these
illustrations is calculated by dividing the unit value at the end of the
period by the unit value at the beginning of the period, raising this quantity
to the power of 1/n (where n is the number of years in the period), and then
subtracting 1.
Set forth on the following pages are illustrations of the percentage change
in unit value information and annual effective rate of return information
discussed above that may appear in the Variable Account's Annual and Semi-
Annual Reports and in other illustrations of historical investment
performance. Such illustrations do not reflect the impact of any Contingent
Deferred Sales Charge or the annual Administration Contract Charge.
LOOMIS SAYLES SMALL CAP SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
May 2, 1994............................................ 1.000000
December 31, 1994...................................... 0.961326 -3.9%
December 31, 1995...................................... 1.226330 27.6%
December 31, 1996...................................... 1.586549 29.4%
December 31, 1997...................................... 1.961142 23.6%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 8 months ended December 31, 1997............... 96.1% 20.2%
1 year ended December 31, 1997.......................... 23.6% 23.6%
</TABLE>
MORGAN STANLEY INTERNATIONAL MAGNUM EQUITY SUB-ACCOUNT**
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994....................................... 1.000000
December 31, 1994...................................... 1.024334 2.4%
December 31, 1995...................................... 1.077376 5.2%
December 31, 1996...................................... 1.137758 5.6%
December 31, 1997...................................... 1.111802 -2.3%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997............... 11.2% 3.4%
1 year ended December 31, 1997.......................... -2.3% -2.3%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
** The Morgan Stanley International Magnum Equity Series' subadviser was
Draycott Partners, Ltd. until May 1, 1997, when Morgan Stanley Asset
Management Inc. became the subadviser.
II-12
<PAGE>
ALGER EQUITY GROWTH SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994....................................... 1.000000
December 31, 1994...................................... 0.956441 -4.4%
December 31, 1995...................................... 1.408084 47.2%
December 31, 1996...................................... 1.577605 12.0%
December 31, 1997...................................... 1.962217 24.4%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 year, 2 months ended December 31, 1997................ 96.2% 23.7%
1 year ended December 31, 1997.......................... 24.4% 24.4%
</TABLE>
GOLDMAN SACHS MIDCAP VALUE SUB-ACCOUNT**
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
April 30, 1993......................................... 1.000000
December 31, 1993...................................... 1.139711 14.0%
December 31, 1994...................................... 1.125345 -1.3%
December 31, 1995...................................... 1.452347 29.1%
December 31, 1996...................................... 1.690956 16.4%
December 31, 1997...................................... 1.964139 16.2%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
4 years, 8 months ended December 31, 1997............... 96.4% 15.5%
1 year ended December 31, 1997.......................... 16.2% 16.2%
</TABLE>
DAVIS VENTURE VALUE SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994....................................... 1.000000
December 31, 1994...................................... 0.963414 -3.7%
December 31, 1995...................................... 1.328568 37.9%
December 31, 1996...................................... 1.655125 24.6%
December 31, 1997...................................... 2.187577 32.2%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997............... 118.8% 28.0%
1 year ended December 31, 1997.......................... 32.2% 32.2%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales
Charge or the annual $30 Administration Contract Charge.
** The Goldman Sachs Midcap Value Series' Subadviser was Loomis, Sayles &
Company, L.P. until May 1, 1998, when Goldman Sachs Asset Management became
the subadviser.
II-13
<PAGE>
WESTPEAK GROWTH AND INCOME SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
April 30, 1993......................................... 1.000000
December 31, 1993...................................... 1.134771 13.5%
December 31, 1994...................................... 1.109950 -2.2%
December 31, 1995...................................... 1.499680 35.1%
December 31, 1996...................................... 1.753311 16.9%
December 31, 1997...................................... 2.316896 32.1%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
4 years, 8 months ended December 31, 1997............... 131.7% 19.7%
1 year ended December 31, 1997.......................... 32.1% 32.1%
</TABLE>
LOOMIS SAYLES BALANCED SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994....................................... 1.000000
December 31, 1994...................................... 0.997365 -0.3%
December 31, 1995...................................... 1.232277 23.6%
December 31, 1996...................................... 1.426266 15.7%
December 31, 1997...................................... 1.640543 15.0%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997............... 64.1% 16.9%
1 year ended December 31, 1997.......................... 15.0% 15.0%
</TABLE>
SALOMON BROTHERS STRATEGIC BOND OPPORTUNITIES SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994....................................... 1.000000
December 31, 1994...................................... 0.984417 -1.6%
December 31, 1995...................................... 1.163542 18.2%
December 31, 1996...................................... 1.317253 13.2%
December 31, 1997...................................... 1.448577 10.0%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997............... 44.9% 12.4%
1 year ended December 31, 1997.......................... 10.0% 10.0%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales Charge
or the annual $30 Administration Contract Charge.
II-14
<PAGE>
BACK BAY ADVISORS BOND INCOME SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
August 26, 1983........................................ 1.000000
December 31, 1983...................................... 1.028437 2.8%
December 31, 1984...................................... 1.146514 11.5%
December 31, 1985...................................... 1.348044 17.6%
December 31, 1986...................................... 1.532610 13.7%
December 31, 1987...................................... 1.551754 1.2%
December 31, 1988...................................... 1.664845 7.3%
December 31, 1989...................................... 1.851018 11.2%
December 31, 1990...................................... 1.980714 7.0%
December 31, 1991...................................... 2.313192 16.8%
December 31, 1992...................................... 2.477440 7.1%
December 31, 1993...................................... 2.762110 11.5%
December 31, 1994...................................... 2.642721 4.3%
December 31, 1995...................................... 3.171150 20.0%
December 31, 1996...................................... 3.284075 3.6%
December 31, 1997...................................... 3.605446 9.8%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
14 years, 4 months ended December 31, 1997.............. 260.5% 9.3%
10 years ended December 31, 1997........................ 132.3% 8.8%
5 years ended December 31, 1997......................... 45.5% 7.8%
1 year ended December 31, 1997.......................... 9.8% 9.8%
</TABLE>
SALOMON BROTHERS U.S. GOVERNMENT SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
October 31, 1994....................................... 1.000000 --
December 31, 1994...................................... 1.004348 0.4%
December 31, 1995...................................... 1.143747 13.9%
December 31, 1996...................................... 1.169805 2.3%
December 31, 1997...................................... 1.256256 7.4%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
3 years, 2 months ended December 31, 1997............... 25.6% 7.5%
1 year ended December 31, 1997.......................... 7.4% 7.4%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales Charge
or the annual $30 Administration Contract Charge.
II-15
<PAGE>
BACK BAY ADVISORS MONEY MARKET SUB-ACCOUNT
ANNUAL PERCENT CHANGE IN UNIT VALUE*
<TABLE>
<CAPTION>
ACCUMULATION %
DATE UNIT VALUE CHANGE
---- ------------ ------
<S> <C> <C>
August 26, 1983........................................ 1.000000
December 31, 1983...................................... 1.028407 2.8%
December 31, 1984...................................... 1.127368 9.6%
December 31, 1985...................................... 1.208374 7.2%
December 31, 1986...................................... 1.277745 5.7%
December 31, 1987...................................... 1.347602 5.5%
December 31, 1988...................................... 1.434497 6.4%
December 31, 1989...................................... 1.551704 8.2%
December 31, 1990...................................... 1.662062 7.1%
December 31, 1991...................................... 1.747768 5.2%
December 31, 1992...................................... 1.796049 2.8%
December 31, 1993...................................... 1.831027 1.9%
December 31, 1994...................................... 1.884840 2.9%
December 31, 1995...................................... 1.972491 4.7%
December 31, 1996...................................... 2.052875 4.1%
December 31, 1997...................................... 2.140953 4.3%
</TABLE>
PERCENT CHANGE IN UNIT VALUE AND ANNUAL EFFECTIVE RATE OF RETURN*
<TABLE>
<CAPTION>
% CHANGE ANNUAL
IN UNIT EFFECTIVE
VALUE RATE
-------- ---------
<S> <C> <C>
14 years, 4 months ended December 31, 1997.............. 114.1% 5.4%
10 years ended December 31, 1997........................ 58.9% 4.7%
5 years ended December 31, 1997......................... 19.2% 3.6%
1 year ended December 31, 1997.......................... 4.3% 4.3%
</TABLE>
- --------
* Unit values do not reflect the impact of any Contingent Deferred Sales Charge
or the annual $30 Administration Contract Charge.
II-16
<PAGE>
NET INVESTMENT FACTOR
The Company determines the net investment factor ("Net Investment Factor")
for any sub-account on each day on which the New York Stock Exchange is open
for trading as follows:
(1) The Company takes the net asset value per share of the Eligible Fund
held in the sub-account determined as of the close of regular trading on
the New York Stock Exchange on a particular day.
(2) Next, the Company adds the per share amount of any dividend or
capital gains distribution made by the Eligible Fund since the close of
regular trading on the New York Stock Exchange on the preceding trading
day.
(3) This total amount is then divided by the net asset value per share of
the Eligible Fund as of the close of regular trading on the New York Stock
Exchange on the preceding trading day.
(4) Finally, the Company subtracts the daily charges for the Mortality
and Expense Risk Charge since the close of regular trading on the New York
Stock Exchange on the preceding trading day. (See "Administration Charges,
Contingent Deferred Sales Charge and Other Deductions" in the prospectus.)
On an annual basis, the total deduction for such charges equals 1.00% of
the daily net asset value of the Variable Account.
ANNUITY PAYMENTS
At annuitization, the Contract Value is applied toward the purchase of
monthly variable annuity payments. The amount of these payments will be
determined on the basis of (i) annuity purchase rates not lower than the rates
set forth in the Life Income Tables contained in the Contract that reflect the
age of the Payee at annuitization, (ii) the assumed interest rate selected,
(iii) the type of payment option selected, and (iv) the investment performance
of the Eligible Fund selected.
When a variable annuity payment option is selected, the Contract proceeds
will be applied at annuity purchase rates, which vary depending on the
particular option selected and the age of the Payee, to calculate the basic
payment level purchased by the Contract Value. With respect to Contracts
issued in New York or Oregon for use in situations not involving an employer-
sponsored plan, annuity purchase rates used to calculate the basic payment
level will also reflect the sex of the Payee when the annuity payment option
involves a life contingency. The impact of the choice of option and the sex
and age of the Payee on the level of annuity payments is described in the
prospectus under "Amount of Variable Annuity Payments."
The amount of the basic payment level is determined by applying the
applicable annuity purchase rate to the amount applied from each sub-account
to provide the annuity. This basic payment level is converted into annuity
units, the number of which remains constant. Each monthly annuity payment is
in an amount equal to that number of annuity units multiplied by the
applicable annuity unit value for that payment (described below). The
applicable annuity unit value for each sub-account will change from day to day
depending upon the investment performance of the sub-account, which in turn
depends upon the investment performance of the Eligible Fund in which the sub-
account invests.
The selection of an assumed interest rate ("Assumed Interest Rate") will
affect both the basic payment level and the amount by which subsequent
payments increase or decrease. The basic payment level is calculated on the
assumption that the Net Investment Factors applicable to the Contract will be
equivalent on an annual basis to a net investment return at the Assumed
Interest Rate. If this assumption is met following the date any payment is
determined, then the amount of the next payment will be exactly equal to the
amount of the preceding payment. If the actual Net Investment Factors are
equivalent to a net investment return greater than the Assumed Interest Rate,
the next payment will be larger than the preceding one; if the actual Net
Investment Factors are equivalent to a net investment return smaller than the
Assumed Interest Rate, then the next payment will be smaller than the
preceding
II-17
<PAGE>
payment. The definition of the Assumed Interest Rate, and the effect of the
level of the Assumed Interest Rate on the amount of monthly payments is
explained in the prospectus under "Amount of Variable Annuity Payments."
The number of annuity units credited under a variable payment option is
determined as follows:
(1) The Contract proceeds are applied at the Company's annuity purchase
rates for the selected Assumed Interest Rate to determine the basic payment
level. (The amount of Contract Value or Death Proceeds applied will be
reduced by any applicable Contingent Deferred Sales Charge, Administration
Contract Charge, premium tax charge and the amount of any outstanding loan
plus accrued interest.)
(2) The number of annuity units is determined by dividing the amount of
the basic payment level by the applicable annuity unit value(s) next
determined following the date of application of proceeds.
The dollar amount of the initial payment will be at the basic payment level
(if the initial payment is due more than 14 days after the proceeds are
applied, the Company will add interest to that initial payment.) The dollar
amount of each subsequent payment is determined by multiplying the number of
annuity units by the applicable annuity unit value which is determined at
least 14 days before the payment is due.
The value of an annuity unit for each sub-account depends on the Assumed
Interest Rate and on the Net Investment Factors applicable at the time of
valuation. The initial annuity unit values were set at $1.00 effective on or
about the date on which shares of the corresponding Eligible Funds were first
publicly available. The Net Investment Factor and, therefore, changes in the
value of an annuity unit under a variable payment option, reflect the
deduction of the Mortality and Expense Risk Charge and Administration Asset
Charge. (See "Net Investment Factor" above.)
The annuity unit value for each sub-account is equal to the corresponding
annuity unit value for the sub-account previously determined multiplied by the
applicable Net Investment Factor for that sub-account for the New York Stock
Exchange trading day then ended, and further multiplied by the assumed
interest factor ("Assumed Interest Factor") for each day of the valuation
period. The Assumed Interest Factor represents the daily equivalent of the
Contract's annual Assumed Interest Rate. In the calculation of annuity unit
values, the Assumed Interest Factor has the effect of reducing the Net
Investment Factor by an amount equal to the daily equivalent of the Contract's
Assumed Interest Rate. The result of this adjustment is that if the Net
Investment Factor for a valuation period is greater (when expressed as an
annual net investment return) than the Assumed Interest Rate, the annuity unit
value will increase. If the Net Investment Factor for the period is less (when
expressed as an annual net investment return) than the Assumed Interest Rate,
the annuity unit value will decrease. At an Assumed Interest Rate of 3.5%, the
Assumed Interest Factor is .9999058. Assumed Interest Factors for other
Assumed Interest Rates are computed on a consistent basis.
Illustrations of annuity income payments under various hypothetical and
historical rates appear below. The monthly equivalents of the hypothetical
annual net returns of 0%, 5.41%, 6%, 8% and 10% shown in the tables at pages
II-20 and II-21 are 0%, .44%, .49%, .64% and .83%.
II-18
<PAGE>
HYPOTHETICAL ILLUSTRATIONS OF ANNUITY INCOME PAYOUTS
The following tables have been prepared to show how variable annuity income
payments under the Contract change with investment performance over an
extended period of time. The tables illustrate how monthly annuity income
payments would vary over time if the return on assets in the selected
portfolios were a uniform gross annual rate of 0%, 5.41%, 6%, 8% or 10%. The
values would be different from those shown if the returns averaged 0%, 5.41%,
6%, 8% or 10%, but fluctuated over and under those averages throughout the
years.
The tables reflect the daily charge to the sub-accounts for assuming
mortality and expense risks, which is equivalent to an annual charge of 1.00%.
The amounts shown in the tables also take into account the portfolios'
management fees and operating expenses which are assumed to be at an annual
rate of 0.83% of the average daily net assets of the Eligible Funds. Actual
fees and expenses of the portfolios associated with your Contract may be more
or less than 0.83%, will vary from year to year, and will depend on how you
allocate your Contract Value. See the section in your current prospectus
entitled "Expense Table" for more complete details. The monthly annuity income
payments illustrated are on a pre-tax basis. The federal income tax treatment
of annuity income considerations is generally described in the section of your
current prospectus entitled "Federal Income Tax Status."
The tables show both the gross rate and the net rate. The difference between
gross and net rates represents the 1.00% for mortality and expense risk
charges and the assumed 0.83% for investment management and operating
expenses. Since these charges are deducted daily from assets, the difference
between the gross and net rate is not exactly 1.83%.
Two tables follow. The first table assumes that 100% of the Contract Value
is allocated to a variable annuity income option, the second assumes that 50%
of the Contract Value is placed under a fixed annuity income option, using the
fixed crediting rate the Company offered on the fixed annuity income option at
the date of the illustration. Both illustrations assume that the final value
of the accumulation account is $100,000 and is applied at age 65 to purchase a
life annuity for a guaranteed period of 10 years certain and life thereafter.
When part of the Contract Value has been allocated to the fixed annuity
income option, the guaranteed minimum annuity income payment resulting from
this allocation is also shown. The illustrated variable annuity income
payments are determined through the use of standard mortality tables and an
assumed interest rate of 3.5% per year. Thus, actual performance greater than
3.5% per year will result in increasing annuity income payments and actual
performance less than 3.5% per year will result in decreasing annuity income
payments. We offer alternative Assumed Interest Rates from which you may
select. Fixed annuity income payments remain constant. Initial monthly annuity
income payments under a fixed annuity income payout are generally higher than
initial payments under a variable income payout option.
These tables show the monthly income payments for several hypothetical
constant assumed interest rates. of course, actual investment performance will
not be constant and may be volatile. Actual monthly income amounts would
differ from those shown if the actual rate of return averaged the rate shown
over a period of years, but also fluctuated above or below those averages for
individual contract years. Upon request, and when you are considering an
annuity income option, we will furnish a comparable illustration based on your
individual circumstances.
II-19
<PAGE>
ANNUITY PAY-OUT ILLUSTRATION
(100% VARIABLE PAYOUT)
<TABLE>
<C> <C> <S> <C>
ANNUITANT: John Doe GROSS AMOUNT OF CONTRACT $100,000
VALUE:
SEX: Unisex DATE OF ILLUSTRATION: 4/1/98
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAYMENTS: Monthly
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT BASED ON CURRENT RATES, IF 100% FIXED
ANNUITY OPTION SELECTED FOR AGE 65: $648.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT.
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN CONSTANT: 3.5%
VARIABLE MONTHLY ANNUITY INCOME PAYMENT ON THE DATE OF THE
ILLUSTRATION: $581.00
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
<TABLE>
<CAPTION>
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN
WITH AN ASSUMED RATE OF RETURN OF:
----------------------------------------------
GROSS 0% 5.41% 6% 8% 10%
PAYMENT CALENDAR ----- ----------------- -------- -------- ----------
YEAR YEAR AGE NET** -1.81% 3.50% 4.08% 6.04% 8.01%
- ------- -------- --- ----- ----------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1998 65 $ 581.00 $ 581.00 $ 581.00 $ 581.00 $ 581.00
2 1999 66 551.18 581.00 584.26 595.28 606.30
3 2000 67 522.90 581.00 587.53 609.91 632.71
4 2001 68 496.06 581.00 590.82 624.90 660.27
5 2002 69 470.60 581.00 594.13 640.26 689.02
10 2007 74 361.62 581.00 610.97 722.91 852.72
15 2012 79 277.88 581.00 628.28 816.22 1,055.31
20 2017 84 213.53 581.00 646.08 921.58 1,306.03
</TABLE>
IT IS EMPHASIZED THAT THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE.
ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY
THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED.
THE AMOUNT OF THE INCOME PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE
ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A
PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL
FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME (BASED ON THE VARIABLE ACCOUNT)
WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS
THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period,
payments will be continued for the balance of the Certain Period. The
cumulative amount of income payments received under the annuity depends on
how long the Annuitant lives after the Certain Period. An annuity pools the
mortality experience of Annuitants. Annuitants who die earlier, in effect,
subsidize the payments for those who live longer.
** The illustrated Net Assumed Rates of Return reflect the deduction of
average fund expenses and the 1.00% Mortality and Expense Risk and
Administration Asset Changes from the Gross Rates of Return.
II-20
<PAGE>
ANNUITY PAY-OUT ILLUSTRATION
(50% VARIABLE--50% FIXED PAYOUT)
<TABLE>
<C> <C> <S> <C>
ANNUITANT: John Doe GROSS AMOUNT OF CONTRACT $100,000
VALUE:
SEX: Unisex DATE OF ILLUSTRATION: 4/1/98
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAYMENTS: Monthly
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT FOR AGE 65 BASED ON CURRENT RATES, IF
100% FIXED ANNUITY OPTION SELECTED: $648.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 50% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN CONSTANT: 3.5%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE, BUT WILL NEVER
BE LESS THAN: $324.00 THE MONTHLY GUARANTEED PAYMENT OF $317.00 IS BEING
PROVIDED BY THE $50,000 APPLIED UNDER THE FIXED ANNUITY OPTION.
<TABLE>
<CAPTION>
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN
WITH AN ASSUMED RATE OF RETURN OF:
-------------------------------------------------
GROSS 0% 5.41% 6% 8% 10%
PAYMENT CALENDAR ----- --------- --------- --------- --------- ---------
YEAR YEAR AGE NET** -1.81% 3.50% 4.08% 6.04% 8.01%
- ------- -------- --- ----- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1998 65 $ 614.50 $ 614.50 $ 614.50 $ 614.50 $ 614.50
2 1999 66 599.59 614.50 616.13 621.64 627.15
3 2000 67 585.45 614.50 617.76 628.96 640.36
4 2001 68 572.03 614.50 619.41 636.45 654.13
5 2002 69 559.30 614.50 621.07 644.13 668.51
10 2007 74 504.81 614.50 629.48 685.45 750.36
15 2012 79 462.94 614.50 638.14 732.11 851.65
20 2017 84 430.76 614.50 647.04 784.79 977.01
</TABLE>
IT IS EMPHASIZED THAT THE ASSUMED RATES OF RETURN SHOWN ABOVE ARE ILLUSTRATIVE
ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE.
ACTUAL PERFORMANCE RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL
DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY
THE CONTRACT OWNER AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED.
THE AMOUNT OF THE INCOME PAYMENT WOULD BE DIFFERENT FROM THAT SHOWN IF THE
ACTUAL PERFORMANCE AVERAGED THE ASSUMED RATES OF RETURN SHOWN ABOVE OVER A
PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR
INDIVIDUAL CONTRACT YEARS. SINCE IT IS HIGHLY LIKELY THAT THE PERFORMANCE WILL
FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME (BASED ON THE VARIABLE ACCOUNT)
WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE FUNDS
THAT THIS HYPOTHETICAL PERFORMANCE CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period,
payments will be continued for the balance of the Certain Period. The
cumulative amount of income payments received under the annuity depends on
how long the Annuitant lives after the Certain Period. An annuity pools the
mortality experience of Annuitants. Annuitants who die earlier, in effect,
subsidize the payments for those who live longer.
** The illustrated Net Assumed Rates of Return apply only to the variable
portion of the monthly payment and reflect the deduction of average fund
expenses and the 1.00% Mortality and Expense Risk and Administration Asset
Charges from the Gross Rate of Return.
II-21
<PAGE>
HISTORICAL ILLUSTRATIONS OF ANNUITY INCOME PAYOUTS
The following tables have been prepared to show how variable annuity income
payments under the Contract change with investment performance over an
extended period of time. In comparison with hypothetical illustrations based
on a uniform annual rate of return, the table uses historical annual returns
to illustrate that monthly annuity income payments vary over time based on
fluctuations in annual returns.
The tables reflect the daily charge to the sub-accounts for assuming mortality
and expense risks, which is equivalent to an annual charge of 1.00%. The
amounts shown in the tables also take into account the actual portfolios'
management fees and operating expenses. Actual fees and expenses of the
portfolios associated with your Contract may be more or less than the
historical fees, will vary from year to year, and will depend on how you
allocate your Contract Value. See the section in your current prospectus
entitled "Expense Table" for more complete details. The monthly annuity income
payments illustrated are on a pre-tax basis. The federal income tax treatment
of annuity income considerations is generally described in the section of your
current prospectus entitled "Federal Income Tax Status."
The following tables assume that 100% of the Contract Value is allocated to a
variable annuity income option, that the final value of the accumulation
account is $100,000 and is applied at age 65 to purchase a life annuity for a
guaranteed period of 10 years certain and life thereafter. The table assumes
that the Annuitant was age 65 in 1983, the year of inception for the Bond
Income and Money Market portfolios, and that the Annuitant's age had increased
by the time the other portfolios became available. The historical variable
annuity income payments are based on an assumed interest rate of 3.5% per
year. Thus, actual performance greater than 3.5% per year resulted in an
increased annuity income payment and actual performance less than 3.5% per
year resulted in a decreased annuity income payment. We offer alternative
Assumed Interest Rates (AIR) from which you may select: 0% and 5%. An AIR of
0% will result in a lower initial payment than a 3.5% or 5% AIR. Similarly, an
AIR of 5% will result in a higher initial payment than a 0% or 3.5% AIR.
The table illustrates the amount of the first monthly payment for each year
shown. During each year, the monthly payments would vary to reflect
fluctuations in the actual rate of return on the portfolios. Upon request, and
when you are considering an annuity income option, we will furnish a
comparable illustration based on your individual circumstances.
II-22
<PAGE>
ANNUITY PAY-OUT HISTORICAL ILLUSTRATION
(100% VARIABLE PAYOUT)
<TABLE>
<C> <C> <S> <C>
ANNUITANT: John Doe GROSS AMOUNT OF CONTRACT $100,000
VALUE:
SEX: Unisex DATE OF ILLUSTRATION: 4/1/98
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAYMENTS: Monthly
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT BASED ON CURRENT RATES, IF 100% FIXED
ANNUITY OPTION SELECTED: FOR AGE 75: $783.00; AND FOR AGE 76: $799.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN
CONSTANT: 3.50%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN WITH
100% OF THE CONTRACT VALUE INVESTED IN:
<TABLE>
<CAPTION>
MORGAN GOLDMAN WESTPEAK
LOOMIS STANLEY ALGER SACHS DAVIS GROWTH
PAYMENT CALENDAR SAYLES INTERNATIONAL EQUITY MIDCAP VENTURE AND
YEAR YEAR AGE SMALL CAP MAGNUM GROWTH VALUE** VALUE INCOME
- ------- -------- --- --------- ------------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 1983 65
2 1984 66
3 1985 67
4 1986 68
5 1987 69
6 1988 70
7 1989 71
8 1990 72
9 1991 73
10 1992 74
11 1993 75 $ 747.00 $ 747.00
12 1994 76 $ 765.00 $765.00 $ 765.00 831.93 $ 765.00 828.32
13 1995 77 735.22 779.14 737.83 793.67 732.81 782.81
14 1996 78 906.18 791.78 1,049.51 989.65 976.38 1,021.90
15 1997 79 1,132.60 807.80 1,136.00 1,113.17 1,175.13 1,154.22
16 1998 80 1,352.67 789.37 1,412.94 1,249.29 1,553.17 1,473.66
</TABLE>
INVESTMENT PERFORMANCE RESULTS CONTAINED IN THIS REPORT REPRESENT PAST
PERFORMANCE AND ARE NOT INDICATIVE OF FUTURE RETURNS. THE PERFORMANCE RESULTS
OF A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER
AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED. SINCE IT IS HIGHLY
LIKELY THAT PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME
(BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE
MADE BY THE COMPANY OR THE FUNDS THAT THESE HISTORICAL RETURNS CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THE PAYMENTS IN THIS ILLUSTRATION ARE NET OF ALL CHARGES: MORTALITY AND
EXPENSE RISK CHARGE AND ADMINISTRATION ASSET CHARGE (1.00%), MANAGEMENT FEES
AND OTHER EXPENSES (These may vary from year to year. The following expenses
are for the year ended December 31, 1997, after giving effect to current
expense caps or deferrals: 1.00% Loomis Sayles Small Cap, 1.30% Morgan Stanley
International Magnum, 0.87% Alger Equity Growth, 0.85% Goldman Sachs Midcap
Value, 0.90% Davis Venture Value, 0.82% Westpeak Growth and Income, 0.85%
Loomis Sayles Balanced, 0.85% Salomon Strategic Bond Opportunities, 0.52% Back
Bay Bond Income, 0.70% Salomon US Government, 0.45% Back Bay Money Market.)
Effective May 1, 1998 the Goldman Sachs Midcap Value Series is subject to a
voluntary expense deferral arrangement with an annual expense limit of .90% of
net assets.
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period,
payments will be continued for the balance of the Certain Period. The
cumulative amount of income payments received under the annuity depends on
how long the Annuitant lives after the Certain Period. An annuity pools the
mortality experience of Annuitants. Annuitants who die earlier, in effect,
subsidize the payments for those who live longer.
** Rates of return and Contract Values and benefits shown reflect the Goldman
Sachs Midcap Value Series' investment advisory fee of .70% of average daily
net assets. Beginning May 1, 1998 the Series' advisory fee is .75%.
II-23
<PAGE>
ANNUITY PAY-OUT HISTORICAL ILLUSTRATION
(100% VARIABLE PAYOUT)
<TABLE>
<C> <C> <S> <C>
ANNUITANT: John Doe GROSS AMOUNT OF CONTRACT $100,000
VALUE:
SEX: Unisex DATE OF ILLUSTRATION: 4/1/98
ANNUITY OPTION SELECTED: Life Income with 10 Years Certain*
FREQUENCY OF INCOME PAYMENTS: Monthly
</TABLE>
FIXED MONTHLY ANNUITY INCOME PAYMENT BASED ON CURRENT RATES, IF 100% FIXED
ANNUITY OPTION SELECTED: FOR AGE 65: $648.00 FOR AGE 75: $783.00 AND FOR AGE
76: $799.00
ILLUSTRATIVE AMOUNTS BELOW ASSUME THAT 100% OF THE CONTRACT VALUE IS ALLOCATED
TO VARIABLE PAYOUT
ASSUMED INTEREST RATE AT WHICH MONTHLY VARIABLE PAYMENTS REMAIN
CONSTANT: 3.50%
MONTHLY INCOME PAYMENTS WILL VARY WITH INVESTMENT PERFORMANCE. NO MINIMUM
DOLLAR AMOUNT IS GUARANTEED.
AMOUNT OF FIRST MONTHLY PAYMENT IN YEAR SHOWN WITH
100% OF THE CONTRACT VALUE INVESTED IN:
<TABLE>
<CAPTION>
SALOMON
LOOMIS STRATEGIC BACK BAY SALOMON BACK BAY
PAYMENT CALENDAR SAYLES BOND BOND U.S. MONEY
YEAR YEAR AGE BALANCED OPPORTUNITIES INCOME GOVERNMENT MARKET
- ------- -------- --- --------- ------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1983 65 $ 581.00 $581.00
2 1984 66 594.53 589.89
3 1985 67 640.32 624.72
4 1986 68 727.41 646.97
5 1987 69 799.04 660.98
6 1988 70 781.66 673.54
7 1989 71 810.19 692.66
8 1990 72 870.33 723.92
9 1991 73 899.82 749.18
10 1992 74 1,015.33 761.17
11 1993 75 1,050.55 755.68
12 1994 76 $ 765.00 $ 765.00 1,131.65 $765.00 744.34
13 1995 77 758.63 748.78 1,046.12 763.94 740.31
14 1996 78 905.62 855.10 1,212.85 840.56 748.54
15 1997 79 1,012.64 935.24 1,213.45 830.56 752.63
16 1998 80 1,164.78 1,028.48 1,287.15 891.93 758.37
</TABLE>
INVESTMENT PERFORMANCE RESULTS CONTAINED IN THIS REPORT REPRESENT PAST
PERFORMANCE AND ARE NOT INDICATIVE OF FUTURE RETURNS. THE PERFORMANCE RESULTS
OF A CONTRACT MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER
OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY THE CONTRACT OWNER
AND THE VARIOUS RATES OF RETURN OF THE PORTFOLIOS SELECTED. SINCE IT IS HIGHLY
LIKELY THAT PERFORMANCE WILL FLUCTUATE FROM MONTH TO MONTH, MONTHLY INCOME
(BASED ON THE VARIABLE ACCOUNT) WILL ALSO FLUCTUATE. NO REPRESENTATION CAN BE
MADE BY THE COMPANY OR THE FUNDS THAT THESE HISTORICAL RETURNS CAN BE ACHIEVED
FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
THE PAYMENTS IN THIS ILLUSTRATION ARE NET OF ALL CHARGES: MORTALITY AND
EXPENSE RISK CHARGES AND ADMINISTRATION ASSET CHARGE (1.00%), MANAGEMENT FEES
AND OTHER EXPENSES (These may vary from year to year. The following expenses
are for the year ended December 31, 1997, after giving effect to current
expense caps or deferrals: 1.00% Loomis Sayles Small Cap, 1.30% Morgan Stanley
International Magnum, 0.87% Alger Equity Growth, 0.85% Goldman Sachs Midcap
Value, 0.90% Davis Venture Value, 0.82% Westpeak Growth and Income, 0.85%
Loomis Sayles Balanced, 0.85% Salomon Strategic Bond Opportunities, 0.52% Back
Bay Bond Income, 0.70% Salomon US Government, 0.45% Back Bay Money Market.)
Effective May 1, 1998 the Goldman Sachs Midcap Value Series is subject to a
voluntary expense deferral arrangement with an annual expense limit of .90% of
net assets.
- --------
* Income payments are made during the Annuitant's lifetime. If the Annuitant
dies before payments have been made for the 10 Year Certain Period, payments
will be continued for the balance of the Certain Period. The cumulative
amount of income payments received under the annuity depends on how long the
Annuitant lives after the Certain Period. An annuity pools the mortality
experience of Annuitants. Annuitants who die earlier, in effect, subsidize
the payments for those who live longer.
** Rates of return and contract values and benefits shown reflect the Goldman
Sachs Midcap Value Series' investment advisory fee of .70% of average daily
net assets. Beginning May 1, 1998, the Series' advisory fee is .75%.
II-24
<PAGE>
EXPERTS
The financial statements of New England Variable Annuity Separate Account of
New England Life Insurance Company ("NELICO") (formerly New England Variable
Life Insurance Company) and the consolidated financial statements of NELICO
and subsidiaries as of and for the year ended December 31, 1996, and December
31, 1997 included in this Statement of Additional Information have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein (whose reports express unqualified opinions and, with
respect to NELICO, includes an explanatory paragraph referring to the change
in the basis of accounting and the change in corporate organization), and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing. The adjustments that were
applied to restate the 1995 financial statements to reflect the effects of the
changes for adoption of generally accepted accounting principles and the
changes in corporate organization have also been audited by Deloitte & Touche
LLP.
The statutory balance sheets of New England Variable Life Insurance Company
and New England Pension and Annuity Company as of December 31, 1995, and the
related statutory statements of operations, surplus, and cash flows for each
of the two years in the period ended December 31, 1995 (not included herein),
have been incorporated herein in reliance on the reports (which reports
include adverse opinions as to generally accepted accounting principles and
unqualified opinions as to statutory accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware) of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing. The statutory balance sheet of Exeter
Reassurance Company, Ltd. as at December 31, 1995, and the related statutory
statements of income, capital and surplus, and cash flows for the year then
ended (not included herein), have been incorporated herein in reliance on the
report (which report includes an adverse opinion as to generally accepted
accounting principles and an unqualified opinion as to conformity with The
Insurance Act 1978, amendments thereto and related regulations) of Coopers &
Lybrand, chartered accountants, given on the authority of that firm as experts
in accounting and auditing.
The consolidated statement of financial condition of New England Securities
Corporation as of December 31, 1995, and the related consolidated statements
of operations, shareholder's equity, and cash flows for the year then ended
(not included herein); the balance sheet of TNE Advisers, Inc. as of December
31, 1995, and the related statements of operations, changes in shareholder's
equity (deficit), and cash flows for the year ended December 31, 1995 (not
included herein), have been incorporated herein in reliance on the reports of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing. The balance sheet of Newbury
Insurance Company, Limited as of December 31, 1995, and the related statements
of earnings and retained earnings, and cash flows for the year ended December
31, 1995, have been incorporated herein in reliance on the reports of Coopers
& Lybrand, chartered accountants, given on the authority of that firm as
experts in accounting and auditing.
LEGAL MATTERS
Legal matters in connection with the Contracts described in this
registration statement have been passed on by H. James Wilson, General Counsel
of the Company. Sutherland, Asbill & Brennan LLP, Washington, D.C., have acted
as special counsel on certain matters relating to the Federal securities laws.
II-25
<PAGE>
APPENDIX A
ABC and affiliates Fortune Public Broadcasting
Atlanta Constitution Fox Network and Service
Atlanta Journal affiliates Quinn, Jane Bryant
Austin American Fund Action (syndicated column)
Statesman Hartford Courant Registered
Baltimore Sun Houston Chronicle Representative
Barron's INC Research Magazine
Bond Buyer Indianapolis Star Resource
Boston Business Journal Institutional Investor Reuters
Boston Globe Investment Dealers Rukeyser's Business
Boston Herald Digest (syndicated column)
Broker World Investment Vision Sacramento Bee
Business Radio Network Investor's Daily San Francisco Chronicle
Business Week Journal of Commerce San Francisco Examiner
CBS and affiliates Kansas City Star San Jose Mercury
CFO LA Times Seattle Post-
Changing Times Leckey, Andrew Intelligencer
Chicago Sun Times (syndicated column) Seattle Times
Chicago Tribune Life Association News Smart Money
Christian Science Miami Herald St. Louis Post Dispatch
Monitor Milwaukee Sentinel St. Petersburg Times
Christian Science Money Standard & Poor's
Monitor News Service Money Maker Outlook
Cincinnati Enquirer Money Management Letter Standard & Poor's Stock
Cincinnati Post Morningstar Guide
CNBC National Public Radio Stanger's Investment
CNN National Underwriter Advisor
Columbus Dispatch NBC and affiliates Stockbroker's Register
Dallas Morning News New England Business Strategic Insight
Dallas Times-Herald New England Cable News Tampa Tribune
Denver Post New Orleans Times- Time
Des Moines Register Picayune Tobias, Andrew
Detroit Free Press New York Daily News (syndicated column)
Donoghues Money Fund New York Times UPI
Report Newark Star Ledger US News and World Report
Dorfman, Dan (syndicated Newsday USA Today
column) Newsweek Value Line
Dow Jones News Service Nightly Business Report Wall St. Journal
Economist Orange County Register Wall Street Letter
FACS of the Week Orlando Sentinel Wall Street Week
Financial News Network Pension World Washington Post
Financial Planning Pensions and Investments WBZ
Financial Services Week Personal Investor WBZ-TV
Financial World Philadelphia Inquirer WCVB-TV
Forbes Porter, Sylvia WEEI
Fort Worth Star-Telegram (syndicated column) WHDH
Portland Oregonian Worcester Telegram
Worth Magazine
WRKO
II-26
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
REPORT OF INDEPENDENT AUDITORS
To the Contract Owners of New England Life Insurance Company:
We have audited the accompanying statement of assets and liabilities of the
New England Variable Annuity Separate Account (comprised of Bond Income Sub-
Account, Money Market Sub-Account, Avanti Growth Sub-Account, Growth and
Income Sub-Account (formerly Value Growth Sub-Account), Small Cap Sub-Account,
U.S. Government Sub-Account, Balanced Sub-Account, Equity Growth Sub-Account,
International Equity Sub-Account, Venture Value Sub-Account and Bond
Opportunities Sub-Account) of New England Life Insurance Company (formerly New
England Variable Life Insurance Company) as of December 31, 1997, and the
related statements of operations and changes in net assets for the twelve
months ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the respective aforementioned
sub-accounts comprising the New England Variable Annuity Separate Account of
New England Life Insurance Company as of December 31, 1997, and the results of
their operations and the changes in net assets for the twelve months ended
December 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 17, 1998
F-1
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
Investments in New England Zenith Fund, at
value (Note 2)..............................
SHARES COST
---------- --------------
Back Bay Advisors
Bond Income
Series........... 247,325 $ 27,066,266
Back Bay Advisors
Money Market
Series........... 179,741 17,974,088
Loomis Sayles
Avanti Growth
Series........... 183,864 29,669,016
Westpeak Growth
and Income
Series........... 252,320 41,645,334
Loomis Sayles
Small Cap Series. 326,968 48,736,032
Salomon Brothers
U.S. Government
Series........... 954,895 10,606,355
Loomis Sayles
Balanced Series.. 3,765,551 51,022,152
Alger Equity
Growth Series.... 3,594,498 58,013,641
Morgan Stanley
International
Magnum Equity
Series........... 2,273,617 25,467,235
Davis Venture
Value Series..... 4,139,394 70,081,860
Solomon Brothers
Strategic Bond
Opportunities
Series........... 2,873,726 34,227,075
--------------
Total............ $ 414,509,054
==============
Amount due and accrued from
contract-related
transactions, net............
Dividends receivable.........
TOTAL ASSETS.........
LIABILITIES
Due to (from) New England
Life Insurance Company.......
NET ASSETS
Net Assets consist of:
Net Assets attributable to
Variable Annuity
Contracts....................
Annuity Reserves (Note 7)....
TOTAL NET ASSETS.....
<CAPTION>
-------------------------------------------------------------------------------------------------
BOND MONEY AVANTI GROWTH AND SMALL U.S. EQUITY
INCOME MARKET GROWTH INCOME CAP GOVERNMENT BALANCED GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in New
England Zenith Fund,
at value
(Note 2)......... $26,837,199 $17,974,088 $31,365,400 $45,409,964 $51,961,757 $10,627,983 $55,956,082 $63,335,055
Back Bay Advisors
Bond Income
Series...........
Back Bay Advisors
Money Market
Series...........
Loomis Sayles
Avanti Growth
Series...........
Westpeak Growth
and Income
Series...........
Loomis Sayles
Small Cap Series.
Salomon Brothers
U.S. Government
Series...........
Loomis Sayles
Balanced Series..
Alger Equity
Growth Series....
Morgan Stanley
International
Magnum Equity
Series...........
Davis Venture
Value Series.....
Solomon Brothers
Strategic Bond
Opportunities
Series...........
Total............
Amount due and accrued from
contract-related
transactions, net............ 131,882 141,693 91,737 154,813 208,618 4,971 316,322 152,279
Dividends receivable......... -- 83,229 -- -- -- -- -- --
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS......... 26,969,081 18,199,010 31,457,137 45,564,777 52,170,375 10,632,954 56,272,404 63,487,334
LIABILITIES
Due to (from) New England
Life Insurance Company....... (8,486) 30,130 (16,967) (118,819) 88,945 9,698 90,193 61,299
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS $26,977,567 $18,168,880 $31,474,104 $45,683,596 $52,081,430 $10,623,256 $56,182,211 $63,426,035
============ =========== =========== =========== =========== =========== =========== ===========
Net Assets consist of:
Net Assets attributable to
Variable Annuity
Contracts.................... $26,042,398 $17,910,620 $30,668,885 $42,482,915 $51,209,887 $10,369,656 $54,558,995 $62,648,691
Annuity Reserves (Note 7).... 935,169 258,260 805,219 3,200,681 871,543 253,600 1,623,216 777,344
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL NET ASSETS..... $26,977,567 $18,168,880 $31,474,104 $45,683,596 $52,081,430 $10,623,256 $56,182,211 $63,426,035
============ =========== =========== =========== =========== =========== =========== ===========
<CAPTION>
----------------------------------------------------
INTERNATIONAL VENTURE BOND
EQUITY VALUE OPPORTUNITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Investments in New
England Zenith Fund,
at value
(Note 2)......... $24,691,485 $86,099,383 $34,513,448 $448,771,844
Back Bay Advisors
Bond Income
Series...........
Back Bay Advisors
Money Market
Series...........
Loomis Sayles
Avanti Growth
Series...........
Westpeak Growth
and Income
Series...........
Loomis Sayles
Small Cap Series.
Salomon Brothers
U.S. Government
Series...........
Loomis Sayles
Balanced Series..
Alger Equity
Growth Series....
Morgan Stanley
International
Magnum Equity
Series...........
Davis Venture
Value Series.....
Solomon Brothers
Strategic Bond
Opportunities
Series...........
Total............
Amount due and accrued from
contract-related
transactions, net............ 78,406 224,873 79,872 1,585,466
Dividends receivable......... -- -- -- 83,229
----------- ----------- ----------- ------------
TOTAL ASSETS......... 24,769,891 86,324,256 34,593,320 450,440,539
LIABILITIES
Due to (from) New England Life
Insurance Company............ (44,237) 223,486 (82,976) 232,266
----------- ----------- ----------- ------------
NET ASSETS $24,814,128 $86,100,770 $34,676,296 $450,208,273
=========== =========== =========== ============
Net Assets consist of:
Net Assets attributable to
Variable Annuity
Contracts.................... $24,261,165 $84,555,420 $33,384,179 $438,092,811
Annuity Reserves (Note 7).... 552,963 1,545,350 1,292,117 12,115,462
----------- ----------- ----------- ------------
TOTAL NET ASSETS..... $24,814,128 $86,100,770 $34,676,296 $450,208,273
=========== =========== =========== ============
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
BOND MONEY AVANTI GROWTH AND SMALL U.S. EQUITY INTERNATIONAL
INCOME MARKET GROWTH INCOME CAP GOVERNMENT BALANCED GROWTH EQUITY
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB-
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
---------- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME
Dividends........ $1,945,217 $976,275 $2,407,620 $4,798,541 $5,930,573 $550,466 $3,047,021 $6,117,169 $ 621,097
EXPENSES
Mortality,
expense risk and
administrative
charges
(Note 3)......... 273,001 256,711 338,700 426,698 501,429 110,575 571,695 661,841 278,858
---------- -------- ---------- ---------- ---------- -------- ---------- ---------- -----------
Net investment
income........... 1,672,216 719,564 2,068,920 4,371,843 5,429,144 439,891 2,475,326 5,455,328 342,239
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of
year............ (388,420) -- 365,848 534,754 1,485,276 (92,485) 1,957,461 2,073,762 368,493
End of year..... (229,067) -- 1,696,384 3,764,630 3,225,725 21,628 4,933,930 5,321,414 (775,750)
---------- -------- ---------- ---------- ---------- -------- ---------- ---------- -----------
Net change in
unrealized
appreciation
(depreciation)... 159,353 -- 1,330,536 3,229,876 1,740,449 114,113 2,976,469 3,247,652 (1,144,243)
Net realized gain
(loss) on
investments...... 234 -- 2,229 1,645 567 85 700 465 117
---------- -------- ---------- ---------- ---------- -------- ---------- ---------- -----------
Net realized and
unrealized gain
(loss) on
investments...... 159,587 -- 1,332,765 3,231,521 1,741,016 114,198 2,977,169 3,248,117 (1,144,126)
---------- -------- ---------- ---------- ---------- -------- ---------- ---------- -----------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS... $1,831,803 $719,564 $3,401,685 $7,603,364 $7,170,160 $554,089 $5,452,495 $8,703,445 $ (801,887)
========== ======== ========== ========== ========== ======== ========== ========== ===========
<CAPTION>
BOND
VENTURE OPPORTUNITIES
VALUE SUB-
SUB-ACCOUNT ACCOUNT TOTAL
------------ ------------- -----------
<S> <C> <C> <C>
INCOME
Dividends........ $ 2,640,935 $2,382,489 $31,417,403
EXPENSES
Mortality,
expense risk and
administrative
charges
(Note 3)......... 816,066 347,454 4,583,028
------------ ------------- -----------
Net investment
income........... 1,824,869 2,035,035 26,834,375
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of
year............ 3,645,390 45,311 9,995,390
End of year..... 16,017,523 286,373 34,262,790
------------ ------------- -----------
Net change in
unrealized
appreciation
(depreciation)... 12,372,133 241,062 24,267,400
Net realized gain
(loss) on
investments...... (34) (71) 5,937
------------ ------------- -----------
Net realized and
unrealized gain
(loss) on
investments...... 12,372,099 240,991 24,273,337
------------ ------------- -----------
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING
FROM OPERATIONS... $14,196,968 $2,276,026 $51,107,712
============ ============= ===========
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
BOND MONEY AVANTI GROWTH AND SMALL U.S. EQUITY
INCOME MARKET GROWTH INCOME CAP GOVERNMENT BALANCED GROWTH INTERNATIONAL
SUB- SUB- SUB- SUB- SUB- SUB- SUB- SUB- EQUITY
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT SUB-ACCOUNT
--------- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME
Dividends........ $ 996,618 $584,576 $ 796,869 $1,486,194 $1,236,100 $314,575 $ 690,227 $ 49,135 $217,097
EXPENSES
Mortality,
expense risk and
administrative
charges
(Note 3)......... 117,696 139,034 106,974 128,321 124,297 55,834 173,854 213,057 111,065
--------- -------- ---------- ---------- ---------- -------- ---------- ---------- --------
Net investment
income (loss).... 878,922 445,542 689,895 1,357,873 1,111,803 258,741 516,373 (163,922) 106,032
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of
year............ (56,238) -- (20,804) 83,206 92,761 6,856 85,201 20,459 64,159
End of year..... (388,420) -- 365,848 534,754 1,485,276 (92,485) 1,957,461 2,073,762 368,493
--------- -------- ---------- ---------- ---------- -------- ---------- ---------- --------
Net change in
unrealized
appreciation
(depreciation)... (332,182) -- 386,652 451,548 1,392,515 (99,341) 1,872,260 2,053,303 304,334
Net realized gain
(loss) on
investments...... (73) -- 56 172 202 1,012 72 (131) 804
--------- -------- ---------- ---------- ---------- -------- ---------- ---------- --------
Net realized and
unrealized gain
(loss) on
investments...... (332,255) -- 386,708 451,720 1,392,717 (98,329) 1,872,332 2,053,172 305,138
--------- -------- ---------- ---------- ---------- -------- ---------- ---------- --------
NET INCREASE IN
NET ASSETS
RESULTING FROM
OPERATIONS........ $ 546,667 $445,542 $1,076,603 $1,809,593 $2,504,520 $160,412 $2,388,705 $1,889,250 $411,170
========= ======== ========== ========== ========== ======== ========== ========== ========
<CAPTION>
VENTURE
VALUE BOND
SUB- OPPORTUNITIES
ACCOUNT SUB-ACCOUNT TOTAL
---------- ------------- -----------
<S> <C> <C> <C>
INCOME
Dividends........ $ 679,955 $891,674 $ 7,943,020
EXPENSES
Mortality,
expense risk and
administrative
charges
(Note 3)......... 204,628 92,995 1,467,755
---------- ------------- -----------
Net investment
income (loss).... 475,327 798,679 6,475,265
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS
Net unrealized
appreciation
(depreciation) on
investments:
Beginning of
year............ 179,424 (56,229) 398,795
End of year..... 3,645,390 45,311 9,995,390
---------- ------------- -----------
Net change in
unrealized
appreciation
(depreciation)... 3,465,966 101,540 9,596,595
Net realized gain
(loss) on
investments...... 440 705 3,259
---------- ------------- -----------
Net realized and
unrealized gain
(loss) on
investments...... 3,466,406 102,245 9,599,854
---------- ------------- -----------
NET INCREASE IN
NET ASSETS
RESULTING FROM
OPERATIONS........ $3,941,733 $900,924 $16,075,119
========== ============= ===========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
BOND MONEY AVANTI GROWTH AND SMALL U.S. EQUITY
INCOME MARKET GROWTH INCOME CAP GOVERNMENT BALANCED GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment
income.......... $ 1,672,216 $ 719,564 $ 2,068,920 $ 4,371,843 $ 5,429,144 $ 439,891 $ 2,475,326 $ 5,455,328
Net realized and
unrealized gain
(loss) on
investments..... 159,587 -- 1,332,765 3,231,521 1,741,016 114,198 2,977,169 3,248,117
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net increase
(decrease) in
net assets
resulting from
operations...... 1,831,803 719,564 3,401,685 7,603,364 7,170,160 554,089 5,452,495 8,703,445
FROM CONTRACT-
RELATED
TRANSACTIONS
Purchase
payments
transferred from
New England Life
Insurance
Company......... 11,236,642 33,271,900 12,535,013 20,020,290 21,326,402 3,841,692 26,180,743 23,395,987
Net transfers
(to) from other
sub-accounts.... 936,254 (32,091,801) 1,384,330 4,744,804 6,042,290 259,045 2,443,590 4,307,055
Net transfers to
New England Life
Insurance
Company......... (1,406,131) (1,866,995) (1,008,921) (3,176,042) (1,565,170) (430,245) (2,461,194) (2,018,944)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Increase
(decrease) in
net assets
resulting from
contract-related
transactions.... 10,766,765 (686,896) 12,910,422 21,589,052 25,803,522 3,670,492 26,163,139 25,684,098
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE IN
NET ASSETS....... 12,598,568 32,668 16,312,107 29,192,416 32,973,682 4,224,581 31,615,634 34,387,543
NET ASSETS, AT
BEGINNING OF THE
YEAR............. 14,378,999 18,136,212 15,161,997 16,491,180 19,107,748 6,398,675 24,566,577 29,038,492
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS, AT
END OF THE YEAR.. $26,977,567 $18,168,880 $31,474,104 $45,683,596 $52,081,430 $10,623,256 $56,182,211 $63,426,035
=========== =========== =========== =========== =========== =========== =========== ===========
<CAPTION>
INTERNATIONAL VENTURE BOND
EQUITY VALUE OPPORTUNITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment
income.......... $ 342,239 $ 1,824,869 $ 2,035,035 $ 26,834,375
Net realized and
unrealized gain
(loss) on
investments..... (1,144,126) 12,372,099 240,991 24,273,337
------------- ------------ ------------- -------------
Net increase
(decrease) in
net assets
resulting from
operations...... (801,887) 14,196,968 2,276,026 51,107,712
FROM CONTRACT-
RELATED
TRANSACTIONS
Purchase
payments
transferred from
New England Life
Insurance
Company......... 11,037,821 36,720,286 17,465,416 217,032,192
Net transfers
(to) from other
sub-accounts.... 938,157 8,959,499 2,076,777 --
Net transfers to
New England Life
Insurance
Company......... (923,740) (2,986,228) (1,713,411) (19,557,021)
------------- ------------ ------------- -------------
Net Increase
(decrease) in
net assets
resulting from
contract-related
transactions.... 11,052,238 42,693,557 17,828,782 197,475,171
------------- ------------ ------------- -------------
NET INCREASE IN
NET ASSETS....... 10,250,351 56,890,525 20,104,808 248,582,883
NET ASSETS, AT
BEGINNING OF THE
YEAR............. 14,563,777 29,210,245 14,571,488 201,625,390
------------- ------------ ------------- -------------
NET ASSETS, AT
END OF THE YEAR.. $24,814,128 $86,100,770 $34,676,296 $450,208,273
============= ============ ============= =============
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN NET ASSETS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
U.S.
BOND MONEY AVANTI GROWTH AND SMALL GOVERNMENT EQUITY
INCOME MARKET GROWTH INCOME CAP SUB- BALANCED GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment
income (loss).... $ 878,922 $ 445,542 $ 689,895 $ 1,357,873 $ 1,111,803 $ 258,741 $ 516,373 ($163,922)
Net realized and
unrealized gain
(loss) on
investments..... (332,255) -- 386,708 451,720 1,392,717 (98,329) 1,872,332 2,053,172
----------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Net increase in
net assets
resulting from
operations...... 546,667 445,542 1,076,603 1,809,593 2,504,520 160,412 2,388,705 1,889,250
FROM CONTRACT-
RELATED
TRANSACTIONS
Purchase payments
transferred from
New England Life
Insurance
Company.......... 10,068,726 30,165,177 10,017,554 9,961,049 12,313,114 4,228,387 16,027,105 19,491,589
Net transfers
(to) from other
sub-accounts..... 308,694 (16,711,897) 1,607,239 1,390,946 1,878,952 62,147 2,053,141 2,962,775
Net transfers
(to) from New
England Life
Insurance
Company.......... (489,973) (975,438) (430,695) (957,156) (547,400) (469,227) (623,930) (789,579)
----------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Net increase in
net assets
resulting from
contract-related
transactions.... 9,887,447 12,477,842 11,194,098 10,394,839 13,644,666 3,821,307 17,456,316 21,664,785
----------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
NET INCREASE IN
NET ASSETS....... 10,434,114 12,923,384 12,270,701 12,204,432 16,149,186 3,981,719 19,845,021 23,554,035
NET ASSETS, AT
BEGINNING OF THE
YEAR............. 3,944,885 5,212,828 2,891,296 4,286,748 2,958,562 2,416,956 4,721,556 5,484,457
----------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
NET ASSETS, AT
END OF THE YEAR.. $14,378,999 $18,136,212 $15,161,997 $16,491,180 $19,107,748 $6,398,675 $24,566,577 $29,038,492
=========== =========== =========== =========== =========== ========== =========== ===========
<CAPTION>
INTERNATIONAL VENTURE BOND
EQUITY VALUE OPPORTUNITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT TOTAL
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATING
ACTIVITIES
Net investment
income (loss).... $ 106,032 $ 475,327 $ 798,679 $ 6,475,265
Net realized and
unrealized gain
(loss) on
investments..... 305,138 3,466,406 102,245 9,599,854
------------- ------------ ------------- -------------
Net increase in
net assets
resulting from
operations...... 411,170 3,941,733 900,924 16,075,119
FROM CONTRACT-
RELATED
TRANSACTIONS
Purchase payments
transferred from
New England Life
Insurance
Company.......... 9,804,736 18,465,880 10,298,058 150,841,375
Net transfers
(to) from other
sub-accounts..... 1,727,240 2,832,686 1,888,077 --
Net transfers
(to) from New
England Life
Insurance
Company.......... (569,779) (1,055,952) (804,697) (7,713,826)
------------- ------------ ------------- -------------
Net increase in
net assets
resulting from
contract-related
transactions.... 10,962,197 20,242,614 11,381,438 143,127,549
------------- ------------ ------------- -------------
NET INCREASE IN
NET ASSETS....... 11,373,367 24,184,347 12,282,362 159,202,668
NET ASSETS, AT
BEGINNING OF THE
YEAR............. 3,190,410 5,025,898 2,289,126 42,422,722
------------- ------------ ------------- -------------
NET ASSETS, AT
END OF THE YEAR.. $14,563,777 $29,210,245 $14,571,488 $201,625,390
============= ============ ============= =============
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS. New England Variable Annuity Separate Account (the
"Account") of New England Life Insurance Company ("NELICO"), formerly New
England Variable Life Insurance Company ("NEVLICO"), was established by
NELICO's Board of Directors on July 1, 1994 in accordance with the regulations
of the Delaware Insurance Department and is now operating in accordance with
the regulations of the Commonwealth of Massachusetts Division of Insurance.
The Account is registered as a unit investment trust under the Investment
Company Act of 1940. The assets of the Account are owned by NELICO. The net
assets of the Account are restricted from use in the ordinary business of
NELICO.
Effective with the merger on August 30, 1996 of New England Mutual Life
Insurance Company ("NEMLICO") and Metropolitan Life Insurance Company ("MLI"),
NEMLICO ceased to exist, with MLI the surviving company of the merger. NELICO
then became an indirect wholly-owned subsidiary of MLI.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. SUB-ACCOUNTS. The Account has eleven investment sub-accounts each of which
invests in the shares of one portfolio of the New England Zenith Fund ("Zenith
Fund"). The portfolios of the Zenith Fund in which the sub-accounts invest are
referred to herein as the "Eligible Funds". The Zenith Fund is a diversified,
open-end management investment company. The Account purchases or redeems
shares of the eleven Eligible Funds based on the amount of purchase payments
invested in the Account, transfers among the sub-accounts, surrender payments,
annuity payments and death benefit payments. The values of the shares of the
Eligible Funds are determined as of the close of the New York Stock Exchange
(normally 4:00 p.m. EST) on each day the Exchange is open for trading.
Realized gains and losses on the sale of Eligible Funds' shares are computed
on the basis of identified cost on the trade date. Income from dividends is
recorded on the ex-dividend date. Charges for investment advisory fees and
other expenses are reflected in the carrying value of the assets of the
Eligible Funds.
3. MORTALITY AND EXPENSE RISKS AND ADMINISTRATION CHARGES. Although variable
annuity payments differ according to the investment performance of the
Eligible Funds, they are not affected by mortality or expense experience
because NELICO assumes the mortality and expense risks under the contracts.
The mortality risk assumed by NELICO has two elements, a life annuity
mortality risk and, for deferred annuity contracts, a minimum death refund
risk. The life annuity mortality risk results from a provision in the contract
in which NELICO agrees to make annuity payments regardless of how long a
particular annuitant or other payee lives and how long all annuitants or other
payees as a class live if payment options involving life contingencies are
chosen. Those annuity payments are determined in accordance with annuity
purchase rate provisions established at the time that contracts are issued.
Under deferred annuity contracts, NELICO also assumes a minimum death refund
risk by providing that there will be payable, on the death of the annuitant
during the accumulation period, an amount equal to the greater of (1) a
guaranteed amount equal to the aggregate purchase payments made, without
interest, reduced by any partial surrender, and (2) the value of the contract
as of the death valuation date. The guaranteed amount in (1) above is
recalculated at the specific contract anniversaries to determine whether a
higher (but never a lower) guarantee will apply, based on the contract value
at the time of recalculation. Death proceeds are reduced by any outstanding
contract loan and, in certain states, by a premium tax charge. The expense
risk assumed by NELICO is the risk that the deductions for sales and
administrative expenses provided for in the variable annuity contract may
prove to be insufficient to cover the cost of those items.
F-7
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
NELICO charges the Account for the mortality and expense risk NELICO assumes.
Currently, the charges are made daily at an annual rate of 1.25% of the
Account assets attributable to the American Growth Series individual variable
annuity contracts, and 1.00% of the Account assets attributable to the
American Forerunner Series individual variable annuity contracts. NELICO also
imposes an administration asset charge at an annual rate of .10% of the
Account assets attributable to American Growth Series and an annual
administration contract charge of $30 (not to exceed 2% of the total contract
value) per contract against contract value in the Account for both the
American Growth Series and American Forerunner Series, but this charge is
waived for any contract year in which the contract value reaches certain
amounts. A premium tax charge applies to the contracts in certain states.
4. FEDERAL INCOME TAXES. For federal income tax purposes the Account's
operations are included with those of NELICO. NELICO intends to make
appropriate charges against the Account in the future if and when tax
liabilities arise.
5. INVESTMENT ADVISERS. The adviser and sub-adviser for each series of the
Zenith Fund are listed in the chart below. TNE Advisers, Inc. which is a
subsidiary of NELICO, and each of the sub-advisers are registered with the SEC
as investment advisers under the Investment Advisers Act of 1940.
<TABLE>
<CAPTION>
SERIES ADVISER SUB-ADVISER
------ ------------------ -------------------------------------
<S> <C> <C>
Back Bay Advisors Bond
Income TNE Advisers, Inc. Back Bay Advisors, L.P.*
Back Bay Advisors Money
Market TNE Advisers, Inc. Back Bay Advisors, L.P.*
Westpeak Growth and
Income TNE Advisers, Inc. Westpeak Investment Advisors, L.P.*
Loomis Sayles Avanti
Growth TNE Advisers, Inc. Loomis, Sayles & Company, L.P.*
Loomis Sayles Small Cap TNE Advisers, Inc. Loomis, Sayles & Company, L.P.*
Loomis Sayles Balanced TNE Advisers, Inc. Loomis, Sayles & Company, L.P.*
Morgan Stanley TNE Advisers, Inc. Morgan Stanley Asset Management Inc.
International Magnum
Equity Series
Davis Venture Value TNE Advisers, Inc. Davis Selected Advisers, L.P.(a)
Alger Equity Growth TNE Advisers, Inc. Fred Alger Management, Inc.
Salomon Brothers U.S.
Government TNE Advisers, Inc. Salomon Brothers Asset Management Inc
Salomon Brothers TNE Advisers, Inc. Salomon Brothers Asset Management Inc(b)
Strategic Bond
Opportunities
</TABLE>
- --------
* An affiliate of NELICO
(a) Davis Selected Advisers, L.P. may also delegate any of its
responsibilities to Davis Selected Advisers-NY, Inc. a wholly-owned
subsidiary of Davis Selected Advisers, L.P.
(b) In connection with Solomon Brothers Asset Management Inc's service as
subadviser to the Strategic Bond Opportunities Series, Solomon Brothers
Asset Management Inc's London based affiliate, Solomon Brothers Asset
Management Limited provides certain subadvisory services to Solomon
Brothers Asset Management Inc.
Effective May 1, 1997 the Draycott International Equity Series was renamed the
Morgan Stanley International Magnum Equity Series and a new Sub-Advisory
agreement between TNE Advisers, Inc. and Morgan Stanley Asset Management Inc.
went into effect replacing the prior agreement between TNE Advisers, Inc. and
Draycott Partners Ltd.
F-8
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
On January 28, 1998 the Zenith Fund's Board of Trustees approved new advisory
and subadvisory agreements (the "New Agreements") relating to the Loomis
Sayles Avanti Growth Series between TNE Advisers, Inc. and the Zenith Fund on
behalf of the Series, and between TNE Advisers, Inc. and Goldman Sachs Asset
Management ("Goldman Sachs"), respectively. The New Agreements, which are
subject to shareholder approval, are expected to become effective on or about
May 1, 1998. Under the New Agreements, Goldman Sachs would become the
subadvisor of the Series, succeeding Loomis Sayles & Company, L.P., and would
become responsible for the day-to-day management of the Series' investment
operations under the oversight of TNE Advisers, Inc. Accordingly, the name of
the Series would be changed to the "Goldman Sachs Midcap Value Series" at the
time the New Agreements take effect. Goldman Sachs is a separate operating
division of Goldman, Sachs & Co., a privately-owned global financial services
company.
6. INVESTMENT PURCHASES AND SALES. The following table shows the aggregate
cost of Eligible Fund shares purchased and proceeds from the sales of Eligible
Fund shares for each sub-account for the year ended December 31, 1997:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Back Bay Advisors Bond Income Series $16,841,907 $ 4,349,249
Back Bay Advisors Money Market Series 48,685,335 48,970,324
Westpeak Growth and Income Series 33,233,707 7,534,134
Loomis Sayles Avanti Growth Series 20,301,291 5,362,826
Loomis Sayles Small Cap Series 37,778,826 6,600,835
Loomis Sayles Balanced Series 37,134,670 8,695,188
Morgan Stanley International Magnum Equity Series 17,187,373 5,848,475
Davis Venture Value Series 55,094,472 10,493,506
Alger Equity Growth Series 39,728,632 8,594,154
Salomon Brothers U.S. Government Series 6,432,752 2,290,291
Salomon Brothers Strategic Bond Opportunities
Series 26,804,707 7,095,236
</TABLE>
7. ANNUITY RESERVES. Annuity reserves are computed for currently payable
contracts according to the 1983-a Mortality Tables. The assumed interest rate
may be 0%, 3.5% or 5% as elected by the annuitant and as regulated by the laws
of the respective states. Adjustments to annuity reserves are reimbursed to or
from NELICO. For contracts payable on or after January 1, 1998 annuity
reserves will be computed according to the Annuity 2000 Mortality Tables.
F-9
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
OF
NEW ENGLAND LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--CONTINUED
8. INCREASE (DECREASES) IN ACCUMULATION UNITS. A summary of units outstanding
for variable annuity contracts for the year ended December 31, 1997:
<TABLE>
<CAPTION>
BOND MONEY AVANTI GROWTH AND SMALL U.S.
INCOME MARKET GROWTH INCOME CAP GOVERNMENT
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
--------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Units Outstanding
12/31/96................ 4,587,906.5882 9,257,297.7125 9,082,531.9506 9,527,396.1743 12,156,548.3743 5,511,551.9895
Units Purchased......... 3,916,068.5631 14,956,260.5578 8,525,396.2900 11,653,129.7279 16,140,136.9031 3,969,281.2671
Units Redeemed.......... 636,015.0558 15,289,943.9985 1,319,345.0539 1,137,962.5425 1,397,023.7503 930,233.5378
--------------- --------------- --------------- --------------- --------------- --------------
Units Outstanding
12/31/97................ 7,867,960.0955 8,923,614.2718 16,288,583.1867 20,042,563.3597 26,899,661.5271 8,550,599.7188
=============== =============== =============== =============== =============== ==============
Unit Value 12/31/97..... 3.428788 2.036045 1.932280 2.279329 1.936137 1.242399
=============== =============== =============== =============== =============== ==============
<CAPTION>
EQUITY INTERNATIONAL VENTURE BOND
BALANCED GROWTH EQUITY VALUE OPPORTUNITIES
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Units Outstanding
12/31/96................ 17,355,626.7971 18,546,947.2516 12,897,988.9760 17,782,791.6006 11,146,314.4768
Units Purchased......... 19,437,082.4699 15,656,144.5554 11,248,885.8471 23,868,861.2391 14,867,651.3746
Units Redeemed.......... 2,164,765.8566 1,518,980.2309 1,579,036.1913 1,853,990.5224 1,808,834.3458
--------------- --------------- --------------- --------------- ---------------
Units Outstanding
12/31/97................ 34,627,943.4104 32,684,111.5761 22,567,838.6318 39,797,662.3173 24,205,131.5056
=============== =============== =============== =============== ===============
Unit Value 12/31/97..... 1.622453 1.940577 1.099535 2.163463 1.432601
=============== =============== =============== =============== ===============
</TABLE>
F-10
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of New England
Life Insurance Company (formerly New England Variable Life Insurance Company)
and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the New England Life Insurance
Company and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
In 1996, as discussed in Note 1 to the financial statements, the Company (1)
adopted all applicable generally accepted accounting principles as required
for mutual life insurance enterprises (or wholly-owned stock life insurance
company subsidiaries of mutual life insurance enterprises) by Interpretation
No. 40, Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises, and Statement of Financial Accounting
Standards No. 120, Accounting and Reporting by Mutual Life Insurance
Enterprises and by Insurance Enterprises for Certain Long Duration
Participating Policies; and (2) reflected the effects of the changes in
corporate organizations.
The consolidated statements of earnings, equity, and cash flows for the period
ended December 31, 1995 present the combination of the individual financial
statements of New England Variable Life Insurance Company and other entities
listed in Note 1. Such individual financial statements were audited by other
auditors before the applicable effects of the changes described in the
paragraph above and their reports on the financial statements of each of the
insurance entities listed in Note 1 expressed an adverse opinion as to the
conformity with generally accepted accounting principles and an unqualified
opinion as to conformity with statutory principles and their reports on the
financial statements of each of the other entities expressed an unqualified
opinion. We have audited the adjustments that were applied to restate the 1995
financial statements to reflect the effects of the changes for the adoption of
generally accepted accounting principles and the changes in corporate
organization as described in Note 1. In our opinion, such adjustments are
appropriate and have been properly applied.
DELOITTE & TOUCHE LLP
February 17, 1998
Boston, Massachusetts
N-1
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 AND 1996 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES 1997 1996
----- ---------- ----------
<S> <C> <C> <C>
ASSETS
Investments:
Fixed Maturities:
Available for Sale, at Estimated Fair Value...... 2,11 $ 734,391 $ 524,285
Held to Maturity, at Amortized Cost.............. 2 -- 29,666
Equity Securities................................. 2,11 9,399 --
Policy Loans...................................... 11 104,783 76,263
Real Estate....................................... 2,757 1,702
Short-Term Investments............................ 11 27,944 156,560
Other Invested Assets............................. 24,349 12,956
---------- ----------
Total Investments.............................. 903,623 801,432
Cash and Cash Equivalents.......................... 11 74,148 49,147
Deferred Policy Acquisition Costs.................. 565,769 434,637
Accrued Investment Income.......................... 18,712 13,713
Premiums and Other Receivables..................... 4 63,036 5,941
Other Assets....................................... 62,326 95,106
Separate Account Assets............................ 1,988,225 1,206,959
---------- ----------
TOTAL ASSETS................................... $3,675,839 $2,606,935
========== ==========
LIABILITIES AND EQUITY
LIABILITIES
Future Policy Benefits............................. 4 $ 500,429 $ 464,889
Policyholder Account Balances...................... 4,11 240,411 181,594
Other Policyholder Funds........................... 11 8,380 2,071
Policyholder Dividends Payable..................... 14,719 9,018
Short and Long-Term Debt........................... 8,11 85,981 84,057
Income Taxes Payable: 5
Current........................................... 9,102 6,272
Deferred.......................................... 42,066 39,463
Due to Parent...................................... 107,337 40,225
Other Liabilities.................................. 45,647 21,965
Separate Account Liabilities....................... 1,988,225 1,206,959
---------- ----------
TOTAL LIABILITIES.............................. 3,042,297 2,056,513
---------- ----------
Commitments and Contingencies (Notes 2, 4, 8 and 9)
EQUITY
Common Stock, $125.00 par value; 50,000 shares
authorized, 20,000 shares issued and outstanding.. 2,500 2,500
Contributed Capital................................ 545,477 497,946
Retained Earnings.................................. 68,218 46,249
Net Unrealized Investment Gains.................... 3 17,347 3,727
---------- ----------
TOTAL EQUITY................................... 12 633,542 550,422
---------- ----------
TOTAL LIABILITIES AND EQUITY....................... $3,675,839 $2,606,935
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
N-2
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES 1997 1996 1995
----- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Premiums...................................... 4 $ 63,616 $ 37,410 $ 38,566
Universal Life and Investment-Type Product
Policy Fee Income............................ 145,157 101,756 79,371
Net Investment Income......................... 3 61,059 49,628 41,815
Investment Gains (Losses), Net................ 3 890 8,822 10,514
Commissions, Fees and Other Income............ 28,302 44,930 34,555
-------- -------- --------
TOTAL REVENUES.............................. 299,024 242,546 204,821
-------- -------- --------
BENEFITS AND OTHER DEDUCTIONS
Policyholder Benefits......................... 4 100,180 65,520 55,810
Interest Credited to Policyholder Account
Balances..................................... 6,220 5,558 2,564
Policyholder Dividends........................ 21,325 14,830 13,954
Other Operating Costs and Expenses............ 10 144,342 143,886 99,424
-------- -------- --------
TOTAL BENEFITS AND OTHER DEDUCTIONS......... 272,067 229,794 171,752
-------- -------- --------
Earnings from Operations before Income Taxes.. 26,957 12,752 33,069
Income Taxes.................................. 5 4,988 3,051 12,303
-------- -------- --------
NET EARNINGS.................................. $ 21,969 $ 9,701 $ 20,766
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
N-3
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EQUITY
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK & NET UNREALIZED
CONTRIBUTED RETAINED INVESTMENT
CAPITAL EARNINGS GAINS (LOSSES) TOTAL
----------- -------- -------------- --------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994.... 228,057 15,782 (670) 243,169
Net Earnings..................... 20,766 20,766
Change in Net Unrealized Invest-
ment Gains (Losses)............. 27,026 27,026
Contributed Capital.............. 63,543 63,543
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1995.... 291,600 36,548 26,356 354,504
Net Earnings..................... 9,701 9,701
Change in Net Unrealized Invest-
ment Gains (Losses)............. (22,629) (22,629)
Contributed Capital.............. 208,846 208,846
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1996.... 500,446 46,249 3,727 550,422
Net Earnings..................... 21,969 21,969
Change in Net Unrealized Invest-
ment Gains (Losses)............. 13,620 13,620
Contributed Capital.............. 47,531 47,531
-------- ------- -------- --------
BALANCES AT DECEMBER 31, 1997.... $547,977 $68,218 $ 17,347 $633,542
======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
N-4
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES......... $(121,838) $ (85,674) $(111,834)
--------- --------- ---------
Cash Flows from Investing Activities:
Sales, Maturities and Repayments of:
Available for Sale Fixed Maturities.......... 178,003 276,420 538,297
Held to Maturity Fixed Maturities............ -- 10,519 625
Mortgage Loans on Real Estate................ -- 2,210 12
Other, Net................................... 128 -- --
Purchases of:
Available for Sale Fixed Maturities.......... (326,059) (259,713) (983,518)
Real Estate.................................. -- (480) --
Fixed Asset Property and Equipment........... (101) (3,786) --
Other Assets................................. -- (11,024) (15)
Net Change in Short-Term Investments......... 128,616 (135,731) 379,325
Net Change in Policy Loans................... (28,520) (18,052) (14,243)
Other, Net................................... 177 67 (114)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES......... (47,756) (139,570) (79,631)
--------- --------- ---------
Cash Flows from Financing Activities:
Common Stock
Capital Contributions........................ 46,681 159,162 9,515
Borrowed Money............................... (3,181) -- 25,000
Policyholder Account Balances
Deposits..................................... 244,338 482,552 281,762
Withdrawals.................................. (95,066) (364,933) (148,403)
Financial Reinsurance Receivables............ 1,823 (37,519) --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 194,595 239,262 167,874
--------- --------- ---------
Change in Cash and Cash Equivalents........... 25,001 14,018 (23,591)
Cash and Cash Equivalents, Beginning of Year.. 49,147 35,129 58,720
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR........ $ 74,148 $ 49,147 $ 35,129
========= ========= =========
Supplemental Cash Flow Information:
Interest Paid................................ $ 1,495 $ 1,523 $ 1,277
========= ========= =========
Income Taxes Paid............................ $ 5,470 $ 4,721 $ 6,765
========= ========= =========
NET EARNINGS.................................. 21,969 9,701 20,766
Adjustments to Reconcile Net Earnings to Net
Cash Provided by (Used in) Operating
Activities:
Change in Deferred Policy Acquisition Costs,
Net......................................... (140,578) (68,626) (45,823)
Change in Accrued Investment Income.......... (4,999) 909 (11,507)
Change in Premiums and Other Receivables..... (57,095) 4,370 (4,073)
Gains from Sales of Investments, Net......... (890) (15,979) (21,980)
Depreciation and Amortization Expenses....... 10,085 4,120 5,725
Interest Credited to Policyholder Account
Balances.................................... 6,220 5,558 2,565
Universal Life and Investment-Type Product
Policy Fee Income........................... -- (101,756) (79,371)
Change in Future Policy Benefits............. 35,540 18,202 14,539
Change in Other Policyholder Funds........... 6,309 (283) 1,789
Change in Policyholder Dividends Payable..... 5,701 1,671 114
Change in Income Taxes Payable............... 1,674 (6,634) 10,211
Other, Net................................... (5,774) 63,073 (4,789)
--------- --------- ---------
NET CASH USED BY OPERATING ACTIVITIES......... $(121,838) $ (85,674) $(111,834)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
N-5
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
New England Life Insurance Company and its subsidiaries (the Company) is a
wholly-owned stock life insurance subsidiary of Metropolitan Life Insurance
Company (MetLife). The Company principally provides variable life insurance
and variable annuity products through a network of general agencies located
throughout the United States. The Company also provides participating
traditional life insurance, annuity contracts, pension products, as well as,
group life, group medical, and group disability coverage.
Prior to the merger of New England Mutual Life Insurance Company (NEMLICO)
with MetLife on August 30, 1996, New England Life Insurance Company (NELICO),
formerly known as New England Variable Life Insurance Company (NEVLICO) was a
subsidiary of NEMLICO. NEMLICO was merged directly into MetLife and ceased to
exist as a separate mutual life insurance company. In conjunction with the
merger, NEVLICO became a subsidiary of MetLife and changed its name to New
England Life Insurance Company. NELICO has continued after the merger to
conduct its existing businesses and is also administering the business
activities of the former parent NEMLICO. (Note 13)
NELICO is headquartered in Boston, Massachusetts and became a Massachusetts
chartered company through a legal process known as redomestication. Prior to
the merger, NEVLICO was organized under Delaware law. The capital structure of
NELICO continues in the same form subsequent to the merger with common stock
authorized at 50,000 shares and 20,000 shares issued and outstanding with a
par value of $125 per share. MetLife made an additional statutory capital
contribution to NELICO at the merger date totaling $208,846 consisting of
$129,254 of cash and $79,592 of bonds, real estate, mortgages, common stock of
affiliates and furniture and equipment. Prior to the merger, NELICO received a
capital contribution from NEMLICO for $20,000 in cash. MetLife made an
additional statutory capital contribution to NELICO of $50,000 in cash during
1997, which was offset by $2,469 of returned capital.
Certain companies that were subsidiaries of NEMLICO became subsidiaries of
NELICO as of the merger. The principal subsidiaries of which NELICO owns 100%
of the outstanding common stock are: Exeter Reassurance Company, Ltd., New
England Pension and Annuity Company, and Newbury Insurance Company, Limited,
for insurance operations and New England Securities Corporation and TNE
Advisers, Inc. for other operations. On February 28, 1997, NELICO created and
became the sole owner of New England Life Holdings, Inc. which was established
as a holding company for the non-insurance operations of the Company,
principally, New England Securities and TNE Advisers, Inc. The principal
business activities of the subsidiaries are disclosed below.
Exeter Reassurance Company, Ltd., (Exeter) was incorporated in Bermuda on
November 15, 1994, and registered as an insurer under The Insurance Act 1978
(Bermuda). Exeter engages in financial reinsurance of life insurance and
annuity policies.
New England Pension and Annuity Company (NEPA) was incorporated under the laws
of the State of Delaware on September 12, 1980. NEPA holds licenses in 20
states, but is currently not actively engaged in the sale or distribution of
insurance products.
New England Securities Corporation (NES), a National Association of Securities
Dealers (NASD) registered broker/dealer, conducts business as a wholesale
distributor of investment products through the sales force of NELICO.
Established in 1968, NES offers a range of investment products including
mutual funds, investment partnerships, and individual securities. In 1994, NES
became a Registered Investment Advisor with the Securities and Exchange
Commission (SEC) and now offers individually managed portfolios. NES is the
national distributor for variable annuity and variable life products issued by
NELICO. NES is the sole owner of Hereford Insurance Agency, Inc.
N-6
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
Newbury Insurance Company, Limited (Newbury) was incorporated in Bermuda on
May 1, 1987, and is registered as a Class 2 insurer under The Insurance Act
1978 (Bermuda). Newbury provides professional liability and personal injury
coverage to the agents of NELICO through a facultative reinsurance agreement
with Lexington Insurance Company. The policy applies to claims made during the
policy period or during the discovery period with limits of $1,000 each claim,
$1,000 annual aggregate each insured, $3,500, $3,500 and $3,000 annual
aggregate all insured in 1997, 1996 and 1995 respectively.
TNE Advisers, Inc. was incorporated on August 26, 1994, and is registered as
an investment adviser with the SEC, under the Investment Advisers Act of 1940.
TNE Advisers, Inc. was organized to serve as an investment adviser to certain
mutual funds of the New England Zenith Fund and does not intend to engage in
any business activities other than providing investment management and
administrative services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP), and include
the accounts of NELICO and its subsidiaries in which NELICO has control and a
majority economic interest. The consolidated financial statements have been
prepared as though the current reporting entity had always existed.
Significant intercompany transactions and balances have been eliminated in
consolidation.
Prior to 1996, NELICO, as a wholly owned stock life insurance subsidiary of a
mutual life insurance company, prepared its financial statements in conformity
with accounting practices prescribed or permitted by the Insurance Department
of the State of Delaware (statutory financial statements), which accounting
practices were considered to be GAAP. In 1996, NELICO adopted Interpretation
No. 40, APPLICABILITY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES TO MUTUAL
LIFE INSURANCE AND OTHER ENTERPRISES (the "Interpretation") and Statement of
Financial Accounting Standards (SFAS) No. 120, ACCOUNTING AND REPORTING BY
MUTUAL LIFE INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN
LONG DURATION PARTICIPATING POLICIES (the "Standard"), of the Financial
Accounting Standards Board (FASB). The Interpretation and Standard required
mutual life insurance companies to adopt all standards promulgated by the FASB
in their general purpose financial statements. The cumulative effect of such
adoption of all applicable authoritative GAAP pronouncements as of January 1,
1994 was reflected in the financial statements of NELICO as an adjustment of
equity at January 1, 1994.
As of December 31, 1993, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", which expanded the use of fair value accounting for those
securities that a company does not have positive intent and ability to hold to
maturity. Implementation of SFAS No. 115 increased consolidated equity by
$105, net of deferred income taxes and adjustments of deferred policy
acquisition costs and future policy benefits.
Effective July 1, 1997, management realigned its fixed maturity investment
classifications and transferred all securities classified as held to maturity
to available for sale. As a result, consolidated equity at July 1, 1997
increased by $798, excluding the effects of deferred income taxes, amounts
attributable to participating pension contractholders and adjustments of
deferred policy acquisition costs and future policy benefits.
N-7
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
VALUATION OF INVESTMENTS
As mentioned above, during 1997 management reclassified all of the company's
fixed maturity securities to available for sale. Accordingly, as of December
31, all of the company's investment securities are carried at estimated fair
value. Prior to this reclassification, certain fixed maturity securities
(principally bonds) were carried at amortized cost. Unrealized investment
gains and losses on investment securities are recorded directly as a separate
component of equity net of related deferred income taxes and adjustments of
deferred policy acquisition costs and future policy benefits. Costs of
securities are adjusted for impairments in value deemed to be other than
temporary. Such adjustments are recorded as realized investment losses. All
securities transactions are recorded on a trade date basis.
Real estate is considered held for sale by management and is reported at the
lower of cost or estimated fair market value less allowances for the estimated
cost of sales. No impairment allowance is required on the property.
Policy loans are stated at unpaid principal balances which approximates fair
value.
Short-term investments are stated at amortized cost which approximates fair
value.
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. These are carried at cost, which approximates fair value.
INVESTMENT RESULTS
Realized investment gains and losses are determined by specific identification
and are presented as a component of revenues. Valuation allowances are netted
against asset categories to which they apply and provisions for losses for
investments are included in investment gains and losses.
PROPERTY AND EQUIPMENT
Property and equipment and leasehold improvements are included in other assets
and are stated at cost, less accumulated depreciation and amortization.
Depreciation is provided using the straight line method over the estimated
useful lives of the assets which generally range from 4 to 15 years or the
term of the lease, if shorter. Amortization of leasehold improvements is
provided using the straight line method over the lesser of the term of the
leases or the estimated useful life of the improvements.
Accumulated depreciation and amortization on property and equipment and
leasehold improvements was $13,203, and $3,118 at December 31, 1997 and 1996,
respectively. Related depreciation and amortization expense was $10,085,
$3,118, and $0 for the years ended December 31, 1997, 1996 and 1995,
respectively.
RECOGNITION OF INCOME AND EXPENSES
Premiums from traditional life and annuity policies with life contingencies
are generally recognized as income when due. Benefits and expenses are matched
with such income so as to result in the recognition of profits over the life
of the contract. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
Reinsurance allowances for individual non-medical health contracts are
recognized as income when due.
Premiums from variable life, universal life and investment-type contracts are
reported as deposits to policyholder account balances. Revenues from these
contracts consist of amounts assessed during the period against policyholder
account balances for mortality charges, policy administration charges and
surrender charges. Policy benefits and claims that are charged to expense
include benefit claims incurred in the period in excess of related
policyholder account balances and interest credited to policyholder account
balances.
N-8
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions, agency and
policy issue expenses, all of which vary with and are primarily related to the
production of new business, have been deferred. Deferred policy acquisition
costs are subject to recoverability testing at the time of policy issue and
loss recognition testing at the end of each accounting period.
Deferred policy acquisition costs are amortized over a period up to 40 years
for traditional life, variable life, universal life products and investment-
type products as a constant percentage of estimated gross margins or profits
arising principally from surrender charges and interest, mortality and expense
margins based on historical and anticipated future experience, updated
regularly. The effects of revisions to experience on previous amortization of
deferred policy acquisition costs are reflected in earnings in the period
estimated gross margins or profits are revised.
For non-medical health insurance contracts, deferred policy acquisition costs
are amortized over the life of the contracts (generally between 10 and 30
years) in proportion to anticipated reinsurance allowances.
FUTURE POLICY BENEFITS AND POLICYHOLDER ACCOUNT BALANCES
Future policy benefit liabilities for participating traditional life insurance
policies are equal to the aggregate of net level premium reserve for death and
endowment policy benefits and the liability for terminal dividends. The net
level premium reserve is calculated based on the dividend fund interest rate
and mortality rates guaranteed in calculating the cash surrender values
described in such contracts. Interest rates used in establishing future policy
benefit liabilities range from 4 percent to 5 percent for life insurance
policies.
Policyholder account balances for variable life, universal life and
investment-type contracts are equal to the policy account values. The policy
account values represent an accumulation of gross premium payments plus
credited interest less expense and mortality charges and withdrawals.
Benefit liabilities for non-medical health insurance are calculated as the net
GAAP liability plus the unamortized deferred acquisition costs. Benefit
liabilities for disabled lives are estimated using the present value of
benefits method and experience assumptions as to claim terminations, expenses
and interest.
INCOME TAXES
NELICO and its eligible life insurance subsidiary, Exeter Reassurance Company,
Ltd., files a consolidated federal income tax return. Separate income tax
returns as required are filed for the other life insurance and nonlife
insurance direct subsidiaries. The future tax consequences of temporary
differences between financial reporting and tax basis of assets and
liabilities are measured as of the balance sheet dates and are recorded as
deferred income tax assets or liabilities.
SEPARATE ACCOUNT OPERATIONS
Separate Accounts are established in conformity with the state insurance laws
and are generally not chargeable with liabilities that arise from any other
business of the Company. Separate Account assets are subject to general
account claims only to the extent the value of such assets exceed the Separate
Account liabilities.
Investments held in the Separate Accounts (stated at estimated fair market
value) and liabilities of the Separate Accounts (including participants'
corresponding equity in the Separate Accounts) are reported separately as
assets and liabilities. Deposits to Separate Accounts are reported as
increases in Separate Account liabilities and are not reported in revenues.
Mortality, policy administration and surrender charges to all Separate
Accounts are included in revenues.
N-9
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
POLICYHOLDER DIVIDENDS
The amount of policyholder dividends to be paid is determined annually by the
Board of Directors. The aggregate amount of policyholder dividends is related
to actual interest, mortality, morbidity and expense experience for the year
and management's judgment as to the appropriate level of statutory surplus to
be retained by the Company.
CONSOLIDATED STATEMENTS OF CASH FLOWS--NON CASH TRANSACTIONS
For the years ended December 31, 1997, 1996 and 1995, the Company received
capital contributions in the form of transfer of assets of $0, $79,592 and
$54,028, respectively.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
The FASB has issued SFAS No. 130 REPORTING COMPREHENSIVE INCOME which
establishes standards for reporting and presentation of comprehensive income
and its components. Comprehensive income (loss) was $35,589, $(12,928), and
$47,792 in 1997, 1996, and 1995, respectively. Consolidated statements of
comprehensive income, which will be required in 1998, have not been presented
as the Company has not determined the individual amounts to be displayed in
such statements.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform to
the 1997 presentation.
N-10
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
2. INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gain (loss) and estimated fair value of
fixed securities and equity securities, by category, are shown below.
AVAILABLE FOR SALE SECURITIES
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- -------- ------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed Maturities:
U. S. Treasury Securities and
obligations of U. S. government
corporations and agencies............. $ 12,105 $ 101 $ -- $ 12,206
Foreign governments.................... 2,316 67 -- 2,383
Corporate.............................. 620,916 41,564 3,308 659,172
Mortgage-backed securities............. 57,348 3,282 -- 60,630
-------- -------- ------- --------
Total Fixed Maturities............... $692,685 $ 45,014 $ 3,308 $734,391
======== ======== ======= ========
Equity Securities:
Common stocks.......................... 9,424 216 241 9,399
-------- -------- ------- --------
Total Equity Securities.............. $ 9,424 $ 216 $ 241 $ 9,399
======== ======== ======= ========
AVAILABLE FOR SALE SECURITIES
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- -------- ------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Fixed Maturities:
U. S. Treasury Securities and
obligations of U. S. government
corporations and agencies............. $ 5,465 $ 47 $ 25 $ 5,487
Foreign governments.................... 1,577 1 57 1,521
Corporate.............................. 505,683 18,637 7,093 517,227
Mortgage-backed securities............. 49 1 -- 50
-------- -------- ------- --------
Total Fixed Maturities............... $512,774 $ 18,686 $ 7,175 $524,285
======== ======== ======= ========
HELD TO MATURITY SECURITIES
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- -------- ------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Fixed Maturities:
U. S. Treasury Securities and
obligations of U. S. government
corporations and agencies............. $ 7,299 $ 51 $ 6 $ 7,344
States and political subdivisions...... 480 38 -- 518
Corporate.............................. 21,887 860 99 22,648
-------- -------- ------- --------
Total Fixed Maturities............... $ 29,666 $ 949 $ 105 $ 30,510
======== ======== ======= ========
</TABLE>
N-11
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
Included in net unrealized investment gains (losses) are unrealized gains on
foreign currency investments as well as unrealized gains on the associated
forward foreign exchange contracts. Unrealized investment gains (losses)
consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net unrealized gains on investments................................ $281 $ 8
Unrealized gains (losses) on the maturity of forward contracts..... 14 14
---- ---
$295 $22
==== ===
</TABLE>
The amortized cost and estimated fair value of bonds classified as available
for sale, by contractual maturity, at December 31, 1997 are shown below.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less................................. $ 5,729 $ 5,723
Due after one year through five years................... 61,395 62,503
Due after five years through ten years.................. 155,795 157,820
Due after ten years..................................... 412,418 447,715
-------- --------
Subtotal.............................................. 635,337 673,761
Mortgage-backed securities.............................. 57,348 60,630
-------- --------
Total................................................. $692,685 $734,391
======== ========
</TABLE>
Bonds not due at a single maturity date have been included in the above tables
in the year of final maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties.
ASSETS HELD IN TRUST FOR THE BENEFIT OF OTHER PARTIES
Exeter has deposited in a trust for the benefit of MetLife certain assets for
the purpose of allowing MetLife to record a reserve credit as permitted by
regulations of the State of New York. Under the terms of the Trust Agreement
MetLife enjoys broad powers to withdraw funds from the trust for the payment
of policyholder claims incurred by Exeter under its reinsurance treaty and to
direct the investment of funds held in the trust. The Trust Agreement limits
the types of investments that may be held in trust to cash and certificates of
deposit, U.S. Government bonds and notes and publicly traded securities of
U.S. companies having a National Association of Insurance Commissioners (NAIC)
rating of 1. At December 31, 1997 the trust held $516,491 of bonds and short-
term investments, and at December 31, 1996, the trust held $787 of cash and
$468,847 of bonds and short-term investments.
ASSETS ON DEPOSIT
As of December 31, 1997 and 1996, the Company had assets on deposit with
regulatory agencies of $7,020 and $5,884, respectively.
N-12
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
3. NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Fixed maturities................................. $50,348 $44,630 $39,264
Equity securities................................ 4,915 -- --
Mortgage loans on real estate.................... -- 110 234
Real estate...................................... 815 55 --
Policy loans..................................... 5,081 3,734 2,831
Cash, cash equivalents and short-term
investments..................................... 4,160 3,656 1,174
Other investment income.......................... 591 38 --
------- ------- -------
Gross investment income.......................... 65,910 52,223 43,503
Investment expenses.............................. (4,851) (2,595) (1,688)
------- ------- -------
Net Investment income............................ $61,059 $49,628 $41,815
======= ======= =======
</TABLE>
Investment gains (losses) are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Fixed maturities................................... $ (774) $15,467 $21,981
Other.............................................. 1,032 512 (1)
------ ------- -------
Subtotal......................................... 258 15,979 21,980
Investment gains (losses) related to accelerated
amortization of deferred
policy acquisition costs.......................... (632) 7,157 11,466
------ ------- -------
Investment gains (losses), net..................... $ 890 $ 8,822 $10,514
====== ======= =======
</TABLE>
Proceeds from the sales of bonds classified as available for sale during 1997,
1996 and 1995 were $143,107, $275,008 and $518,417 respectively. During 1997,
1996 and 1995, respectively, gross gains of $1,846, $19,109 and $22,558, and
gross losses of $1,489, $3,878, and $577 were realized on those sales.
Proceeds from the call of direct issue fixed maturities classified as held to
maturity during 1997, 1996 and 1995 were $0, $5,291 and $0, respectively.
During 1997, 1996 and 1995, respectively, gross gains of $0, $236 and $0, and
gross losses of $0, $0 and $0 were realized due to prepayment premiums
received. In 1997 the Company transferred all fixed maturities classified as
held to maturity to available for sale.
N-13
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
The net unrealized investment gains (losses), which are included in the
consolidated balance sheets as a component of equity and the changes for the
corresponding years are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Year ended December 31
Balance, beginning of year................... $ 3,727 $ 26,356 $ (670)
Change in unrealized investment gains
(losses).................................. 30,207 (46,850) 58,947
Change in unrealized investment gains
(losses) attributable to:
Deferred policy acquisition cost
allowances.............................. (9,446) 12,211 (17,884)
Deferred income tax (expense) benefit.... (7,141) 12,010 (14,037)
-------- -------- --------
Balance, end of year......................... $ 17,347 $ 3,727 $ 26,356
======== ======== ========
December 31
Balance, end of year, comprised of:
Unrealized investment gains (losses) on:
Fixed maturities......................... $ 41,706 $ 11,525 $ 58,369
Other.................................... 22 (4) 2
-------- -------- --------
41,728 11,521 58,371
Amounts of unrealized investment gains
(losses) attributable to:
Deferred policy acquisition cost
allowances................................ (15,202) (5,756) (17,967)
Deferred income tax (expense) benefit...... (9,179) (2,038) (14,048)
-------- -------- --------
Balance, end of year......................... $ 17,347 $ 3,727 $ 26,356
======== ======== ========
</TABLE>
Net unrealized investment gains at December 31, 1997, before deferred Federal
income tax, reflects gross unrealized gains of $45,014 and gross unrealized
losses of $3,308.
4. REINSURANCE AND OTHER INSURANCE TRANSACTIONS
In the normal course of business, the Company assumes and cedes reinsurance
with other insurance companies. The accompanying consolidated statements of
earnings are presented net of reinsurance.
The effect of reinsurance on premiums earned is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Direct premiums................................ $ 30,975 $ 2,682 $ 2,794
Reinsurance assumed............................ 62,315 67,483 69,330
Reinsurance ceded.............................. (29,674) (32,755) (33,558)
-------- -------- --------
Net premiums earned............................ $ 63,616 $ 37,410 $ 38,566
======== ======== ========
</TABLE>
N-14
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
Policyholder benefits in the accompanying consolidated statements of earnings
are presented net of reinsurance recoveries of $55,445, $23,962 and $22,577
for the years ended December 31, 1997, 1996 and 1995, respectively. Premiums
and other receivables in the accompanying consolidated balance sheets include
reinsurance recoveries of $1,489 and $200 at December 31, 1997 and 1996,
respectively.
A contingent liability exists with respect to reinsurance ceded should the
reinsurers be unable to meet their obligations.
5. INCOME TAXES
Income tax expense for U.S. operations has been calculated in accordance with
the provisions of the Internal Revenue Code, as amended (the "Code").
NELICO and its eligible life insurance subsidiary, Exeter Reassurance Company,
Ltd., files a consolidated federal income tax return. Separate income tax
returns as required are filed for the other life insurance and nonlife
insurance direct subsidiaries. The Company uses the liability method of
accounting for income taxes. Income tax provisions are based on income
reported for financial statement purposes. Deferred income taxes arise from
the recognition of temporary differences between income determined for
financial reporting purposes and income tax purposes.
A summary of income tax expense (benefit) in the consolidated statements of
earnings is shown below:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
1997
Federal............................................ $8,473 $(3,772) $ 4,701
State and Local.................................... 316 (29) 287
------ ------- -------
Total............................................ $8,789 $(3,801) $ 4,988
====== ======= =======
1996
Federal............................................ $5,333 $(1,531) $ 3,802
State and Local.................................... -- (751) (751)
------ ------- -------
Total............................................ $5,333 $(2,282) $ 3,051
====== ======= =======
1995
Federal............................................ $5,504 $ 6,355 $11,859
State and Local.................................... -- 444 444
------ ------- -------
Total.......................................... $5,504 $ 6,799 $12,303
====== ======= =======
</TABLE>
Reconciliations of the differences between income taxes of operations computed
at the federal statutory tax rates and consolidated provisions for income
taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income before taxes.............................. $26,957 $12,752 $33,069
Income tax rate.................................. 35% 35% 35%
------- ------- -------
Expected income tax expense at federal statutory
income tax rate................................. 9,435 4,463 11,574
Tax effect of:
Change in valuation allowance.................. -- (13,948) (413)
NOL benefit write-off.......................... -- 13,012 --
State and local income taxes................... (1,013) (488) 289
Other, net..................................... (3,434) 12 853
------- ------- -------
Income Tax Expense............................... $ 4,988 $ 3,051 $12,303
======= ======= =======
</TABLE>
N-15
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
The net deferred tax liabilities recorded represents the net temporary
differences between the tax bases of assets and liabilities and their amounts
for financial reporting. The components of the net deferred tax liabilities at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Policyholder liabilities............................ $ 63,723 $ 83,304
Net operating loss carryforward..................... -- 12,548
Other............................................... 81,988 14,690
--------- ---------
Total gross assets................................ 145,711 110,542
--------- ---------
Deferred tax liabilities:
Investments......................................... (2,456) (2,526)
Deferred policy acquisition costs................... (168,270) (132,965)
Net unrealized capital gains........................ (9,179) (2,038)
Other............................................... (7,872) (12,476)
--------- ---------
Total gross liabilities........................... (187,777) (150,005)
--------- ---------
Net deferred tax liability............................ $ (42,066) $ (39,463)
========= =========
</TABLE>
The sources of the deferred tax expense (benefit) and their tax effects are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Policyholder liabilities....................... $(23,759) $(17,818) $(4,110)
Net operating loss carryforward................ 12,548 464 --
Investments.................................... 1,319 -- --
Deferred policy acquisition costs.............. 33,621 21,828 13,878
Other, net..................................... (27,530) (6,756) (2,969)
-------- -------- -------
Total........................................ $ (3,801) $ (2,282) $ 6,799
======== ======== =======
</TABLE>
6. EMPLOYEE BENEFIT PLANS
Prior to the merger, substantially all employees were employed by NEMLICO and
were covered under the Home Office Retirement Plan and related Select
Employees' Supplemental Retirement Plan (collectively referred to as the
Plans). Subsequent to the merger substantially all of the employees became
employees of the Company and continued to be covered by the Plans, which
became the Plans of the Company. Under the Plans retirement benefits are based
primarily on years of service and the employee's average salary. The Company's
funding policy is to contribute annually an amount that can be deducted for
federal income tax purposes using a different actuarial cost method and
different assumptions from those used for financial reporting purposes. The
Company's net pension cost charged to income in 1997, 1996, and 1995 was $277,
$159, and $150, respectively, which represents the Company's allocation of the
total net periodic pension cost of the Plans as shown below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost................................... $ 5,310 $ 5,761 $ 4,797
Interest cost on projected benefit obligation.. 13,958 12,489 11,012
Actual return on assets........................ (22,250) (15,468) (21,221)
Net amortization and deferrals................. 11,092 6,009 13,059
-------- -------- --------
Net periodic pension cost.................... $ 8,110 $ 8,791 $ 7,647
======== ======== ========
</TABLE>
N-16
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
The assumed long-term rate of return on assets used in determining the net
periodic pension cost was 8.5 percent.
The following information for the Plans includes amounts relating to NEMLICO.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of accumulated plan benefits.... $143,681 $133,000
======== ========
Projected benefit obligation............................ 193,652 182,000
======== ========
Net assets available for plan benefits.................. 150,820 130,992
======== ========
Unrecognized prior service cost......................... 2,844 224
======== ========
Unrecognized net (loss) from past experience difference
from that assumed...................................... (18,936) (37,327)
======== ========
Unamortized transition gains............................ $ 5,832 $ 4,015
======== ========
</TABLE>
The weighted average discount rate was 7.75%, 7.5% and 8.0% in 1997, 1996 and
1995, respectively. The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit was 5.0% for
1997, 1996 and 1995. Assets of the Plans consist of bonds, stocks, real
estate, and insurance contracts and have an assumed long-term rate of return
of 8.75% for 1997, and 8.5% for 1996 and 1995.
OTHER POSTRETIREMENT BENEFITS
Prior to the merger, NEMLICO provided certain health care and life insurance
benefits for retired employees. Substantially all employees would have become
eligible for these benefits had they reached retirement age while working for
NEMLICO. Subsequent to the merger, these benefits are being provided by
MetLife, with respect to benefits earned prior to the merger, and the Company,
with respect to benefits earned subsequent to the merger.
As claims were incurred, the Company made contributions to the plan in 1997
and 1996 which were considered immaterial. The total contributions made to the
plan were $3,670 and $3,386, in 1997 and 1996, respectively. The following
table sets forth the plan's fiscal year end funded status:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $33,823 $28,566
Fully eligible active plan participants................... 4,487 5,482
All other actives......................................... 11,114 11,098
------- -------
Total....................................................... 49,424 45,146
plus: unrecognized net gain............................... 15,726 19,997
------- -------
Accrued postretirement benefit liability.................... $65,150 $65,143
======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
The components of net postretirement benefit cost
were:
Service cost........................................ $ 880 $ 876 $ 876
Interest cost....................................... 3,690 3,183 3,768
Amortization of gain................................ (849) (1,155) (1,043)
------ ------ ------
Net periodic postretirement benefit cost.............. $3,721 $2,904 $3,601
====== ====== ======
</TABLE>
N-17
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
Net periodic postretirement benefit costs for the years ended December 31,
1997, 1996 and 1995, includes the cost of benefits earned by active employees,
interest cost, gains and losses arising from differences between actuarial
assumptions and actual experience, and amortization of the transition
obligation. The discount rate used to determine the net periodic
postretirement benefit cost was 7.75%, 7.25% and 8.5% for 1997, 1996 and 1995,
respectively.
The discount rate used to determine the accumulated postretirement benefit
obligation was 7.75% and 7.50% as of December 31, 1997 and 1996, respectively.
The health care cost trend rate was 7.8% graded to 5.0% over 8 years for 1997,
and 8.2% graded to 5.0% over 8 years for 1996. The health care cost trend rate
assumption has a minimal impact on the amounts reported, since the Company has
capped its contributions at 200% of 1993 levels.
7. LEASES
LEASE EXPENSE
The Company has entered into various lease agreements for office space, data
processing and other equipment. Future gross minimum rental payments under
non-cancelable leases for 1998 and the succeeding four years are $13,323,
$13,057, $11,765, $10,739 and $10,468, respectively, and $95,762 thereafter.
Minimum future sub-lease rental income on these non-cancelable leases for 1998
and the succeeding four years is $3,553, $3,620, $3,600, $3,578 and $3,578,
respectively, and $15,257 thereafter.
8. DEBT
In 1995, the Company borrowed $25,000 from a bank, bearing interest at a
variable rate, equal to the greater of the bank's base rate or money market
rates plus 0.6% per annum payable monthly, 5.8% at December 31, 1997 and 5.7%
at December 31, 1996. The loan is collateralized by sales loads and surrender
charges collected on a defined block of variable life insurance policies
issued by the Company. Repayment is structured in a manner to result in
repayment over a term of five years. The carrying value of the loan
approximates its fair value of $21,965, repayments made during 1997 were
$3,181.
Exeter privately placed $75,118 aggregate principal amount, subordinated notes
payable (the "Notes"), on December 30, 1994 which are due December 30, 2004,
with no interest payments for the first five years and semiannual interest
payments thereafter. The Notes have been discounted to yield 8.45% for the
first five years and pay interest at 8.845% thereafter. The Notes are
expressly subordinated in right of payment to the insurance liabilities of
Exeter. The Notes are not subject to redemption by Exeter or through the
operation of a sinking fund prior to maturity. Proceeds of the issuance of the
Notes, net of discount, amounted to $50,000. The issue costs of the Notes of
$130 were deducted from Notes, net of discount, to arrive at net subordinated
notes payable of $49,870. The issue cost will be amortized over the life of
the Notes. The Notes are held by MetLife, and the carrying value of the loan
approximates its fair value of $64,016, repayments made during 1997 were $0.
9. CONTINGENCIES
The Company has no contingent liabilities which might materially affect the
financial position of the Company or the results of its operations. There are
no pending legal proceedings which are beyond the ordinary course of business
which could have a material financial effect.
N-18
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
10. OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Compensation costs........................... $ 58,754 $ 36,172 $ 23,630
Commissions.................................. 77,351 51,617 37,476
Debt expense................................. 6,750 6,261 5,659
Amortization of policy acquisition costs..... 17,723 22,233 21,199
Capitalization of policy acquisition costs... (157,670) (98,016) (65,850)
Rent expense, net of sub-lease income of
$719, $119 and $0........................... 4,473 3,060 1,609
Other........................................ 136,961 122,559 75,701
--------- -------- --------
Total...................................... $ 144,342 $143,886 $ 99,424
========= ======== ========
</TABLE>
11. FAIR VALUE INFORMATION
The estimated fair value amounts of financial instruments presented below have
been determined by the Company using market information available as of
December 31, 1997 and 1996 and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value for financial instruments for which there
are no available market value quotations.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
-------- ----------
<S> <C> <C>
DECEMBER 31, 1997:
ASSETS
Fixed Maturities......................................... $734,391 $734,391
Equity Securities........................................ 9,399 9,399
Policy loans............................................. 104,783 104,783
Short-term investments................................... 27,944 27,944
Cash and cash equivalents................................ 74,148 74,148
LIABILITIES
Policyholder account balances............................ 9,271 8,508
Other policyholder funds................................. 4,324 4,324
Short and long-term debt................................. 85,981 85,981
DECEMBER 31, 1996:
ASSETS
Fixed Maturities......................................... $553,951 $554,795
Policy loans............................................. 76,263 76,263
Short-term investments................................... 156,560 156,560
Cash and cash equivalents................................ 49,147 49,147
LIABILITIES
Policyholder account balances............................ 3,368 3,168
Other policyholder funds................................. 2,868 2,868
Short and long-term debt................................. 84,057 84,057
</TABLE>
N-19
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
For bonds that are publicly traded, estimated fair value was obtained from an
independent market pricing service. Publicly traded bonds represented
approximately 91% of the carrying value and estimated fair value of the total
bonds as of December 31, 1997 and 96% of the carrying value and estimated fair
value of the total bonds as of December 31, 1996. For all other bonds,
estimated fair value was determined by management, based primarily on interest
rates, maturity, credit quality and average life. Estimated fair values of
policy loans were based on discounted projected cash flows using U.S. Treasury
rates to approximate interest rates and Company experience to project patterns
of loan accrual and repayment. For cash and cash equivalents and short-term
investments, the carrying amount is a reasonable estimate of fair value.
The fair values for policyholder account balances are estimated using
discounted projected cash flows, based on interest rates being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued. Other policyholder funds include liabilities without
defined durations such as policy proceeds and dividends left with the Company.
The estimated fair value of such liabilities, which generally are of short
duration or have periodic adjustments of interest rates, approximates their
carrying value.
The estimated fair value of short and long-term debt was determined using
rates currently available to the Company for debt with similar terms and
remaining maturities.
12. STATUTORY FINANCIAL INFORMATION
The following reconciles statutory net income and statutory surplus and
reflects the corporate reorganization described in Note 1 determined in
accordance with accounting practices prescribed or permitted by insurance
regulatory authorities with net earnings and equity on a GAAP basis.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory net income (loss)................ $ (37,358) $ (46,021) $ 375
Adjustments to GAAP for life insurance
companies:
Future policy benefits and policyholders
account balances........................ (718,229) (41,174) (9,616)
Deferred policy acquisition costs........ 139,947 68,626 45,823
Deferred Federal Income taxes............ 4,009 2,283 (6,799)
Statutory interest maintenance reserve... 342 231 --
Other, net............................... 633,258 25,756 (9,017)
--------- --------- ---------
Net GAAP Earnings.......................... $ 21,969 $ 9,701 $ 20,766
========= ========= =========
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory surplus.......................... $ 307,290 $ 355,853 $ 203,374
Adjustments to GAAP for life insurance
companies:
Future policy benefits and policyholders
account balances........................ (279,510) (195,273) (154,099)
Deferred policy acquisition costs........ 565,769 434,637 353,809
Deferred Federal Income taxes............ (43,318) (40,185) (55,201)
Valuation of investments................. 56,873 11,503 58,063
Statutory interest maintenance reserve... 571 306 74
Statutory investment valuation reserves.. 8,388 3,335 373
Surplus notes............................ (64,016) (58,911) (54,210)
Receivables from reinsurance
transactions............................ 27,519 26,030 --
Other, net............................... 53,976 13,127 2,320
--------- --------- ---------
GAAP Equity................................ $ 633,542 $ 550,422 $ 354,503
========= ========= =========
</TABLE>
N-20
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
13. RELATED PARTY TRANSACTIONS
Prior to the merger NELICO operated under a service agreement with its parent
NEMLICO to receive all executive, legal, clerical and other personnel
services. Subsequent to the merger, the Company has entered into a Service
Agreement to provide all administrative, accounting, legal and similar
services to MetLife for certain administered contracts, which are life
insurance and annuity contracts issued by NEMLICO prior to the merger of
NEMLICO and MetLife and those policies and contracts defined in the Service
Agreement as Transition Policies which were sold by the Company's field force
post-merger.
The Company charged MetLife $186,757 including accruals for administrative
services on NEMLICO administered contracts for 1997. The Company charged
MetLife $88,043 including accruals for administrative services on NEMLICO
administered contracts for the period of September 1, 1996 through December
31, 1996. Prior to the merger, the Company paid $62,643 to NEMLICO for
administrative services on variable-life and variable-annuity contracts for
the period of January 1, 1996 through August 31, 1996. In 1995, the Company
paid $50,875 to NEMLICO for administrative services. These services were
charged based upon direct costs incurred. Service fees are recorded by NELICO
as a reduction in operating expenses.
In 1997, MetLife made a capital contribution to the Company of $50,000 in
cash. In 1996, MetLife made a non-cash capital contribution to the Company of
common stock of affiliated companies consisting of Exeter, NEPA, NES, Newbury,
Omega Reinsurance Corp., TNE Advisers Inc., and TNE Information Services Inc.
with a total estimated statutory fair value of $29,558. MetLife also made non-
cash capital contributions of home-office properties of $10,301, socially-
responsible investments with a book value of $11,916, furniture, equipment and
leasehold improvements of $27,816, and a cash contribution of $128,412. Prior
to the merger, NEMLICO made a cash contribution to NELICO of $20,000.
In 1995, NEMLICO made a non-cash capital contribution to NELICO of publicly-
traded debt securities and private-placement obligations with an estimated
fair value of $54,028. NELICO received cash contributions from NEMLICO of
$8,215 in 1995.
The Company entered into a lease agreement with MetLife on August 30, 1996 for
the home-office building which it occupies on 501 Boylston Street in Boston,
Massachusetts. The Company paid lease payments to MetLife of $2,340 and $780
in 1997 and 1996, respectively.
On June 21, 1996, NEMLICO purchased a mortgage from NELICO for $2,217 which
included principal of $2,204, and interest of $13.
Commissions earned by NES from sales of New England Funds (NEF) and State
Street Research (SSR) shares, subsidiaries of MetLife, for 1997 were $16,799
and $1,127, respectively. Included in accrued income at December 31, 1997,
were amounts receivable for sales-based commissions from NEF and SSR totaling
$233 and $13, respectively. In 1997, NES earned asset-based income of $8,777
and $61 on average assets of approximately $3.9 billion and $33 million under
management with NEF and SSR, respectively.
Exeter has a privately-placed subordinated notes payable to MetLife for
$64,016 at December 31, 1997 and $58,911 at December 31, 1996.
Stockholder dividends or other distributions proposed to be paid by NELICO
must be approved by the Massachusetts Commissioner of Insurance if such
dividends or distributions, together with other dividends or distributions
made within the preceding 12 months, exceeds the greater of (1) 10% of
NELICO's statutory surplus as regards policyholders as of the previous
December 31, or (2) NELICO's statutory net gain from operations for the 12
month period ending the previous December 31.
N-21
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS,
EXCEPT AS NOTED)
Of the statutory profits earned by NELICO on participating policies and
contracts, the portion which shall inure to the benefit of NELICO's
stockholder shall not exceed the larger of (1) 10% of such statutory profits,
or (2) fifty cents per year per thousand dollars of participating life
insurance other than group term insurance in force at the end of the year.
14. SUBSEQUENT EVENTS
In February 1998, the Company signed a definitive agreement to acquire all of
the outstanding common stock of Nathan Lewis Holding Corp. (Nathan Lewis) a
broker-dealer based in New York City. Under the terms of the agreement, the
Company will pay approximately $28 million in cash at the close and $2 million
per year over the next three years subject to certain financial conditions.
Nathan Lewis had approximately $22 million in assets and earned $2.1 million
on revenues of $78.4 million for the twelve month fiscal period ended
September 30, 1997. The acquisition, which is expected to close in the second
quarter of 1998, will be accounted for as a purchase under generally accepted
accounting principles.
N-22
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholder of
New England Variable Life Insurance Company:
We have audited the statutory statements of operations, surplus, and cash
flows of New England Variable Life Insurance Company (a wholly-owned
subsidiary of New England Mutual Life Insurance Company) for the year ended
December 31, 1995. These statutory financial statements (not presented
separately herein) are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations,
surplus, and cash flows are free of material misstatement. An audit includes
examining, on test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall presentation of the statements of operations, surplus,
and cash flows. We believe that our audit of the statements of operations,
surplus, and cash flows provides a reasonable basis for our opinion.
As described more fully in Note 1 to the aforementioned financial statements,
the Company prepared the statements of operations, surplus, and cash flows
using accounting practices prescribed or permitted by the Insurance Department
of the State of Delaware (SAP), which practices after 1996 (upon issuance of
1996 financial statements) differ from generally accepted accounting
principles (GAAP).
In our report dated March 8, 1996, we expressed our opinion that the 1995
statements of operations, surplus, and cash flows, prepared using SAP,
presented fairly, in all material respects the results of operations and cash
flows of New England Variable Life Insurance Company for the year ended
December 31, 1995 in conformity with GAAP. As described in Note 1 to the
aforementioned financial statements, financial statements of wholly-owned
subsidiaries of mutual life insurance enterprises prepared in accordance with
SAP are no longer considered to be presented in conformity with GAAP.
Accordingly, our present opinion on the 1995 statements of operations,
surplus, and cash flows is different from that expressed in our previous
report.
In our opinion, because of the effects of the matter discussed in the two
preceding paragraphs, the financial statements referred to above (and not
included herein) do not present fairly, in conformity with GAAP, the results
of operations or cash flows of New England Variable Life Insurance Company for
the year ended December 31, 1995.
In our opinion, the statutory financial statements referred to above (and not
included herein) present fairly, in all material respects, the results of
operations and cash flows of New England Variable Life Insurance Company for
the year ended December 31, 1995, on the basis of accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 8, 1996, except for the information in the
second paragraph under "Basis of Presentation
and Principles of Consolidation" of Note 1, for which
the date is February 18, 1997
N-23
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
REPORT ON INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholder of
New England Pension and Annuity Company:
We have audited the statutory statements of operations and surplus, and cash
flows of New England Pension and Annuity Company (a wholly-owned subsidiary of
New England Mutual Life Insurance Company) for the year ended December 31,
1995. These statutory financial statements (not presented separately herein)
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
surplus, and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall presentation of the statements of operations and
surplus, and cash flows. We believe that our audit of the statements of
operations and surplus, and cash flows provides a reasonable basis for our
opinion.
As described more fully in Note 1 to the aforementioned financial statements,
the Company prepared the statements of operations and surplus, and cash flows
using accounting practices prescribed or permitted by the Insurance Department
of the State of Delaware (SAP), which practices after 1996 (upon issuance of
1996 financial statements) differ from generally accepted accounting
principles (GAAP).
In our report dated March 8, 1996, we expressed our opinion that the 1995
statements of operations and surplus, and cash flows, prepared using SAP,
presented fairly, in all material respects the results of operations and cash
flows of New England Pension and Annuity Company for the year ended December
31, 1995 in conformity with GAAP. As described in Note 1 to the aforementioned
financial statements, financial statements of wholly-owned subsidiaries of
mutual life insurance enterprises prepared in accordance with SAP are no
longer considered to be presented in conformity with GAAP. Accordingly, our
present opinion on the 1995 statements of operations and surplus, and cash
flows is different from that expressed in our previous report.
In our opinion, because of the effects of the matter discussed in the two
preceding paragraphs, the financial statements referred to above (and not
included herein) do not present fairly, in conformity with GAAP, the results
of operations or cash flows of New England Pension and Annuity Company for the
year ended December 31, 1995.
In our opinion, the statutory financial statements referred to above (and not
included herein) present fairly, in all material respects, the results of
operations and cash flows of New England Pension and Annuity Company for the
year ended December 31, 1995, on the basis of accounting practices prescribed
or permitted by the Insurance Department of the State of Delaware.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 8, 1996, except for the information in the
second paragraph under "Basis of Presentation and
Principles of Consolidation" of Note 1, for which the
date is February 18, 1997
N-24
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
April 23, 1996
To The Board of Directors and Shareholder of
Exeter Reassurance Company, Ltd.
We have audited the statutory statements of operations and surplus, and cash
flows of Exeter Reassurance Company, Ltd. (a wholly-owned subsidiary of New
England Mutual Life Insurance Company) for the year ended December 31, 1995.
These statutory financial statements (not presented separately herein) are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
statements of operations and surplus, and cash flows are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the statements of operations and surplus, and cash flows. We believe that
our audit of the statements of operations and surplus, and cash flows provides
a reasonable basis for our opinion.
The statutory statements of operations and surplus, and cash flows have been
prepared in conformity with The Insurance Act 1978, amendments thereto and
related regulations and are not intended to be presented in conformity with
accounting principles generally accepted in the United States of America
("U.S. GAAP").
In our opinion, because of the effects of the matter discussed in the
preceding paragraph, the financial statements referred to above (and not
included herein) do not present fairly in conformity with U.S. GAAP, the
results of operations or cash flows of Exeter Reassurance Company, Ltd. for
the year ended December 31, 1995. In our opinion, the statutory financial
statements referred to above (and not included herein) present fairly, in all
material respects, the results of operations and cash flows of Exeter
Reassurance Company, Ltd. for the year ended December 31, 1995 in conformity
with the Insurance Act 1978, amendments thereto and related regulations.
COOPERS & LYBRAND
CHARTERED ACCOUNTANTS
N-25
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholder of
New England Securities Corporation:
We have audited the consolidated statements of operations, shareholder's
equity, and cash flows of New England Securities Corporation for the year
ended December 31, 1995. These financial statements (not presented separately
herein) are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations,
shareholder's equity, and cash flows are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements of operations,
shareholder's equity, and cash flows. We believe that our audit of the
statements of operations, shareholder's equity, and cash flows provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above (and not included
herein) present fairly, in all material respects, the consolidated results of
operations and cash flows of New England Securities Corporation for the year
ended December 31, 1995 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 9, 1996
N-26
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Shareholder and Board of Directors of
TNE Advisers, Inc.:
We have audited the statements of operations, changes in shareholder's equity,
and cash flows of TNE Advisers, Inc. for the year ended December 31, 1995.
These financial statements (not presented separately herein) are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations,
changes in shareholder's equity, and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the statements of operations, changes in shareholder's equity, and cash
flows. We believe that our audit of the statements of operations, changes in
shareholder's equity, and cash flows provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above (and not included
herein) present fairly, in all material respects, the results of operations
and cash flows of TNE Advisers, Inc. for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 29, 1996
N-27
<PAGE>
NEW ENGLAND LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
March 14, 1996
To The Shareholders of
Newbury Insurance Company, Limited
We have audited the statements of earnings and retained earnings, and cash
flows of Newbury Insurance Company, Limited for the year ended December 31,
1995 (not presented separately herein). 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 audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of earnings and retained
earnings, and cash flows are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statements of earnings and retained
earnings, and cash flows. We believe that our audit of the statements of
earnings and retained earnings, and cash flows provides a reasonable basis for
our opinion.
The provision for losses incurred but not reported is calculated in the manner
described in note 3(b). We have not reviewed the underlying information used
in the calculation of the provision and therefore we have been unable to
determine whether the provision for the year ended December 31, 1995 is
adequate, deficient or excessive.
In our opinion, except for the effects of such adjustments, if any, that might
have been determined to be necessary had we been able to assess fully the
matter described in the preceding paragraph, the financial statements referred
to above (and not included herein) present fairly, in all material respects,
the results of operations and cash flows of Newbury Insurance Company, Limited
for the year ended December 31, 1995, in conformity with accounting principles
generally accepted in the United States of America.
COOPERS & LYBRAND
CHARTERED ACCOUNTANTS
N-28
<PAGE>
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
PART C. OTHER INFORMATION
-----------------
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements
The following financial statements of the Registrant are included in Part B
of this Registration Statement:
Statement of Assets and Liabilities as of December 31, 1997.
Statement of Operations for the years ended December 31, 1997 and 1996.
Statement of Changes in Net Assets for the years ended December 31, 1997 and
1996.
Notes to Financial Statements.
The following financial statements of the Depositor are included in Part B
of this Registration Statement:
Consolidated Balance Sheets as of December 31, 1996 and 1997.
Consolidated Statements of Earnings for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Equity for the years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995.
Notes to Financial Statements.
(b) Exhibits
(1) Resolutions of Board of Directors of the Depositor authorizing the
Registrant are incorporated herein by reference to Post-Effective Amendment
No. 5 to Registration Statement on Form N-4 (No. 33-85442) filed on May 1,
1998.
(2) None.
(3) (i) Form of Distribution Agreement is incorporated herein by reference to
Post-Effective Amendment No. 5 to Registration Statement on Form N-4
(No. 33-85442) filed on May 1, 1998.
<PAGE>
(ii) Form of Selling Agreement with other broker-dealers is incorporated
herein by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-4 (No. 33-85442) filed on May 1, 1998.
(iii) Additional Form of Selling Agreement is incorporated herein by
reference to Registration Statement on Form N-4 (No. 33-64879) filed on
December 11, 1995.
(iv) Additional Forms of Selling Agreement with other broker-dealers are
incorporated herein by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (No. 33-85442) filed on May 1, 1997.
(4) (i) Forms of Variable Annuity Contract (with and without Contingent
Deferred Sales Charge), and Application is incorporated herein by reference
to Registration Statement on Form N-4 (No. 33-64879) filed on December 11,
1995.
(ii) Forms of Endorsements (Living Benefits and Individual Retirement
Annuity) are incorporated herein by reference to Registration Statement on
Form N-4 (No. 33-64879) filed on December 11, 1995.
(5) For Application, see (4)(i) above.
(6) (i) Copy of charter (Amended and Restated Articles of Incorporation) is
incorporated herein by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (No. 33-85442) filed on April 30, 1997.
(ii) Amended and restated By-Laws of Depositor are incorporated herein by
reference to Post-Effective Amendment No. 5 to Registration Statement on
Form N-4 (No. 33-85442) filed on May 1, 1998.
(7) None
(8) None
(9) Opinion and consent of H. James Wilson, Esq.
(10) (i) Consent of Deloitte & Touche LLP
(ii) Consent of Sutherland, Asbill and Brennan, LLP
(11) None
(12) None
(13) Schedule of computations for performance quotations is incorporated
herein by
<PAGE>
reference to Pre-Effective Amendment No. 1 to Registration Statement on
Form N-4 (No. 33-64879) filed on June 6. 1996.
(14) Powers of Attorney are incorporated herein by reference to Post-Effective
Amendment No. 4 to Registration Statement on Form N-4 (No. 33-85442)
filed on April 30, 1997.
(i) Additional Powers of Attorney are incorporated herein by reference to
Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (No.
33-85442) filed on April 30, 1998.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
---------------------------------------
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DEPOSITOR
- ------------------------------- -----------------------------------------------
<S> <C>
James M. Benson* President and Chief Executive Officer
Susan C. Crampton Director
127 Tarbox Road
Jericho, VT 05465
Edward A. Fox Director
RR Box 67-15
Harborside, ME 04642
George J. Goodman Director
Adam Smith's Money World
50th Floor, Craig Drill Capital
General Motors Building
767 Fifth Street
New York, NY 10153
Dr. Paul E. Gray Director
Massachusetts Institute of
Technology
77 Massachusetts Avenue,
Cambridge, MA 01239
Dr. Evelyn E. Handler Director
74 Tater Street
Mont Vernon, NH 03057
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DEPOSITOR
- ------------------------------- -----------------------------------------------
<S> <C>
Philip K. Howard, Esq. Director
Howard, Darby & Levin
1330 Avenue of the Americas
New York, NY 10019
Harry P. Kamen Director
Metropolitan Life
One Madison Avenue
New York, NY 10010
Terence Lennon Director
Metropolitan Life
One Madison Avenue
New York, NY 10010
Bernard A. Leventhal Director
Burlington Industries
1345 Avenue of the Americas
New York, NY 10105
Thomas J. May Director
Boston Edison Company
800 Boylston Street
Boston, MA 02199
Stewart G. Nagler Director
Metropolitan Life Insurance
Company
One Madison Avenue
New York, NY 10010
Rand N. Stowell Director
United Timber Corp.
P.O. Box 650
Pine Street
Dixfield, ME 04224
Alexander B. Trowbridge Director
Trowbridge Partners Inc.
1317 F Street, NW,Suite 500
Washington, D.C. 20036
David W. Allen* Senior Vice President
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DEPOSITOR
- ------------------------------- -----------------------------------------------
<S> <C>
Thom A. Faria* President, Career Agency System
(a business unit of NELICO)
Daniel D. Jordan* Second Vice President, Counsel and Secretary
Richard D. Keidan* Senior Vice President.
Alan C. Leland, Jr.* Senior Vice President.
Bruce C. Long* President, New England Annuities
(a business unit of NELICO)
George J. Maloof* Senior Vice President.
Thomas W. McConnell* Senior Vice President
Thomas W. Moore* Senior Vice President
Robert W. Powell* President, Life Brokerage
(a business unit of NELICO)
Richard A. Robinson* Second Vice President and Chief Accounting Officer
Gregory A. Ross* President, TNE Information Servides
(a business unit of NELICO)
Robert E. Schneider* Executive Vice President and Chief Financial Officer
John G. Small, Jr.* President, New England Services
(a business unit of NELICO)
Ellen D. Sullivan* Senior Vice President and Associate General Counsel
H. James Wilson* Executive Vice President and General Counsel
John W. Wright* President, New England Employee Benefits Group
(a business unit of NELICO)
Frederick K. Zimmermann* Executive Vice President and Chief Investment Officer
</TABLE>
* The principal business address for each of the directors and officers is the
same as NELICO's except where indicated otherwise.
<PAGE>
ITEM 26. PERSONS CONTOLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
The following list provides information regarding the entities under common
control with the Depositor. The Depositor is a wholly-owned , indirect
subsidiary of Metropolitan Life Insurance Company, which is organized under the
laws of New York. The Depositor is organized under the laws of Massachusetts.
No person is controlled by the Registrant.
<PAGE>
ORGANIZATIONAL STRUCTURE OF METROPOLITAN AND SUBSIDIARIES
AS OF DECEMBER 31, 1997
The following is a list of subsidiaries of Metropolitan Life Insurance Company
("Metropolitan") as of December 31, 1997. Those entities which are listed at
the left margin (labelled with capital letters) are direct subsidiaries of
Metropolitan. Unless otherwise indicated, each entity which is indented under
another entity is a subsidiary of such indented entity and, therefore, an
indirect subsidiary of Metropolitan. Certain inactive subsidiaries have been
omitted from the Metropolitan Organizational listing. The voting securities
(excluding directors' qualifying shares, if any) of the subsidiaries listed are
100% owned by their respective parent corporations, unless otherwise indicated.
The jurisdiction of domicile of each subsidiary listed is set forth in the
parenthetical following such subsidiary.
A. Metropolitan Tower Corp. (Delaware)
1. Metropolitan Property and Casualty Insurance Company (Rhode Island)
a. Metropolitan Group Property and Casualty Insurance Company
(Rhode Island)
i. Metropolitan Reinsurance Company (U.K.) Limited (Great
Britain)
b. Metropolitan Casualty Insurance Company (Rhode Island)
c. Metropolitan General Insurance Company (Rhode Island)
d. First General Insurance Company (Georgia)
e. Metropolitan P&C Insurance Services, Inc. (California)
f. Metropolitan Lloyds, Inc. (Texas)
g. Met P&C Managing General Agency, Inc. (Texas)
2. Metropolitan Insurance and Annuity Company (Delaware)
a. MetLife Europe I, Inc. (Delaware)
b. MetLife Europe II, Inc. (Delaware)
c. MetLife Europe III, Inc. (Delaware)
d. MetLife Europe IV, Inc. (Delaware)
e. MetLife Europe V, Inc. (Delaware)
f. MetLife Healthcare Holdings, Inc. (Delaware)
3. MetLife General Insurance Agency, Inc. (Delaware)
a. MetLife General Insurance Agency of Alabama, Inc. (Alabama)
b. MetLife General Insurance Agency of Kentucky, Inc. (Kentucky)
c. MetLife General Insurance Agency of Mississippi, Inc.
(Mississippi)
d. MetLife General Insurance Agency of Texas, Inc. (Texas)
e. MetLife General Insurance Agency of North Carolina, Inc. (North
Carolina)
f. MetLife General Insurance Agency of Massachusetts, Inc.
(Massachusetts)
C-3
<PAGE>
4. Metropolitan Asset Management Corporation (Delaware)
a. MetLife Capital Holdings, Inc. (Delaware)
i. MetLife Capital Corporation (Delaware)
(1) Searles Cogeneration, Inc. (Delaware)
(2) MLYC Cogen, Inc. (Delaware)
(3) MCC Yerkes Inc. (Washington)
(4) MetLife Capital, Limited Partnership (Delaware).
Partnership interests in MetLife Capital, Limited
Partnership are held by Metropolitan (90%) and MetLife
Capital Corporation (10%).
(5) CLJFinco, Inc. (Delaware)
(a) MetLife Capital Credit L.P. (Delaware).
Partnership interests in MetLife Capital Credit
L.P. are held by Metropolitan (90%) and CLJ
Finco, Inc. (10%).
(i) MetLife Capital CFLI Holdings, LLC (DE)
(1) MetLife Capital CFLI Leasing, LLC
(DE)
(6) MetLife Capital Portfolio Investments, Inc. (Nevada)
(a) MetLife Capital Funding Corp. (Delaware)
(7) MetLife Capital Funding Corp. II (Delaware)
(8) MetLife Capital Funding Corp. III (Delaware)
ii. MetLife Capital Financial Corporation (Delaware)
90% of outstanding equity interest in Metlife
Capital Financial Corporation held directly
by Metropolitan Life Insurance Company.
C-4
<PAGE>
iii. MetLife Financial Acceptance Corporation (Delaware).
MetLife Capital Holdings, Inc. holds 100% of the voting
preferred stock of MetLife Financial Acceptance Corporation.
Metropolitan Property and Casualty Insurance Company holds
100% of the common stock of MetLife Financial Acceptance
Corporation.
iv. MetLife Capital International Ltd. (Delaware).
b. MetLife Investments Limited (United Kingdom). 23rd Street
Investments, Inc. holds one share of MetLife Investments
Limited.
c. MetLife Investments Asia Limited (Hong Kong). One share of
MetLife Investments Asia Limited is held by W&C Services, Inc., a
nominee of Metropolitan Asset Management Corporation.
5. SSRM Holdings, Inc. (Delaware)
a. GFM International Investors Ltd. (United Kingdom).
b. GFM International Investors, Inc. (United Kingdom).
i. GFM Investments Limited (United Kingdom)
c. State Street Research & Management Company (Delaware). Is a sub-
investment manager for the Growth, Income, Diversified and
Aggressive Growth Portfolios of Metropolitan Series Fund, Inc.
i. State Street Research Investment Services, Inc.
(Massachusetts)
d. SSR Realty Advisors, Inc. (Delaware)
i. Metric Management Inc. (Delaware)
ii. Metric Property Management, Inc. (Delaware)
(1) Metric Realty (Delaware). SSR Realty Advisors, Inc.
and Metric Property Management, Inc. each hold 50% of
the common stock of Metric Realty.
(a) Metric Institutional Apartment Fund II, L.P.
(California). Metric Realty holds a 1% interest
as general partner and Metropolitan holds an
approximately 14.6% limited partnership interest
in Metric Institutional Apartment Fund II, L.P.
(2) Metric Colorado, Inc. (Colorado). Metric Property
Management, Inc. holds 80% of the common stock of
Metric Colorado, Inc.
iii. Metric Capital Corporation (California)
iv. Metric Assignor, Inc. (California)
v. SSR AV, Inc. (Delaware)
C-5
<PAGE>
6. MetLife Holdings, Inc. (Delaware)
a. MetLife Funding, Inc. (Delaware)
b. MetLife Credit Corp. (Delaware)
7. Metropolitan Tower Realty Company, Inc. (Delaware)
8. Met Life Real Estate Advisors, Inc. (California)
9. Security First Group, Inc. (DE)
a. Security First Life Insurance Company (DE)
(i) Security First Life Insurance Company of Arizona (AZ)
b. Security First Insurance Agency, Inc. (MA)
c. Security First Financial Insurance Agency, Inc. (NV)
d. Security First Group of Ohio, Inc. (OH)
e. Security First Financial, Inc. (DE)
f. Security First Investment Management Corporation (DE)
g. Security First Management Corporation (DE)
h. Security First Real Estate, Inc. (DE)
10. Natiloportem Holdings, Inc. (Delaware)
B. Metropolitan Tower Life Insurance Company (Delaware)
C. MetLife Security Insurance Company of Louisiana (Louisiana)
D. MetLife Texas Holdings, Inc. (Delaware)
1. Texas Life Insurance Company (Texas)
a. Texas Life Agency Services, Inc. (Texas)
b. Texas Life Agency Services of Kansas, Inc. (Kansas)
E. MetLife Securities, Inc. (Delaware)
F. 23rd Street Investments, Inc. (Delaware)
G. Metropolitan Life Holdings Limited (Ontario, Canada)
1. Metropolitan Life Financial Services Limited (Ontario, Canada)
2. Metropolitan Life Financial Management Limited (Ontario, Canada)
a. Metropolitan Life Insurance Company of Canada (Canada)
C-6
<PAGE>
3. Morguard Investments Limited (Ontario, Canada)
Shares of Morguard Investments Limited ("Morguard") are held by
Metropolitan Life Holdings Limited (72%) and by employees of Morguard
(28%).
4. Services La Metropolitaine Quebec, Inc. (Quebec, Canada)
H. Santander Met, S.A. (Spain). Shares of Santander Met, S.A. are held by
Metropolitan (50%) and by an entity (50%) unaffiliated with Metropolitan.
1. Seguros Genesis, S.A. (Spain)
2. Genesis Seguros Generales, Sociedad Anomina de Seguros y Reaseguros
(Spain)
I. Kolon-Met Life Insurance Company (Korea). Shares of Kolon-MetLife Insurance
Company are held by Metropolitan (51%) and by an entity (49%) unaffiliated
with Metropolitan.
C-7
<PAGE>
J. Metropolitan Life Seguros de Vida S.A. (Argentina)
K. Metropolitan Life Seguros de Retiro S.A. (Argentina).
L. Met Life Holdings Luxembourg (Luxembourg)
M. Metropolitan Life Holdings, Netherlands BV (Netherlands)
N. MetLife International Holdings, Inc. (Delaware)
O. Metropolitan Life Insurance Company of Hong Kong Limited (Hong Kong)
P. Metropolitan Marine Way Investments Limited (Canada)
Q. P.T. MetLife Sejahtera (Indonesia)
R. Seguros Genesis S.A. (Mexico) Metropolitan holds 85.49%, Metropolitan Tower
Corp. holds 7.31% and Metropolitan Asset Management Corporation holds 7.20%
of the common stock of Seguros Genesis S.A.
S. AFORE Genesis Metropolitan S.A. de C.V. (Mexico)
T. Metropolitan Life Seguros E Previdencia Privada S.A. (Brazil)
U. Hyatt Legal Plans, Inc. (Delaware)
V. One Madison Merchandising L.L.C. (Connecticut) Ownership of membership
interests in One Madison Merchandising L.L.C. is as follows: Metropolitan
owns 99% and Metropolitan Tower Corp. owns 1%.
C-8
<PAGE>
W. Metropolitan Realty Management, Inc. (Delaware)
1. Edison Supply and Distribution, Inc. (Delaware)
2. Cross & Brown Company (New York)
a. Cross & Brown Associates of New York, Inc. (New York)
b. Cross & Brown Construction Corp. (New York)
c. CBNJ, Inc. (New Jersey)
d. Subrown Corp. (New York)
X. MetPark Funding, Inc. (Delaware)
Y. 2154 Trading Corporation (New York)
Z. Transmountain Land & Livestock Company (Montana)
AA. Farmers National Company (Nebraska)
1. Farmers National Commodities, Inc. (Nebraska)
C-9
<PAGE>
A.B. MetLife Trust Company, National Association. (United States)
A.C. PESCO Plus, L.C. (Florida). Metropolitan holds a 50% interest in
PESCO Plus, L.C. and an unaffiliated party holds a 50% interest.
1. Public Employees Equities Services Company (Florida)
A.D. Benefit Services Corporation (Georgia)
A.E. G.A. Holding Corporation (MA)
A.F. TNE-Y, Inc. (DE)
A.G. CRH., Inc. (MA)
A.H. NELRECO Troy, Inc. (MA)
A.I. TNE Funding Corporation (DE)
A.J. L/C Development Corporation (CA)
A.K. Boylston Capital Advisors, Inc. (MA)
1. New England Portfolio Advisors, Inc. (MA)
A.L. CRB Co., Inc. (MA) AEW Real Estate Advisors, Inc. holds 49,000 preferred
non-voting shares of CRB Co., Inc. AEW Advisors, Inc. holds 1,000
preferred non-voting shares of CRB Co., Inc.
A.M. DPA Holding Corp. (MA)
A.N. Lyon/Copley Development Corporation (CA)
A.O. NEL Partnership Investments I, Inc. (MA)
A.P. New England Life Mortgage Funding Corporation (MA)
A.Q. Mercadian Capital L.P. (DE). Metropolitan holds a 95% limited partner
interest and an unaffiliated third party holds 5% of Mercadian Capital
L.P.
A.R. Mercadian Funding L.P. ( DE). Metropolitan holds a 95% limited partner
interest and an unaffiliated third party holds 5% of Mercadian
Funding L.P.
A.S. MetLife New England Holdings, Inc. (DE)
1. New England Life Insurance Company (MA)
a. New England Life Holdings, Inc. (DE)
i. New England Securities Corporation (MA)
1. Hereford Insurance Agency, Inc. (MA)
2. Hereford Insurance Agency of Alabama, Inc. (AL)
3. Hereford Insurance Agency of Minnesota, Inc. (MN)
4. Hereford Insurance Agency of Ohio, Inc. (OH)
5. Hereford Insurance Agency of New Mexico, Inc. (NM)
ii. TNE Advisers, Inc. (MA)
iii. TNE Information Services, Inc. (MA)
b. Exeter Reassurance Company, Ltd. (MA)
c. Omega Reinsurance Corporation (AZ)
d. New England Pension and Annuity Company (DE)
e. Newbury Insurance Company, Limited (Bermuda)
2. New England Investment Companies, Inc. (MA)
a. New England Investment companies, L.P. (DE) New England Investment
Companies, Inc. holds a 1.7% general partnership interest in New
England Investment Companies, L.P. MetLife New England Holdings,
Inc. holds a 3.3% general partnership interest in New England
Investment Companies, L.P.
3. NEIC Operating Partnership, L.P.
New England Investment Companies, L.P. holds a 14.2% general
partnership Interest and New England Investment Companies, Inc.
holds a 0.00002% general Partnership Interest in NEIC operating
Partnership, L.P. Metropolitan holds a 46.3% Limited Partnership
Interest in NEIC Operating Partnership, L.P.
a. NEIC Holdings, Inc. (MA)
i. Back Bay Advisors, Inc. (MA)
(1) Back Bay Advisors, L.P. (DE)
Back Bay Advisors, Inc.
holds a 1% general partner
interest and NEIC
Holdings, Inc. holds a 99%
limited partner interest
in Back Bay Advisors, L.P.
ii. R & T Asset Management, Inc. (MA)
(1) Reich & Tang Distributors, L.P. (DE)
R & T Asset Management Inc.
holds a 1% general interest and
R & T Asset Management, L.P.
holds a 99.5% limited partner
interest in Reich Tang Distributors, L.P.
(2) R & T Asset Management L.P.
R & T Asset Management, Inc.
holds a 0.5% general partner interest and
NEIC Holdings, Inc. hold a 99.5% limited
partner interest in &
Asset Management, L.P.
(3) Reich & Tang Services, L.P. (DE)
R & T Asset Management, Inc.
holds a 1% general partner interest and
R & T Asset Management, L.P.
holds a 99% limited partner interest
in Reich & Tang Services, L.P.
iii. Loomis, Sayles & Company, Inc. (MA)
(1) Loomis Sayles & Company, L.P. (DE)
Loomis Sayles & Company, Inc.
holds a 1% general partner interest and
R & T Asset Management, Inc. holds a 99%
limited partner interest in Loomis Sayles &
Company, L.P.
iv. Westpeak Investment Advisors, Inc. (MA)
(1) Westpeak Investment Advisors, L.P. (DE)
Westpeak Investment Advisors, Inc.
holds a 1% general partner interest and
Reich & Tang holds a 99% limited
partner interest in Westpeak Investment
Advisors, L.P.
v. VNSM, Inc. (DE)
(1) Vaughan, Nelson Scarborough & McConnell, L.P. (DE)
VNSM, Inc. holds a 1% general partner interest and
Reich & Tang Asset Management, Inc. holds a 99%
limited partner interest in Vaughan, Nelson
Scarborough & McConnell, L.P.
a. Breen Trust Company
vi. MC Management, Inc. (MA)
(1) MC Management, L.P. (DE)
MC Management, Inc. holds a 1% general partner
interest and R & T Asset Management, Inc.
holds a 99% limited partner interest in MC
Management, L.P.
vii. Harris Associates, Inc. (DE)
(1) Harris Associates Securities L.P. (DE)
Harris Associates, Inc. holds a 1% general partner
interest and Harris Associates L.P. holds a
99% limited partner interest in Harris Associates
Securities, L.P.
(2) Harris Associates L.P. (DE)
Harris Associates, Inc. holds a 0.33% general
partner interest and NEIC Operating Partnership,
L.P. holds a 99.67% limited partner interest in
Harris Associates L.P.
(a) Harris Partners, Inc. (DE)
(b) Harris Partners L.L.C. (DE)
Harris Partners, Inc. holds a 1%
membership interest and
Harris Associates L.P. holds a 99%
membership interest in Harris Partners L.L.C.
(i) Aurora Limited Partnership (DE)
Harris Partners L.L.C. holds a 1% general
partner interest
(ii) Perseus Partners L.P. (DE) Harris Partners
L.L.C. holds a 1% general partner interest
(iii) Pleiades Partners L.P. (DE) Harris
Partners L.L.C. holds a 1% general partner
interest
(iv) Stellar Partners L.P. (DE)
Harris Partners L.L.C. holds a 1% general
partner interest
(v) SPA Partners L.P. (DE) Harris Partners
L.L.C. holds a 1% general partner interest
viii. Graystone Partners, Inc. (MA)
(1) Graystone Partners, L.P. (DE)
Graystone Partners, Inc. holds a 1%
general partner interest and New England
NEIC Operating Partnership, L.P.
holds a 99% limited partner interest in
Graystone Partners, L.P.
ix. NEF Corporation (MA)
(1) New England Funds, L.P. (DE) NEF Corporation holds a
1% general partner interest and NEIC Operating
Partnership, L.P. holds a 99% limited
partner interest in New England Funds, L.P.
(2) New England Funds Management, L.P. (DE) NEF
Corporation holds a 1% general partner interest and
NEIC Operating Partnership, L.P. holds a 99%
limited partner interest in New England Funds
Management, L.P.
x. New England Investment Associates, Inc.
xi. Snyder Capital Management, Inc.
(1) Snyder Capital Management, L.P. NEIC Operating
Partnership holds a 99.5% limited partnership
interest and Snyder Capital Management Inc. holds a
0.5% general partnership interest.
xii. Jurika & Voyles, Inc.
(1) Jurika & Voyles, L.P NEIC Operating Partnership,
L.P. holds a 99% limited partnership interest and
Jurika & Voyles, Inc. holds a 1% general partnership
interest.
b. Capital Growth Management, L.P. (DE)
NEIC Operating Partnership, L.P. holds a 50% limited partner
interest in Capital Growth Management, L.P.
c. AEW Capital Management, Inc. (DE)
i. AEW Securities, L.P. (DE) AEW Capital Management, Inc. holds
a 1% general partnership and AEW Capital Management, L.P.
holds a 99% limited partnership interest in AEW Securities,
L.P.
d. AEW Capital Management L.P. (DE)
New England Investment Companies, L.P. holds a 99% limited partner
interest and AEW Capital Management, Inc. holds a 1% general partner
interest in AEW Capital Management, L.P.
1. AEW Investment Group, Inc. (MA)
a. Copley Public Partnership Holding, L.P. (MA)
AEW Investment Group, Inc. holds a 25% general partnership
interest and AEW Capital Management, L.P. holds a 75%
limited partnership interest in Copley Public Partnership
Holding, L.P.
b. AEW Management and Advisors L.P. (MA)
AEW Investment Group, Inc. holds a 25% general partnership
interest and AEW Capital Management, L.P. holds a 75% limited
partnership interest in AEW Management and Advisors L.P.
i. BBC Investment Advisors, Inc. (MA)
AEW Investment Group, Inc. holds 60% of the voting securities
and Back Bay Advisors, L.P. holds 40% of the voting securities
of BBC Investment Advisors, Inc.
1. BBC Investment Advisors, L.P. (MA)
BBC Investment Advisors, Inc. holds a 1% general partnership interest
and AEW Management and Advisors, L.P. holds a 59.4% limited
partnership interest and Back Bay Advisors, L.P. holds a 39.6% limited
partnership interest in BBC Investment Advisors, L.P.
ii. AEW Real Estate Advisors, Inc. (MA)
1. AEW Advisors, Inc. (MA)
2. Copley Properties Company, Inc. (MA)
3. Copley Properties Company II, Inc. (MA)
4. Copley Properties Company III, Inc. (MA)
5. Fourth Copley Corp. (MA)
6. Fifth Copley Corp. (MA)
7. Sixth Copley Corp. (MA)
8. Seventh Copley Corp. (MA).
9. Eighth Copley Corp. (MA).
10. First Income Corp. (MA).
11. Second Income Corp. (MA).
12. Third Income Corp. (MA).
13. Fourth Income Corp. (MA).
14. Third Singleton Corp. (MA).
15. Fourth Singleton Corp. (MA)
16. Fifth Singleton Corp. (MA)
17. Sixth Singleton Corp. (MA).
18. BCOP Associates L.P. (MA)
AEW Real Estate Advisors, Inc. holds a 1% general
partner interest in BCOP Associates L.P.
iii. CREA Western Investors I, Inc. (MA)
1. CREA Western Investors I, L.P. (DE)
CREA Western Investors I, Inc. holds a 24.28% general
partnership interest and Copley Public Partnership Holding,
L.P. holds a 57.62% limited partnership interest in CREA
Western Investors I, L.P.
iv. CREA Investors Santa Fe Springs, Inc. (MA)
2. Copley Public Partnership Holding, L.P. (DE)
AEW Capital Management, L.P. holds a 75% limited partner interest and
AEW Investment Group, Inc. holds a 25% general partner interest and
CREA Western Investors I, L.P holds a 57.62% Limited Partnership
interest.
3. AEW Real Estate Advisors, Limited Partnership (MA)
AEW Real Estate Advisors, Inc. holds a 25% general partnership interest
and AEW Capital Management, L.P. holds a 75% limited partnership
interest in AEW Real Estate Advisors, Limited Partnership.
4. AEW Hotel Investment Corporation (MA)
a. AEW Hotel Investment, Limited Partnership (MA)
AEW Hotel Investment Corporation holds a 1% general
partnership interest and AEW Capital Management, L.P. holds a
99% limited partnership interest in AEW Hotel Investment,
Limited Partnership.
5. Aldrich Eastman Global Investment Strategies, LLC (DE)
AEW Capital Management, L.P. holds a 25% membership interest and an
unaffiliated third party holds a 75% membership interest in Aldrich
Eastman Global Investment Strategies, LLC.
C-10
<PAGE>
In addition to the entities listed above, Metropolitan (or where indicated an
affiliate) also owns an interest in the following entities, among others:
1) CP&S Communications, Inc., a New York corporation, holds federal radio
communications licenses for equipment used in Metropolitan owned facilities and
airplanes. It is not engaged in any business.
2) Quadreal Corp., a New York corporation, is the fee holder of a parcel of
real property subject to a 999 year prepaid lease. It is wholly owned by
Metropolitan, having been acquired by a wholly owned subsidiary of Metropolitan
in 1973 in connection with a real estate investment and transferred to
Metropolitan in 1988.
3) Met Life International Real Estate Equity Shares, Inc., a Delaware
corporation, is a real estate investment trust. Metropolitan owns approximately
18.4% of the outstanding common stock of this company and has the right to
designate 2 of the 5 members of its Board of Directors.
4) Metropolitan Structures is a general partnership in which Metropolitan owns
a 50% interest.
5) Interbroker, Correduria de Reaseguros, S.A., is a Spanish insurance
brokerage company in which Santander Met, S. A., a subsidiary of Metropolitan in
which Metropolitan owns a 50% mt ST, owns a 50% interest and has the right to
designate 2 of the 4 members of the Board of Directors.
C-11
<PAGE>
6) Metropolitan owns varying interests in certain mutual funds distributed by
its affiliates. These ownership interests are generally expected to decrease as
shares of the funds are purchased by unaffiliated investors.
7) Metropolitan Lloyds Insurance Company of Texas, an affiliated association,
provides homeowner and related insurance for the Texas market. It is an
association of individuals designated as underwriters. Metropolitan Lloyds,
Inc., a subsidiary of Metropolitan Property and Casualty Insurance Company ("MET
P&C"), serves as the attorney-in-fact and manages the association.
8) Mezzanine Investment Limited Partnerships ("MILPs"), Delaware limited
partnerships, are investment vehicles through which investments in certain
entities are held. A wholly owned subsidiary of Metropolitan serves as the
general partner of the limited partnerships and Metropolitan directly owns a 99%
limited partnership interest in each MILP. The MILPs have various's ownership
interests in certain companies. The various MILPs own, directly or indirectly,
more than 50% of the voting stock of the following company: Coating
Technologies International, Inc.
NOTE: THE METROPOLITAN LIFE ORGANIZATIONAL CHART DOES NOT INCLUDE REAL ESTATE
- ----
JOINT VENTURES AND PARTNERSHIPS OF WHICH METROPOLITAN LIFE AND/OR ITS
SUBSIDIARIES IS AN INVESTMENT PARTNER. IN ADDITION, CERTAIN INACTIVE
SUBSIDIARIES HAVE ALSO BEEN OMITTED.
C-12
<PAGE>
ITEM 27. NUMBER OF CONTRACTOWNERS
None
ITEM 28. INDEMNIFICATION
The Depositor's parent, Metropolitan Life Insurance Company ("MetLife"),
maintains a directors' and officers' liability policy with a maximum coverage
of $100 million under which the Depositor and New England Securities
Corporation, the Registrant's underwriter (the "Underwriter"), as well as
certain other subsidiaries of MetLife are covered. A provision in MetLife's
by-laws provides for the indemnification (under certain circumstances) of
individuals serving as directors or officers of certain organizations,
including the Depositor and the Underwriter. A provision in the Depositor's
bylaws provides for the indemnification (under certain circumstances) of
individuals serving as directors or officers of the Depositor.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers or controlling persons (if any)
of the Underwriter or Depositor pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and may be, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Depositor or Underwriter of expenses incurred
or paid by a director, officer or controlling person of the Depositor or
Underwriter 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 Depositor or Underwriter will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) New England Securities Corporation also serves as principal underwriter
for:
New England Zenith Fund
New England Variable Annuity Fund I
New England Retirement Investment Account
New England Variable Life Separate Account
The New England Variable Account
(b) The directors and officers of the Registrant's principal underwriter,
New England Securities Corporation, and their addresses are as follows:
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH
NAME POSITIONS AND OFFICES WITH PRINCIPAL UNDERWRITER REGISTRANT
- ---- ------------------------------------------------ -------------
<S> <C> <C>
Thomas W. McConnell* Director, President and CEO None
Frederick K.
Zimmermann** Chairman of Board, Director None
Bradley W. Anderson* Vice President None
Beverly J. DeWitt** Assistant Secretary None
Anne M. Goggin** Vice President, General Counsel, Secretary and Clerk None
Mark F. Greco* Vice President None
Laura A. Hutner* Vice President None
Mitchell A. Karman** Vice President None
Albert R. Margeson, Jr.* Senior Vice President None
Robert F. Regan*** Vice President None
Jonathan M. Rozek* Vice President None
Andrea M. Ruesch* Vice President None
Robert E. Schneider** Director None
Michael E. Toland* Vice President, Chief Compliance Officer, Chief Financial
Officer,
Treasurer, Assistant Secretary and Assistant Clerk None
Principal Business
Address: * 399 Boylston Street, Boston, MA 02116
** 501 Boylston Street, Boston, MA 02117
*** 500 Boylston Street, Boston, MA 02117
</TABLE>
III-1
<PAGE>
(c)
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
NET
NAME OF UNDERWRITING COMPENSATION
PRINCIPAL DISCOUNTS & REDEMPTION OR BROKERAGE OTHER
UNDERWRITER COMMISSIONS ANNUITIZATION COMMISSIONS COMPENSATION
- ----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Not Applicable
</TABLE>
Commissions are paid by the Company directly to agents who are registered
representatives of the principal underwriter, or to broker-dealers that have
entered into a selling agreement with the principal underwriter with respect
to sales of the Contracts.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The following companies will maintain possession of the documents required
by Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder:
(a) Registrant
(b) State Street Bank & Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(c) New England Securities Corporation
399 Boylston Street
Boston, Massachusetts 02116
(d) New England Life Insurance Company
501 Boylston Street
Boston, Massachusetts 02117
ITEM 31. MANAGEMENT SERVICES
Not applicable
ITEM 32. UNDERTAKINGS
Registrant hereby makes the following undertakings:
(1) To file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial statements
contained in the registration statement are never more than 16 months old
for so long as payments under the variable annuity contracts may be
accepted;
(2) To include either (a) as part of any application to purchase a contract
offered by the prospectus, a space that an applicant can check to request a
Statement of Additional Information or (b) a postcard or similar written
communication affixed to or included in the prospectus that the applicant
can remove to send for a Statement of Additional Information; and
(3) To deliver a Statement of Additional Information and any financial
statements required to be made available under this Form N-4 promptly upon
written or oral request.
New England Life Insurance Company hereby represents that the fees and
charges deducted under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses to be incurred, and the risks
assumed by New England Life Insurance Company.
III-2
<PAGE>
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY
ACT OF 1940, THE REGISTRANT, NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT,
CERTIFIES THAT IT MEETS THE REQUIREMENTS OF SECURITIES ACT RULE 485(B) FOR
EFFECTIVENESS OF THIS REGISTRATION STATEMENT AND HAS CAUSED THIS AMENDMENT TO
ITS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF, IN THE CITY OF BOSTON,
AND COMMONWEALTH OF MASSACHUSETTS ON THIS 30TH DAY OF APRIL, 1998.
NEW ENGLAND VARIABLE ANNUITY SEPARATE ACCOUNT
By: New England Life Insurance Company
(Depositor)
By: H. JAMES WILSON
-------------------------------------
H. JAMES WILSON
EXECUTIVE VICE PRESIDENT
AND GENERAL COUNSEL
Attest:
Marie C. Swift
- -----------------------------
Marie C. Swift
<PAGE>
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY
ACT OF 1940, THE DEPOSITOR, NEW ENGLAND LIFE INSURANCE COMPANY, CERTIFIES THAT
IT MEETS THE REQUIREMENTS OF SECURITIES ACT RULE 485(B) FOR EFFECTIVENESS OF
THIS REGISTRATION STATEMENT AND HAS CAUSED THIS AMENDMENT TO ITS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF, IN THE CITY OF BOSTON, AND COMMONWEALTH OF
MASSACHUSETTS, ON THIS 30TH DAY OF APRIL, 1998.
NEW ENGLAND LIFE INSURANCE COMPANY
By: H. JAMES WILSON
----------------------------------
H. JAMES WILSON
EXECUTIVE VICE PRESIDENT
AND GENERAL COUNSEL
Attest:
Marie C. Swift
- --------------------------
Marie C. Swift
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS, IN THE CAPACITIES INDICATED, ON APRIL
30, 1998.
Signature Title
- ---------------------------------- ---------------------------------------
* President and Chief Executive Officer
- ----------------------------------
James M. Benson
* Director
- ----------------------------------
Susan C. Crampton
* Second Vice President and
- ---------------------------------- Chief Accounting Officer
Richard A. Richardson
<PAGE>
Signature Title
- ---------------------------------- ---------------------------------------
* Director
- ----------------------------------
Edward A. Fox
* Director
- ----------------------------------
George J. Goodman
* Director
- ----------------------------------
Paul E. Gray
* Director
- ----------------------------------
Evelyn E. Handler
* Director
- ----------------------------------
Philip K. Howard
* Director
- ----------------------------------
Harry P. Kamen
* Director
- ----------------------------------
Terence Lennon
* Director
- ----------------------------------
Bernard A. Leventhal
* Director
- ----------------------------------
Thomas J. May
* Director
- ----------------------------------
Stewart G. Nagler
<PAGE>
Signature Title
- ---------------------------------- ---------------------------------------
* Executive Vice President and
- ---------------------------------- Chief Financial Officer
Robert E. Schneider
* Director
- ----------------------------------
Rand N. Stowell
* Director
- ----------------------------------
Alexander B. Trowbridge
By: /s/ Anne M. Goggin
---------------------------------
ANNE M. GOGGIN, ESQ.
ATTORNEY-IN-FACT
*Executed by Anne M. Goggin, Esq. on behalf of those indicated pursuant to a
Powers of Attorney filed herewith and incorporated herein by reference to Post-
Effective Amendment No. 4 to the Registration Statement on Form N-4 (No. 33-
85442) filed on April 30, 1997.
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Page No.
(on executed
copy only)
<S> <C>
(1) Resolutions of Board of Directors of the Depositor authorizing
the Registrant.*
(2) None
(3) (i) Form of Distribution Agreement.*
(ii) Form of Selling Agreement with other broker-dealers.*
(iii) Additional Form of Selling Agreement with other broker-dealers.**
(iv) Additional Forms of Selling Agreement with other broker-dealers.***
(4) (i) Forms of Variable Annuity Contract (with and without Contingent
Deferred Sales Charge),and Application.**
(ii) Forms of Endorsements (Living Benefits and Section 1035
Exchange.**
(5) Application (included in Exhibit 4(i)).
(6) (i) Copy of charter (Amended and restated Articles of Incorporation).***
(ii) Amended and Restated By-Laws of Depositor.*
(7) None
(8) None
(9) Opinion and consent of H. James Wilson, Esq.
(10) (i) Consent of Deloitte & Touche LLP
(ii) Consent of Sutherland, Asbill & Brennan, LLP
(11) None
(12) None
(13) Schedule of computations for performance quotations.+
(14) Powers of Attorney.***
(i) Additional Powers of Attorney.*
</TABLE>
- ----------------------------
* Filed with Amendment No. 5 to Registration Statement on Form N-4 (No. 33-
85442) filed on May 1, 1998.
** Filed with Registration Statement on Form N-4 (No. 33-64879) filed on
December 11, 1995.
*** Filed with Post-Effective Amendment No. 4 to Registration Statement on Form
N-4 (No. 33-85442) filed on April 30, 1997.
+ Filed with Pre-Effective Amendment No. 1 to Registration Statement on Form
N-4 (No. 33-64879) filed on June 6, 1996
<PAGE>
Exhibit 9
New England Life Insurance Company
501 Boylston Street
Boston, MA 02117
H. James Wilson
General Counsel
April 29, 1998
New England Life Insurance Company
New England Variable Annuity Separate Account
501 Boylston Street
Boston, MA 02117
Gentlemen and Ladies:
In my capacity as General Counsel of New England Life Insurance Company (the
"Company"), I am rendering the following opinion in connection with the filing
with the Securities and Exchange Commission of a post-effective amendment to the
Registration Statement on Form N-4 under the Securities Act of 1933 and the
Investment Company Act of 1940 (File Nos. 33-64879 and 811-8828). This amendment
is being filed with respect to individual variable annuity contracts (the
"Contracts") issued by New England Variable Annuity Separate Account (the
"Account").
In forming the following opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary and
appropriate.
It is my opinion that:
1. The Account is a separate investment account of the Company and is duly
created and validly existing pursuant to the laws of the State of
Massachusetts.
2. The Contracts, when issued in accordance with the Prospectus of the Account
and in compliance with applicable local law, are and will be legal and
binding obligations of the Company in accordance with their terms.
3. Assets attributable to reserves and other contract liabilities and held in
the Account will not be chargeable with liabilities arising out of any
other business the Company may conduct.
I consent to the filing of this opinion as an exhibit to the above-mentioned
amendment to the Registration Statement and to the inclusion of my name under
the caption "Legal Matters" in the Statement of Additional Information filed as
part of this amendment to the Registration Statement on Form N-4.
Very truly yours,
/s/ H. James Wilson
H. James Wilson
General Counsel
HJW:nlf
<PAGE>
Exhibit 10(i)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post Effective Amendment No. 2 to the
Registration Statement No. 33-64879 of New England Variable Annuity
Separate Account (the "Separate Account") of New England Life Insurance
Company (the "Company") of our reports dated April 17, 1998 and February
17, 1998, on the financial statements of the Separate Account and the
Company for the years ended December 31, 1997 and 1996 appearing in the
Statement of Additional Information (which expressed unqualified opinions
and, with respect to the Company, includes an explanatory paragraph
referring to the change in the basis of accounting and the change in
corporate organization), which is part of such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 28, 1998
<PAGE>
Exhibit 10(ii)
Sutherland, Asbill & Brennan LLP
CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP
We consent to the reference to our firm under the heading "Legal Matters"
in the prospectus included in Post-Effective Amendment No. 2 to the Registration
Statement on Form N-4 for certain variable annuity contracts issued through of
New England Variable Annuity Separate Account of New England Life Insurance
Company (File No. 33-64879). In giving this consent, we do not admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933.
SUTHERLAND, ASBILL & BRENNAN LLP
Washington, D.C.
April 28, 1998
