<PAGE>
FILE NOS. ________
811-7767
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Initial Registration
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
SEPARATE ACCOUNT KG OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on (date) pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a) (1) of Rule 485
_____ on (date) pursuant to paragraph (a) (1) of Rule 485
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
VARIABLE ANNUITY CONTRACTS
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940
("1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("1933 Act").
No filing fee is submitted as a filing fee is not required for this type of
filing.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall become effective in accordance with section 8(a) of the Securities Act
of 1933 or until this Registration Statement shall become effective on such
date or dates as the Commission, acting pursuant to said section 8(a), may
determine.
<PAGE>
Registrant is making this filing in order to register a new flexible payment
variable annuity contract, which is the purpose of this initial Registration
Statement under the Securities Act of 1933 and amendment under the Investment
Company Act of 1940. Registrant does not intend this filing to delete or
amend any currently effective prospectus, statement of additional
information, or supplements thereto, contained in any other registration
statement of the Registrant under the Securities Act of 1933.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
<TABLE>
<CAPTION>
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
<S> <C>
1 Cover Page
2 Special Terms
3 Summary; Annual and Transaction Expenses
4 Condensed Financial Information; Performance Information
5 Description of the Companies, the Variable Account,
Investors Fund Series and Scudder Variable Life Investment Fund
6 Charges and Deductions
7 Description of the Contract
8 Electing the Form of Annuity and Annuity Date;
Description of Variable Annuity Payout Options; Annuity
Benefit Payments
9 Death Benefit
10 Payments; Computation of Values; Distribution
11 Surrender; Withdrawals; Texas Optional Retirement Program
12 Federal Tax Considerations
13 Legal Matters
14 Statement of Additional Information - Table of Contents
<CAPTION>
FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
- ----------------- -----------------------------------------------
15 Cover Page
16 Table of Contents
17 General Information and History
18 Services
19 Underwriters
20 Underwriters
21 Performance Information
22 Annuity Benefit Payments
23 Financial Statements
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
KEMPER GATEWAY ADVISOR
A VARIABLE ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING
THE KEMPER GATEWAY ADVISOR VARIABLE ANNUITY CONTRACT. THE
PROFILE CONTRACT IS MORE FULLY DESCRIBED LATER IN THIS PROSPECTUS.
1998 PLEASE READ THE PROSPECTUS CAREFULLY.
1. KEMPER GATEWAY ADVISOR VARIABLE ANNUITY CONTRACT
The Kemper GATEWAY Advisor variable annuity contract is a contract between you,
the contract owner, and Allmerica Financial Life Insurance and Annuity Company
(for contracts issued in the District of Columbia, Puerto Rico, the Virgin
Islands and any state except Hawaii and New York) or First Allmerica Financial
Life Insurance Company (for contracts issued in Hawaii and New York). It is
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Kemper GATEWAY Advisor contract
combines the concept of professional money management with the attributes of an
annuity contract.
Kemper GATEWAY Advisor offers a customized investment portfolio with experienced
professional portfolio managers. You may allocate your payments among the 20
Kemper investment portfolios of the Investors Fund Series, the four investment
portfolios of the Scudder Variable Life Investment Fund, the Guarantee Period
Accounts and the Fixed Account (the Guarantee Period Accounts and/or the Fixed
Account may not be available in certain jurisdictions.) This range of investment
choices enables you to allocate your money to meet your particular investment
needs.
Like all annuities, the contract has an ACCUMULATION PHASE and an ANNUITY PAYOUT
PHASE. During the ACCUMULATION PHASE you can make payments into the contract on
any frequency. Investment and interest gains accumulate tax deferred. You may
also withdraw money from your contract during the ACCUMULATION PHASE. However,
as with other tax-deferred investments, you pay taxes on earnings and any
untaxed payments to the contract when you withdraw them. A federal tax penalty
may apply if you withdraw money prior to age 59 1/2.
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During the ANNUITY PAYOUT PHASE you, or the payee you designate, will receive
regular annuity benefit payments from your contract, provided you annuitize.
Annuitization involves beginning a series of payments from the capital that has
built up in your contract. The amount of your annuity benefit payments during
the annuity payout phase will, in part, be determined by your contract's growth
during the accumulation phase.
2. ANNUITY BENEFIT PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) monthly payments guaranteed for the annuitant's lifetime; (2)
monthly payments guaranteed for the annuitant's lifetime, but for not less than
10 years; (3) monthly payments for the annuitant's lifetime with the guarantee
that if payments are less than the accumulated value, a refund of the remaining
value will be paid; (4) monthly payments guaranteed for the annuitant's lifetime
and one other individual's (i.e. the beneficiary or a joint annuitant) lifetime;
(5) monthly payments guaranteed for the annuitant's lifetime and one other
individual's lifetime with the payment to the survivor being reduced to 2/3; and
(6) monthly payments guaranteed for a specified period of 1 to 30 years.
You also need to decide if you want the annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once annuity benefit payments begin, the annuity
option cannot be changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making additional
payments into this contract. There are no limits to the frequency of additional
payments, but there are certain limitations as to amount. Generally, the initial
payment must be at least $25,000 and additional payments must be at least $100.
However, minimums may be reduced for certain employer-sponsored plans.
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4. INVESTMENT OPTIONS
You have full investment control over the contract. You may allocate money to
the following portfolios:
<TABLE>
<S> <C>
KEMPER INFS PORTFOLIOS:
- --------------------------------------
Kemper-Dreman Financial Services Kemper Value+Growth
Kemper Small Cap Growth Kemper Horizon 20+
Kemper Small Cap Value Kemper Total Return
Kemper-Dreman High Return Equity Kemper Horizon 10+
Kemper International Kemper High Yield
Kemper International Growth and
Income Kemper Horizon 5
Kemper Global Blue Chip Kemper Global Income
Kemper Growth Kemper Investment Grade Bond
Kemper Contrarian Value Kemper Government Securities
Kemper Blue Chip Kemper Money Market
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
</TABLE>
You may also allocate money to the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts let you choose from among nine different
Guarantee Periods (ranging in maturity from 2 to 10 years) during which
principal and interest rates are guaranteed. The Fixed Account guarantees
principal and a minimum rate of interest (never less than 3% compounded
annually).
5. EXPENSES
Each year and upon surrender, a $35 contract fee ($30 for contracts issued in
Hawaii, New York, North Dakota and Pennsylvania) is deducted from your contract.
The contract fee is waived if the value of the contract is $75,000 or more. We
also deduct insurance charges which amount to 1.40% annually of the daily value
of your contract value allocated to the variable investment options. The
insurance charges include a mortality and expense risk charge of 1.25% and an
administrative expense charge of 0.15%. There are also investment management
fees and other portfolio operating expenses that vary by portfolio.
In states where premium taxes are imposed, a premium tax charge will be deducted
either when withdrawals are made or annuity payments commence.
There is currently no charge for processing investment option transfers. We
reserve the right to assess a charge, not to exceed $25, for transfers in excess
of 12 per contract year.
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The following chart is designed to help you understand the charges in your
contract. Column C labeled "Total Annual Charges" shows the total of the
contract fee (which is represented as 0.04%) and the 1.40% insurance charges
(Column A) plus the investment charges for each portfolio (Column B). Columns D
and E show you two examples of the charges, in dollar amounts, you would pay
under a contract. The examples assume that you invest $1,000 in a portfolio
earning 5% annually and that you withdraw your money: at the end of year 1
(Column D), and at the end of year 10 (Column E). In Column D, the Total Annual
Charges are assessed for one year. In Column E, the example shows the aggregate
of all the annual charges assessed for 10 years. The premium tax is assumed to
be 0% in both examples. The chart does not reflect the optional Enhanced Death
Benefit Rider charge of 0.25% which, if elected, would increase expenses.
<TABLE>
<CAPTION>
A B C D E
TOTAL
<S> <C> <C> <C> <C> <C>
ANNUAL
EXPENSES AT
TOTAL TOTAL END OF
ANNUAL ANNUAL TOTAL ------------
INSURANCE PORTFOLIO ANNUAL 1 10
PORTFOLIO CHARGES CHARGES* CHARGES YEAR YEARS
- -------------------------------------------------- --------- -------- ------- ---- -----
Kemper-Dreman Financial Services* 1.44% 0.99% 2.43% $24 $273
Kemper Small Cap Growth 1.44% 0.71% 2.15% $22 $245
Kemper Small Cap Value 1.44% 0.84% 2.28% $23 $258
Kemper-Dreman High Return Equity* 1.44% 0.87% 2.31% $23 $258
Kemper International 1.44% 0.91% 2.35% $24 $265
Kemper International Growth and Income* 1.44% 1.12% 2.56% $26 $286
Kemper Global Blue Chip* 1.44% 1.56% 3.00% $30 $328
Kemper Growth 1.44% 0.65% 2.09% $21 $239
Kemper Contrarian Value 1.44% 0.80% 2.24% $22 $254
Kemper Blue Chip 1.44% 0.95% 2.39% $24 $269
Kemper Value+Growth 1.44% 0.84% 2.28% $23 $258
Kemper Horizon 20+ 1.44% 0.93% 2.37% $24 $267
Kemper Total Return 1.44% 0.60% 2.04% $20 $233
Kemper Horizon 10+ 1.44% 0.83% 2.27% $23 $257
Kemper High Yield 1.44% 0.65% 2.09% $21 $239
Kemper Horizon 5 1.44% 0.97% 2.41% $24 $271
Kemper Global Income 1.44% 1.05% 2.49% $25 $279
Kemper Investment Grade Bond 1.44% 0.80% 2.24% $22 $254
Kemper Government Securities 1.44% 0.64% 2.08% $21 $238
Kemper Money Market 1.44% 0.55% 1.99% $20 $228
Scudder International 1.44% 1.00% 2.44% $24 $274
Scudder Global Discovery 1.44% 1.50% 2.94% $29 $323
Scudder Capital Growth 1.44% 0.51% 1.95% $20 $224
Scudder Growth and Income 1.44% 0.58% 2.02% $20 $231
</TABLE>
* For newly formed Portfolios, the charges have been estimated. For more
detailed information, see the Fee Table in the Prospectus.
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6. TAXES
You will not pay taxes until you withdraw money from your contract under current
tax rules. During the accumulation phase, earnings are withdrawn first and are
taxed as ordinary income. If you make a withdrawal prior to age 59 1/2, you may
be subject to a 10% federal tax penalty on the earnings. Payments during the
annuity payout phase are considered partly a return of your investment and
partly earnings. You will be subject to income taxes on the earnings portion of
each payment. However, if your contract is funded with pre-tax or tax deductible
dollars (such as a pension or profit sharing plan contribution), then the entire
payment will be taxable.
7. WITHDRAWALS
You can make withdrawals from your contract any time during the accumulation
phase. The minimum withdrawal amount is $100.
Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of the
Guarantee Period will be subject to a market value adjustment which may increase
or decrease the value in that account. This adjustment will never impact your
original investment, nor will earnings in the GPA amount to less than an
effective annual rate of 3%.
8. PERFORMANCE
The value of your contract will vary depending on the investment performance of
the portfolios you choose. The following chart illustrates past returns for each
portfolio since the inception of each Sub-Account that has been in existence for
a complete year as of December 31, 1997. The performance figures reflect the
contract fee, the insurance charges, the investment charges and all other
expenses of the portfolio. They do not reflect the optional Enhanced Death
Benefit Rider charge of 0.25% which, if elected, would reduce performance. These
returns are based upon historical data and are not intended to indicate future
performance.
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
CALENDAR
YEAR
ENDED
PORTFOLIO 12/31/97
- ------------------------------------------------- -----------
Kemper-Dreman Financial Services N/A
<S> <C>
Kemper Small Cap Growth 32.32%
Kemper Small Cap Value 20.03%
Kemper-Dreman High Return Equity N/A
Kemper International 7.92%
Kemper International Growth and Income N/A
Kemper Global Blue Chip N/A
Kemper Growth 19.63%
Kemper Contrarian Value 28.55%
Kemper Blue Chip N/A
Kemper Value+Growth 23.70%
Kemper Horizon 20+ 18.78%
Kemper Total Return 18.27%
Kemper Horizon 10+ 15.13%
Kemper High Yield 10.04%
Kemper Horizon 5 11.11%
Kemper Global Income N/A
Kemper Investment Grade Bond 7.49%
Kemper Government Securities 7.42%
Kemper Money Market 3.72%
Scudder International N/A
Scudder Global Discovery N/A
Scudder Capital Growth N/A
Scudder Growth and Income N/A
</TABLE>
First Allmerica Financial Life Insurance Company -- The Portfolio was first
offered in 1997. Therefore, performance for a complete year is not available and
is not shown here.
9. DEATH BENEFIT
If you, a joint owner or (in the event that the owner is a non-natural person)
an annuitant dies during the accumulation phase, we will pay the beneficiary a
death benefit. The death benefit is equal to the GREATER of: (a) the accumulated
value increased by any positive market value adjustment; or (b) gross payments,
decreased proportionately to reflect withdrawals. You may also purchase a rider
that will enhance the death benefit (see "Optional Enhanced Death Benefit Rider"
below).
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10. OTHER INFORMATION
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), you will receive a refund in
accordance with the terms of the contract's "Right to Examine Contract"
provision.
OPTIONAL ENHANCED DEATH BENEFIT RIDER: This optional rider is available for a
separate monthly charge. Under this rider:
I. If an owner (or an annuitant if the owner is a non-natural person) dies
during the accumulation phase and before the oldest owner's 90th birthday, the
death benefit will be equal to the GREATEST of:
(a) the accumulated value increased by any positive market value adjustment (the
"accumulated value"); or
(b) gross payments compounded daily at an annual rate of 5%, decreased
proportionately to reflect withdrawals (5% compounding not available in
Hawaii and New York); or
(c) the highest accumulated value of all contract anniversaries, as determined
after the accumulated value of each contract anniversary is increased for
subsequent payments and decreased proportionately for subsequent
withdrawals.
The (c) value is determined on each contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior contract anniversaries, AFTER all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an owner (or an annuitant if the owner is a non-natural person) dies
during the accumulation phase but after the oldest owner's 90th birthday, the
death benefit will be equal to the GREATER of:
(a) the accumulated value increased by any positive market value adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the contract anniversary immediately prior to the oldest owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Kemper Money Market Portfolio, the Kemper Government
Securities Portfolio or the Fixed Account to one or more of the variable
investment options.
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AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
11. INQUIRIES
If you need more information you may contact us at 1-800-782-8380 or send
correspondence to:
Kemper Gateway Annuities
Allmerica Financial
P.O. Box 8632
Boston, Massachusetts 02266-8632
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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
This Prospectus describes interests under flexible payment deferred variable and
fixed annuity contracts, known as Kemper Gateway Advisor Variable Annuity
Contracts, issued either on a group basis or as individual contracts, by
Allmerica Financial Life Insurance and Annuity Company (for contracts issued in
the District of Columbia, Puerto Rico, the Virgin Islands and any state except
Hawaii and New York) or by First Allmerica Financial Life Insurance Company (for
contracts issued in Hawaii and New York) to individuals and businesses in
connection with retirement plans which may or may not qualify for special
federal income tax treatment. (For information about the tax status when used
with a particular type of plan, see "FEDERAL TAX CONSIDERATIONS"). Unless
otherwise specified, any reference to the "Company" in this Prospectus shall
refer exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in the District of Columbia, Puerto Rico, the Virgin Islands
and any state except Hawaii and New York and exclusively to First Allmerica
Financial Life Insurance Company for contracts issued in Hawaii and New York.
This Prospectus sets forth the information that a prospective investor ought to
know before investing. Additional information is contained in a Statement of
Additional Information ("SAI") dated , 1998, filed with the
Securities and Exchange Commission (the "SEC") and incorporated herein by
reference. The Table of Contents of the SAI is on page 5 of this Prospectus. The
SAI is available upon request and without charge through Allmerica Investments,
Inc., telephone 1-800-782-8380. In addition, the SEC maintains a website,
www.sec.gov, that contains the SAI as well as material incorporated by reference
related to this Prospectus.
Contract values may accumulate on a variable basis in the separate account known
as Separate Account KG (the "Variable Account"). The assets of the Variable
Account are divided into Sub-Accounts, each investing exclusively in shares of
one of the following Kemper Portfolios of Investors Fund Series ("Kemper INFS")
or Portfolios of Scudder Variable Life Investment Fund ("Scudder VLIF"):
<TABLE>
<CAPTION>
KEMPER INFS PORTFOLIOS:
- ----------------------------------------
<S> <C>
KEMPER-DREMAN FINANCIAL SERVICES KEMPER VALUE+GROWTH
KEMPER SMALL CAP GROWTH KEMPER HORIZON 20+
KEMPER SMALL CAP VALUE KEMPER TOTAL RETURN
KEMPER-DREMAN HIGH RETURN EQUITY KEMPER HORIZON 10+
KEMPER INTERNATIONAL KEMPER HIGH YIELD
KEMPER INTERNATIONAL GROWTH AND INCOME KEMPER HORIZON 5
KEMPER GLOBAL BLUE CHIP KEMPER GLOBAL INCOME
KEMPER GROWTH KEMPER INVESTMENT GRADE BOND
KEMPER CONTRARIAN VALUE KEMPER GOVERNMENT SECURITIES
KEMPER BLUE CHIP KEMPER MONEY MARKET
SCUDDER VLIF PORTFOLIOS:
- ----------------------------------------
SCUDDER INTERNATIONAL SCUDDER CAPITAL GROWTH
SCUDDER GLOBAL DISCOVERY SCUDDER GROWTH AND INCOME
</TABLE>
The Company offers other variable annuity contracts which also invest in many of
the same Portfolios. These contracts may have different charges that could
affect contract performance, and may offer different benefits more suitable to
your needs. To obtain information about these contracts, contact your financial
representative.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF
INVESTORS FUND SERIES AND SCUDDER VARIABLE LIFE INVESTMENT FUND. INVESTORS
SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
DATED , 1998
<PAGE>
In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and during the
accumulation period to one or more of the Company's Guarantee Period Accounts.
Amounts allocated to the Fixed Account earn interest at a guaranteed rate for
one year from the date allocated. Amounts allocated to a Guarantee Period
Account earn a fixed rate of interest for the duration of the applicable
Guarantee Period if held for the entire Guarantee Period. If removed prior to
the end of the Guarantee Period the value may be increased or decreased by a
Market Value Adjustment. Amounts allocated to the Guarantee Period Accounts in
the accumulation phase are held in the Company's Separate Account GPA.
Participation in a group contract will be accounted for by the issuance of a
certificate describing the individual's interest under the group contract.
Participation in an individual contract will be evidenced by the issuance of an
individual contract. Certificates and individual contracts are referred to
collectively herein as the "Contract(s)." The following is a summary of
information about these Contracts. More detailed information can be found under
the referenced captions in this Prospectus.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY (FOR CONTRACTS ISSUED IN THE DISTRICT OF COLUMBIA, PUERTO RICO, THE
VIRGIN ISLANDS AND ANY STATE EXCEPT HAWAII AND NEW YORK) OR FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY (FOR CONTRACTS ISSUED IN HAWAII AND NEW YORK),
AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE
SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE LOSS
OF PRINCIPAL.
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS 5
SPECIAL TERMS 6
SUMMARY 8
ANNUAL AND TRANSACTION EXPENSES 15
CONDENSED FINANCIAL INFORMATION 21
PERFORMANCE INFORMATION 27
DESCRIPTION OF THE COMPANIES, THE VARIABLE
ACCOUNT, INVESTORS FUND SERIES AND SCUDDER
VARIABLE LIFE INVESTMENT FUND 33
INVESTMENT OBJECTIVES AND POLICIES 35
INVESTMENT MANAGEMENT SERVICES 37
DESCRIPTION OF THE CONTRACT 38
A. Payments 38
B. Right to Cancel Individual Retirement Annuity 40
C. Right to Cancel All Other Contracts 40
D. Transfer Privilege 41
Automatic Transfers and Automatic Account Rebalancing
Options 42
E. Surrender 43
F. Withdrawals 44
Systematic Withdrawals 44
Life Expectancy Distributions 45
G. Death Benefit 46
Death of an Owner Prior to the Annuity Date 46
Enhanced Death Benefit Rider 46
Payment of the Death Benefit Prior to the Annuity Date 47
H. The Spouse of the Owner as Beneficiary 48
I. Assignment 48
J. Electing the Form of Annuity and Annuity Date 48
K. Description of Variable Annuity Payout Options 50
L. Annuity Benefit Payments 52
The Annuity Unit 52
Determination of the First and Subsequent Annuity
Benefit Payments 52
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
M. NORRIS Decision 53
N. Computation of Values 54
The Accumulation Unit 54
Net Investment Factor 54
CHARGES AND DEDUCTIONS 55
A. Variable Account Deductions 55
Mortality and Expense Risk Charge 55
Administrative Expense Charge 56
Other Charges 56
B. Contract Fee 56
C. Optional Benefit Rider 57
D. Premium Taxes 57
E. Transfer Charge 57
GUARANTEE PERIOD ACCOUNTS 58
FEDERAL TAX CONSIDERATIONS 62
A. Qualified and Non-Qualified Contracts 63
B. Taxation of the Contracts in General 63
Withdrawals Prior to Annuitization 63
Annuity Payouts After Annuitization 64
Penalty on Distribution 64
Assignments or Transfers 65
Non-Natural Owners 65
Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations 65
C. Tax Withholding 66
D. Provisions Applicable to Qualified Employer Plans 66
Corporate and Self-Employed Pension and
Profit Sharing Plans 66
Individual Retirement Annuities 66
Tax-Sheltered Annuities 67
Texas Optional Retirement Program 67
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
REPORTS 67
LOANS (QUALIFIED CONTRACTS ONLY) 68
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 68
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 70
VOTING RIGHTS 70
DISTRIBUTION 70
SERVICES 71
LEGAL MATTERS 71
FURTHER INFORMATION 71
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED
ACCOUNT A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET
VALUE ADJUSTMENT B-1
APPENDIX C -- THE DEATH BENEFIT C-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY 3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
PERFORMANCE INFORMATION 6
TAX-DEFERRED ACCUMULATION 7
FINANCIAL STATEMENTS F-1
</TABLE>
5
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the Sub-
Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts credited to the Contract on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose continuation of life
annuity benefit payments involving life contingency depend. Joint Annuitants are
permitted and, unless otherwise indicated, any reference to Annuitant shall
include Joint Annuitants.
ANNUITY DATE: the date on which annuity benefit payments begin as specified
pursuant to the Contract.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an Annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited to a Guarantee Period Account.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment to earnings in the
Guarantee Period Account assessed if any portion of a Guarantee Period Account
is withdrawn or transferred prior to the end of its Guarantee Period.
6
<PAGE>
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under this Contract. Joint Owners are permitted if one of the two is
an Annuitant and, unless otherwise indicated, any reference to Owner shall
include Joint Owners.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding Kemper
portfolio of Investors Fund Series ("Kemper INFS") or a corresponding portfolio
of Scudder Variable Life Investment Fund ("Scudder VLIF").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee and Market Value Adjustment.
UNDERLYING PORTFOLIOS (OR PORTFOLIOS): currently, the twenty Portfolios of
Kemper INFS and the four Portfolios of Scudder VLIF in which the Sub-Accounts
invest.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Portfolios is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, as well as each day otherwise required.
VARIABLE ACCOUNT: Separate Account KG, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain of the
Portfolios.
7
<PAGE>
SUMMARY
WHAT IS THE KEMPER GATEWAY ADVISOR VARIABLE ANNUITY?
The Kemper Gateway Advisor variable annuity contract is an insurance contract
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Contract combines the concept of
professional money management with the attributes of an annuity contract.
Features available through the Contract include:
- A customized investment portfolio;
- 20 Kemper INFS Portfolios and 4 Scudder VLIF Portfolios;
- 1 Fixed Account;
- 9 Guarantee Period Accounts;
- Experienced professional portfolio managers;
- Tax deferral on earnings;
- Guarantees that can protect your beneficiaries during the accumulation
phase;
- Income that can be guaranteed for life.
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated to the
combination of portfolio of securities ("Portfolios") under your Contract, to
the Guarantee Period Accounts, and to the Fixed Account. You select the
investment options most appropriate for your investment needs. As those needs
change, you may also change your allocation without incurring any tax
consequences. Your Contract's Accumulated Value is based on the investment
performance of the Portfolios and any accumulations in the Guarantee Period and
Fixed Accounts. No income taxes are paid on any earnings under the Contract
unless and until Accumulated Values are withdrawn. In addition, during the
accumulation phase, your beneficiaries receive certain protections and
guarantees in the event of your death. See discussion below, "WHAT HAPPENS UPON
DEATH DURING THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, you, or the payee you designate, can receive
income based on several annuity payout options. You choose the annuity payout
option and the date for annuity benefit payments to begin. You also decide
whether you want variable annuity benefit payments based on the investment
performance of certain Portfolios, fixed annuity benefit payments with payment
amounts guaranteed by the Company, or a combination of fixed and variable
annuity benefit payments. Among the payout options available during the annuity
payout phase are:
8
<PAGE>
- periodic payments for the Annuitant's lifetime;
- periodic payments for the Annuitant's life and the life of another person
selected by you;
- periodic payments for the Annuitant's lifetime with guaranteed payments
continuing for ten years in the event that the Annuitant dies before the
end of ten years;
- periodic payments over a specified number of years (1 to 30) -- under this
option you may reserve the right to convert remaining payments to a lump-
sum payout by electing a "commutable" option.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner") and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in the District of Columbia,
Puerto Rico, the Virgin Islands and any state except Hawaii and New York) or
First Allmerica Financial Life Insurance Company (for contracts issued in Hawaii
and New York). Unless otherwise specified, any reference to the "Company" in
this Prospectus shall refer exclusively to Allmerica Financial Life Insurance
and Annuity Company for contracts issued in the District of Columbia, Puerto
Rico, the Virgin Islands and any state except Hawaii and New York and
exclusively to First Allmerica Financial Life Insurance Company for contracts
issued in Hawaii and New York. Each Contract has an Owner (or an Owner and a
Joint Owner, in which case one of the two also must be an Annuitant), an
Annuitant (or an Annuitant and a Joint Annuitant) and one or more beneficiaries.
As Owner, you make payments, choose investment allocations, receive annuity
benefit payments (or designate someone else to receive annuity benefit payments)
and select the Annuitant and beneficiary. When a Contract is jointly owned, the
consent of both Owners is required in order to exercise any ownership rights.
The Annuitant is the individual upon whose continuation of life annuity benefit
payments involving life contingency depend. An Annuitant may be changed at any
time after issue of the Contract and prior to the Annuity Date, unless (1) the
Owner is a non-natural person or (2) you are taking life expectancy
distributions. For more information about life expectancy distributions, see "F.
Withdrawals." At all times there must be at least one Annuitant. If an Annuitant
dies and a replacement is not named, you will become the new Annuitant. The
beneficiary is the person, persons or entity entitled to the death benefit prior
to the Annuity Date and who, under certain circumstances, may be entitled to
annuity benefit payments upon the death of an Owner on or after the Annuity
Date.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject to the minimum
and maximum payments stated in "A. Payments."
9
<PAGE>
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. As to the date of this Prospectus, payments may be allocated to a
maximum of seventeen Variable Sub-Accounts during the life of the Contract and
prior to the Annuity Date in addition to the Kemper Money Market Portfolio.
VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the following
Portfolios:
<TABLE>
<S> <C>
KEMPER INFS PORTFOLIOS:
- --------------------------------------
Kemper-Dreman Financial Services Kemper Value+Growth
Kemper Small Cap Growth Kemper Horizon 20+
Kemper Small Cap Value Kemper Total Return
Kemper-Dreman High Return Equity Kemper Horizon 10+
Kemper International Kemper High Yield
Kemper International Growth and
Income Kemper Horizon 5
Kemper Global Blue Chip Kemper Global Income
Kemper Growth Kemper Investment Grade Bond
Kemper Contrarian Value Kemper Government Securities
Kemper Blue Chip Kemper Money Market
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
</TABLE>
For a more detailed description of the Portfolios, see "INVESTMENT OBJECTIVES
AND POLICIES."
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available nine Guarantee Periods ranging from two to
ten years in duration. Once declared, the Guaranteed Interest Rate will not
change during the duration of the Guarantee Period. If amounts allocated to a
Guarantee Period Account are transferred, surrendered or applied to any annuity
option at any time other than the day following the last day of the applicable
Guarantee Period, a Market Value Adjustment will apply that may increase or
decrease the Account's value; however, this adjustment will
10
<PAGE>
never be applied against your principal. In addition, earnings in the GPA after
application of the Market Value Adjustment will not be less than an effective
annual rate of 3%. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
THE GUARANTEE PERIOD ACCOUNTS AND/OR SOME OF THE SUB-ACCOUNTS MAY NOT BE
AVAILABLE IN ALL STATES.
WHO ARE THE PORTFOLIO MANAGERS?
Scudder Kemper Investments, Inc. ("Scudder Kemper") is the investment manager of
each Portfolio of Kemper INFS and each Portfolio of Scudder VLIF. Scudder
Investments (U.K.) Limited, an affiliate of Scudder Kemper, is the sub-adviser
for the Kemper International Portfolio and the Kemper Global Income Portfolio.
Dreman Value Management, L.L.C. is the sub-advisor for the Kemper-Dreman
Financial Services Portfolio and Kemper-Dreman High Return Equity Portfolio,
Scudder Kemper is the investment manager of the Guarantee Period Accounts
pursuant to an investment advisory agreement between the Company and Scudder
Kemper.
CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. You will incur no current taxes on transfers while your money remains
in the Contract. You also may elect Automatic Account Rebalancing to ensure
assets remain allocated according to a desired mix or choose Automatic Dollar
Cost Averaging to gradually move money into one or more Portfolios. As of the
date of this Prospectus, transfers may be made to a maximum of seventeen
variable Sub-Accounts during the life of the Contract and prior to the Annuity
Date in addition to the Kemper Money Market Portfolio. See "D. Transfer
Privilege."
11
<PAGE>
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender your Contract or make withdrawals any time before the annuity
payout phase begins. A 10% tax penalty may apply on all amounts deemed to be
income if you are under age 59 1/2. (A Market Value Adjustment, which may
increase or decrease the value of the account, may apply to any withdrawal made
from a Guarantee Period Account prior to the expiration of the Guarantee
Period.)
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If you, a Joint Owner or (in the event that the Owner is a non-natural person)
an Annuitant should die prior to the Annuity Date, a death benefit will be paid
to the beneficiary. The standard death benefit will be equal to the GREATER of:
- The Accumulated Value increased by any positive Market Value Adjustment; or
- Gross payments, decreased proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal, multiplied by the
withdrawal amount, and divided by the Accumulated Value immediately prior
to the withdrawal).
An optional Enhanced Death Benefit Rider is available for a separate monthly
charge. See "G. Death Benefit" under "DESCRIPTION OF THE CONTRACT." Under the
Enhanced Death Benefit Rider:
I. If an Owner (or an Annuitant if the Owner is a non-natural person) dies prior
to the Annuity Date and before the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATEST of:
(a) the Accumulated Value increased by any positive Market Value Adjustment (the
"Accumulated Value"); or
(b) gross payments compounded daily at an annual rate of 5%, decreased
proportionately to reflect withdrawals (5% compounding not available in
Hawaii and New York); or
(c) the highest Accumulated Value of all Contract anniversaries, as determined
after the Accumulated Value of each contract anniversary is increased for
subsequent payments and decreased proportionately for subsequent
withdrawals.
The (c) value is determined on each Contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior Contract anniversaries, AFTER all of the (a) values have been adjusted to
12
<PAGE>
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next Contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an Owner (or an Annuitant if the Owner is a non-natural person) dies
prior to the Annuity Date but after the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the Contract anniversary immediately prior to the oldest Owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value on a Contract anniversary and upon surrender is less
than $75,000, the Company will deduct a $35 Contract fee ($30 for Contracts
issued in Hawaii, New York, North Dakota and Pennsylvania) from the Contract.
There will be no Contract fee if the Accumulated Value is $75,000 or more.
Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "D. Premium Taxes."
Currently, the Company makes no charge for processing transfers. The first 12
transfers in a Contract year are guaranteed to be free of a transfer charge. For
each subsequent transfer in a Contract year, the Company reserves the right to
assess a charge which is guaranteed never to exceed $25.
The Company will deduct, on a daily basis, an annual mortality and expense risk
charge and administrative expense charge equal to 1.25% and 0.15%, respectively,
of the average daily net assets invested in each Portfolio. The Portfolios will
incur certain management fees and expenses described more fully in "Other
Charges" under "A. Variable Account Deductions" and in the Kemper INFS and
Scudder VLIF prospectuses which accompany this Prospectus.
An optional rider (Enhanced Death Benefit Rider) is available for an additional
charge of 0.25% which is deducted in arrears on a monthly basis. For more
information see "G. Death Benefit" under "DESCRIPTION OF THE CONTRACT."
For more information, see "CHARGES AND DEDUCTIONS."
13
<PAGE>
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the Sub-
Accounts (plus any fees or charges that may have been deducted.) However, if
state law requires or if your Contract was issued as an Individual Retirement
Annuity (IRA), you will generally receive a refund of your entire payment. In
certain states this refund may be the greater of (1) your entire payment or (2)
the amounts allocated to the Fixed and Guarantee Period Accounts plus the
Accumulated Value of amounts in the Sub-Accounts, plus any fees or charges
previously deducted. See "B. Right to Cancel Individual Retirement Annuity" and
"C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving your Contract:
- You may assign your ownership to someone else, except under certain
qualified plans; see "FEDERAL TAX CONSIDERATIONS."
- You may change an Annuitant at any time after Contract issue and prior to
the Annuity Date, unless the Owner is a non-natural person and except while
taking life expectancy distributions.
- You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- You may change your allocation of payments.
- You may make transfers among your accounts prior to the Annuity Date
without any tax consequences.
- You may cancel the Contract within ten days of delivery (or longer if
required by law).
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<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under the Contract, expenses of the Sub-
Accounts, and expenses of the Underlying Portfolios. In addition to the charges
and expenses described below, premium taxes are applicable in some states and
are deducted as described under "D. Premium Taxes."
<TABLE>
<S> <C>
CONTRACT CHARGES: CHARGE
- ----------------------------------------------------------- ---------
TRANSFER CHARGE:
The Company currently makes no charge for processing None
transfers and guarantees that the first 12 transfers in a
Contract year will not be subject to a transfer charge.
For each subsequent transfer, the Company reserves the
right to assess a charge, guaranteed never to exceed $25,
to reimburse the Company for the costs of processing the
transfer.
CONTRACT FEE:
The fee is deducted annually and upon surrender prior to $35*
the Annuity Date when Accumulated Value is less than
$75,000.
CONTRACT OWNER TRANSACTION EXPENSES
- -----------------------------------------------------------
Sales Charge Imposed on Payments: None
Deferred Sales Charge: None
SUB-ACCOUNT EXPENSES:
- -----------------------------------------------------------
(on annual basis as percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
---------
Total Asset Charge: 1.40%
</TABLE>
* $30 in Hawaii, New York, North Dakota and Pennsylvania.
15
<PAGE>
PORTFOLIO EXPENSES: The following table shows the expenses of the Underlying
Portfolios as a percentage of average net assets for the year ended December 31,
1997. For more information concerning fees and expenses, see the prospectuses
for the Underlying Portfolios.
<TABLE>
<CAPTION>
MANAGEMENT FEE
(AFTER APPLICABLE
PORTFOLIO WAIVERS) OTHER EXPENSES TOTAL EXPENSES
- ----------------------------------- ----------------------- -------------- --------------
<S> <C> <C> <C>
Kemper-Dreman Financial
Services*......................... 0.75% 0.24% 0.99%
Kemper Small Cap Growth............ 0.65% 0.06% 0.71%
Kemper Small Cap Value............. 0.75% 0.09% 0.84%
Kemper-Dreman High Return
Equity*........................... 0.75% 0.12% 0.87%
Kemper International............... 0.75% 0.16% 0.91%
Kemper International Growth and
Income*........................... 0.70%(1) 0.42% 1.12%(1)
Kemper Global Blue Chip*........... 0.85%(1) 0.71% 1.56%(1)
Kemper Growth...................... 0.60% 0.05% 0.65%
Kemper Contrarian Value............ 0.75% 0.05% 0.80%
Kemper Blue Chip**................. 0.65% 0.30% 0.95%
Kemper Value+Growth................ 0.75% 0.09% 0.84%
Kemper Horizon 20+................. 0.60% 0.33% 0.93%
Kemper Total Return................ 0.55% 0.05% 0.60%
Kemper Horizon 10+................. 0.60% 0.23% 0.83%
Kemper High Yield.................. 0.60% 0.05% 0.65%
Kemper Horizon 5................... 0.60% 0.37% 0.97%
Kemper Global Income**............. 0.75% 0.30% 1.05%
Kemper Investment Grade Bond....... 0.60% 0.20% 0.80%
Kemper Government Securities....... 0.55% 0.09% 0.64%
Kemper Money Market................ 0.50% 0.05% 0.55%
Scudder International.............. 0.83% 0.17% 1.00%
Scudder Global Discovery........... 0.98% 0.81% 1.79%
Scudder Capital Growth............. 0.47% 0.04% 0.51%
Scudder Growth and Income.......... 0.48% 0.10% 0.58%
</TABLE>
* These Portfolios commenced operations on 5/1/98, therefore "other expenses"
are estimated and annualized and should not be considered representative of
future expenses. Actual expenses may be greater or less than shown.
** These Portfolios commenced operations on 5/1/97, therefore "other expenses"
are estimated and annualized and should not be considered representative of
future expenses. Actual expenses may be greater or less than shown.
16
<PAGE>
(1) Until further notice, the Adviser has agreed to voluntarily waive its
management fee for the Kemper International Growth and Income Portfolio by
0.30% of the average daily net assets and for the Kemper Global Blue Chip
Portfolio by 0.15% of the average daily net assets. Without such a waiver,
the management fee and total expenses would be as follows: Kemper
International Growth and Income - 1.00% and 1.42% and Kemper Global Blue
Chip - 1.00% and 1.71%. The declaration of a voluntary waiver does not bind
the Manager to declare future waivers with respect to these funds. These
limitations may be terminated at any time.
EXAMPLES. The following examples demonstrate the cumulative expenses which
would be paid by the Owner at 1-year, 3-year, 5-year and 10-year intervals with
and without the optional Enhanced Death Benefit Rider. Each example assumes a
$1,000 investment in a Sub-Account and a 5% annual return on assets, as required
by rules of the SEC.
THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
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<PAGE>
(1) At the end of the applicable time period, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and no
optional Enhanced Death Benefit Rider:
<TABLE>
<CAPTION>
1 3 5 10
UNDERLYING PORTFOLIO YEAR YEARS YEARS YEARS
- -------------------------------------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper-Dreman Financial Services.................. $24 $ 75 $128 $273
Kemper Small Cap Growth........................... $22 $ 66 $114 $245
Kemper Small Cap Value............................ $23 $ 70 $120 $258
Kemper-Dreman High Return......................... $23 $ 71 $122 $261
Kemper International.............................. $24 $ 72 $124 $265
Kemper International Growth and Income............ $26 $ 79 $134 $286
Kemper Global Blue Chip........................... $30 $ 92 $156 $328
Kemper Growth..................................... $21 $ 65 $111 $239
Kemper Contrarian Value........................... $22 $ 69 $118 $254
Kemper Blue Chip.................................. $24 $ 74 $126 $269
Kemper Value+Growth............................... $23 $ 70 $120 $258
Kemper Horizon 20+................................ $24 $ 73 $125 $267
Kemper Total Return............................... $20 $ 63 $108 $233
Kemper Horizon 10+................................ $23 $ 70 $120 $257
Kemper High Yield................................. $21 $ 65 $111 $239
Kemper Horizon 5.................................. $24 $ 74 $127 $271
Kemper Global Income.............................. $25 $ 77 $131 $279
Kemper Investment Grade Bond...................... $22 $ 69 $118 $254
Kemper Government Securities...................... $21 $ 64 $110 $238
Kemper Money Market............................... $20 $ 62 $106 $228
Scudder International............................. $24 $ 75 $128 $274
Scudder Global Discovery.......................... $29 $ 90 $153 $323
Scudder Capital Growth............................ $20 $ 60 $104 $224
Scudder Growth and Income......................... $20 $ 62 $107 $231
</TABLE>
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<PAGE>
(2) At the end of the applicable time period, you would pay the following
expenses on a $1000 investment, assuming a 5% annual return on assets and an
optional Enhanced Death Benefit Rider:
<TABLE>
<CAPTION>
1 3 5 10
UNDERLYING PORTFOLIO YEAR YEARS YEARS YEARS
- -------------------------------------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper-Dreman Financial Services.................. $27 $ 82 $140 $298
Kemper Small Cap Growth........................... $24 $ 74 $126 $270
Kemper Small Cap Value............................ $25 $ 78 $133 $283
Kemper-Dreman High Return......................... $26 $ 79 $134 $286
Kemper International.............................. $26 $ 80 $136 $290
Kemper International Growth and Income............ $28 $ 86 $147 $310
Kemper Global Blue Chip........................... $32 $ 99 $168 $352
Kemper Growth..................................... $23 $ 72 $123 $264
Kemper Contrarian Value........................... $25 $ 77 $131 $279
Kemper Blue Chip.................................. $26 $ 81 $138 $294
Kemper Value+Growth............................... $25 $ 78 $133 $283
Kemper Horizon 20+................................ $26 $ 80 $137 $292
Kemper Total Return............................... $23 $ 71 $121 $259
Kemper Horizon 10+................................ $25 $ 77 $132 $282
Kemper High Yield................................. $23 $ 72 $123 $264
Kemper Horizon 5.................................. $27 $ 82 $139 $296
Kemper Global Income.............................. $27 $ 84 $143 $304
Kemper Investment Grade Bond...................... $25 $ 77 $131 $279
Kemper Government Securities...................... $23 $ 72 $123 $263
Kemper Money Market............................... $22 $ 69 $118 $254
Scudder International............................. $27 $ 83 $141 $299
Scudder Global Discovery.......................... $32 $ 97 $165 $346
Scudder Capital Growth............................ $22 $ 68 $116 $250
Scudder Growth and Income......................... $23 $ 70 $120 $257
</TABLE>
As required in rules promulgated under the Investment Company Act of 1940 Act
(the "1940 Act"), the Contract fee is reflected in the examples by a method to
show the "average" impact on an investment in the Variable Account. The total
Contract fees collected are divided by the total average net assets attributable
to the Contract. The resulting percentage is 0.04% and the amount of the
Contract fee is assumed to be $0.40 in the examples. The Contract fee is
deducted only when the accumulated value is less than $75,000.
The Contract fee is not deducted after annuitization.
OPTIONAL ENHANCED DEATH BENEFIT RIDER. Subject to state availability, the
Company offers an optional Enhanced Death Benefit Rider that may be elected by
the Owner. A separate monthly charge is made for this rider. The applicable
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<PAGE>
charge is equal to Accumulated Value on the last day of each month and on the
date a rider is terminated multiplied by 1/12th of the following annual
percentage rate:
Enhanced Death Benefit Rider....................................................
0.25%
For a description of this rider, see "Enhanced Death Benefit Rider" under "G.
Death Benefit."
20
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997 1996
- ----------------------------------------------------------------- --------- ---------
<S> <C> <C>
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0.989 1.000
End of Period................................................ 1.309 0.989
Number of Units Outstanding at End of Period
(in thousands).................................................. 16,339 210
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 1.022 1.000
End of Period................................................ 1.227 1.022
Number of Units Outstanding at End of Period
(in thousands).................................................. 29,597 314
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 1.019 1.000
End of Period................................................ 1.100 1.019
Number of Units Outstanding at End of Period
(in thousands).................................................. 30,789 360
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0.995 1.000
End of Period................................................ 1.191 0.995
Number of Units Outstanding at End of Period
(in thousands).................................................. 24,186 370
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 1.036 1.000
End of Period................................................ 1.332 1.036
Number of Units Outstanding at End of Period
(in thousands).................................................. 53,634 317
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0 N/A
End of Period................................................ 1.105 N/A
Number of Units Outstanding at End of Period
(in thousands).................................................. 13,179 N/A
</TABLE>
21
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997 1996
- ----------------------------------------------------------------- --------- ---------
<S> <C> <C>
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0.981 1.000
End of Period................................................ 1.213 0.981
Number of Units Outstanding at End of Period
(in thousands).................................................. 30,946 197
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0.995 1.000
End of Period................................................ 1.183 0.995
Number of Units Outstanding at End of Period
(in thousands).................................................. 7,768 226
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0.984 1.000
End of Period................................................ 1.164 0.984
Number of Units Outstanding at End of Period
(in thousands).................................................. 31,284 353
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 1.002 1.000
End of Period................................................ 1.154 1.002
Number of Units Outstanding at End of Period
(in thousands).................................................. 10,199 39
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 1.020 1.000
End of Period................................................ 1.123 1.020
Number of Units Outstanding at End of Period
(in thousands).................................................. 64,934 941
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 1.002 1.000
End of Period................................................ 1.114 1.002
Number of Units Outstanding at End of Period
(in thousands).................................................. 7,888 53
</TABLE>
22
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997 1996
- ----------------------------------------------------------------- --------- ---------
<S> <C> <C>
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0 N/A
End of Period................................................ 1.019 N/A
Number of Units Outstanding at End of Period
(in thousands).................................................. 1,317 N/A
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 1.003 1.000
End of Period................................................ 1.079 1.003
Number of Units Outstanding at End of Period
(in thousands).................................................. 8,255 22
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0.993 1.000
End of Period................................................ 1.067 0.993
Number of Units Outstanding at End of Period
(in thousands).................................................. 7,815 498
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 1.004 1.000
End of Period................................................ 1.042 1.004
Number of Units Outstanding at End of Period
(in thousands).................................................. 15,760 1,904
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1997.
23
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ----------------------------------------------------------------- ---------
<S> <C> <C>
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 0.985
Number of Units Outstanding at End of Period
(in thousands).............................................. 18
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.003
Number of Units Outstanding at End of Period
(in thousands).............................................. 52
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 0.932
Number of Units Outstanding at End of Period
(in thousands).............................................. 48
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 0.973
Number of Units Outstanding at End of Period
(in thousands).............................................. 16
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.014
Number of Units Outstanding at End of Period
(in thousands).............................................. 174
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.105
Number of Units Outstanding at End of Period
(in thousands).............................................. 43
</TABLE>
24
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ----------------------------------------------------------------- ---------
<S> <C> <C>
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 0.960
Number of Units Outstanding at End of Period
(in thousands).............................................. 125
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 0.980
Number of Units Outstanding at End of Period
(in thousands).............................................. 5
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.014
Number of Units Outstanding at End of Period
(in thousands).............................................. 42
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.016
Number of Units Outstanding at End of Period
(in thousands).............................................. 21
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.004
Number of Units Outstanding at End of Period
(in thousands).............................................. 75
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.017
Number of Units Outstanding at End of Period
(in thousands).............................................. 81
</TABLE>
25
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1997
- ----------------------------------------------------------------- ---------
<S> <C> <C>
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.019
Number of Units Outstanding at End of Period
(in thousands).............................................. 11
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.004
Number of Units Outstanding at End of Period
(in thousands).............................................. 21
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.004
Number of Units Outstanding at End of Period
(in thousands).............................................. 21
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period.......................................... 0
End of Period................................................ 1.000
Number of Units Outstanding at End of Period
(in thousands).............................................. 5
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1997.
26
<PAGE>
PERFORMANCE INFORMATION
The Contract was first offered to the public in 1999. The Company, however, may
advertise "total return" and "average annual total return" performance
information based on the periods that the Sub-Accounts have been in existence
and the periods that the Underlying Portfolios have been in existence.
Performance results for all periods shown below are calculated with all charges
assumed to be those applicable to the Sub-Accounts and the Underlying
Portfolios. Both the total return and yield figures are based on historical
earnings and are not intended to indicate future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The average annual total return represents the average annual percentage change
in the value of an investment in a Sub-Account over a given period of time.
Average annual total return represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Kemper Money Market Portfolio
refers to the income generated by an investment in the Sub-Account over a seven-
day period (which period will be specified in the advertisement). This income is
then "annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Portfolio other than the Kemper Money
Market Portfolio refers to the annualized income generated by an investment in
the Sub-Account over a specified 30-day or one-month period. The yield is
calculated by assuming that the income generated by the investment during that
30-day or one-month period is generated each period over a 12-month period and
is shown as a percentage of the investment.
Quotations of average annual total return as shown in Tables 1A and 1B are
calculated in the manner prescribed by the SEC and show the percentage rate of
return of a hypothetical initial investment of $1,000 for the most recent one,
five and ten year period or for a period covering the time the Sub-Account has
been in existence, if less than the prescribed periods. The calculation is
adjusted to reflect the deduction of the annual Sub-Account asset charge of
1.40%, the Underlying
27
<PAGE>
Portfolio charges and the annual Contract fee. The calculation has not been
adjusted to reflect the deduction of the optional Enhanced Death Benefit Rider
charge of 0.25% which, if elected, would reduce performance.
The performance shown in Table 2A is calculated in exactly the same manner as
those in Tables 1A and 1B; however, the period of time is based on the
Underlying Portfolios' lifetime, which may predate the Sub-Accounts' inception
dates. These performance calculations are based on the assumption that the Sub-
Account corresponding to the applicable Underlying Portfolio was actually in
existence throughout the stated period and that the contractual charges and
expenses during that period were equal to those currently assessed under the
Contract.
For more detailed information about these performance calculations, including
actual formulas, see the Statement of Additional Information.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING PORTFOLIO IN WHICH THE SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS
DURING THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF WHAT MAY BE ACHIEVED IN THE FUTURE.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity variable accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
28
<PAGE>
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
29
<PAGE>
TABLE 1A
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FOR CONTRACTS OTHER THAN THOSE ISSUED IN HAWAII AND NEW YORK
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS
OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING PORTFOLIO 12/31/97 SUB-ACCOUNT
- ------------------------------------------------------ ----------- ----------------
<S> <C> <C>
Kemper-Dreman Financial Services...................... N/A N/A
Kemper Small Cap Growth............................... 32.32% 28.45%
Kemper Small Cap Value................................ 20.03% 19.80%
Kemper-Dreman High Return Equity...................... N/A N/A
Kemper International.................................. 7.92% 8.78%
Kemper International Growth and Income................ N/A N/A
Kemper Global Blue Chip............................... N/A N/A
Kemper Growth......................................... 19.63% 17.67%
Kemper Contrarian Value............................... 28.55% 28.81%
Kemper Blue Chip...................................... N/A 10.48%
Kemper Value+Growth................................... 23.70% 19.44%
Kemper Horizon 20+.................................... 18.78% 16.91%
Kemper Total Return................................... 18.27% 14.93%
Kemper Horizon 10+.................................... 15.13% 15.00%
Kemper High Yield..................................... 10.04% 10.77%
Kemper Horizon 5...................................... 11.11% 11.10%
Kemper Global Income.................................. N/A 1.87%
Kemper Investment Grade Bond.......................... 7.49% 7.43%
Kemper Government Securities.......................... 7.42% 6.19%
Kemper Money Market................................... 3.72% 3.69%
Scudder International................................. N/A N/A
Scudder Global Discovery.............................. N/A N/A
Scudder Capital Growth................................ N/A N/A
Scudder Growth and Income............................. N/A N/A
</TABLE>
30
<PAGE>
TABLE 1B
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FOR CONTRACTS ISSUED IN HAWAII AND NEW YORK
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
SINCE
SUB-ACCOUNT INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING PORTFOLIO INCEPTION DATE SUB-ACCOUNT
- ----------------------------------------------- ------------------ ----------------
<S> <C> <C>
Kemper-Dreman Financial Services............... N/A N/A
Kemper Small Cap Growth........................ 10/16/97 -1.51%
Kemper Small Cap Value......................... 11/18/97 0.24%
Kemper-Dreman High Return Equity............... N/A N/A
Kemper International........................... 10/16/97 -6.81%
Kemper International Growth and Income......... N/A N/A
Kemper Global Blue Chip........................ N/A N/A
Kemper Growth.................................. 10/16/97 -2.70%
Kemper Contrarian Value........................ 10/14/97 1.39%
Kemper Blue Chip............................... 5/1/97 10.49%
Kemper Value+Growth............................ 10/14/97 -4.02%
Kemper Horizon 20+............................. 10/16/97 -2.04%
Kemper Total Return............................ 11/17/97 1.35%
Kemper Horizon 10+............................. 11/25/97 1.53%
Kemper High Yield.............................. 10/16/97 0.38%
Kemper Horizon 5............................... 11/10/97 1.68%
Kemper Global Income........................... 5/1/97 1.87%
Kemper Investment Grade Bond................... 12/11/97 0.37%
Kemper Government Securities................... 12/11/97 0.36%
Kemper Money Market............................ 12/29/97 -0.02%
Scudder International.......................... N/A N/A
Scudder Global Discovery....................... N/A N/A
Scudder Capital Growth......................... N/A N/A
Scudder Growth and Income...................... N/A N/A
</TABLE>
31
<PAGE>
TABLE 2A
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING PORTFOLIO
<TABLE>
<CAPTION>
YEAR 10 YEARS
ENDED (OR SINCE
UNDERLYING PORTFOLIO 12/31/97 5 YEARS INCEPTION IF LESS)*
- ------------------------------------- ----------- ----------- ---------------------
<S> <C> <C> <C>
Kemper-Dreman Financial Services..... N/A N/A N/A
Kemper Small Cap Growth.............. 32.32% N/A 24.02%
Kemper Small Cap Value............... 20.03% N/A 12.10%
Kemper-Dreman High Return Equity..... N/A N/A N/A
Kemper International................. 7.92% 11.37% 9.02%
Kemper International Growth and
Income.............................. N/A N/A N/A
Kemper Global Blue Chip.............. N/A N/A N/A
Kemper Growth........................ 19.63% 14.96% 14.83%
Kemper Contrarian Value.............. 28.55% N/A 27.16%
Kemper Blue Chip..................... N/A N/A 10.48%
Kemper Value+Growth.................. 23.70% N/A 22.51%
Kemper Horizon 20+................... 18.78% N/A 20.04%
Kemper Total Return.................. 18.27% 10.74% 12.23%
Kemper Horizon 10+................... 15.13% N/A 15.36%
Kemper High Yield.................... 10.04% 10.27% 10.10%
Kemper Horizon 5..................... 11.11% N/A 11.85%
Kemper Global Income................. N/A N/A 1.87%
Kemper Investment Grade Bond......... 7.49% N/A 6.00%
Kemper Government Securities......... 7.42% 5.07% 6.42%
Kemper Money Market.................. 3.72% 3.03% 4.13%
Scudder International................ 7.52% 12.10% 10.21%
Scudder Global Discovery............. 10.79% N/A 9.18%
Scudder Capital Growth............... 33.84% 16.36% 15.13%
Scudder Growth and Income............ 28.63% N/A 22.29%
</TABLE>
* The inception dates for the Underlying Portfolios are: 4/6/82 for Kemper Money
Market, Kemper Total Return and Kemper High Yield; 12/9/83 for Kemper Growth;
9/3/87 for Kemper Government Securities; 1/6/92 for Kemper International; 5/2/94
for Kemper Small Cap Growth and Scudder Growth and Income; 5/1/96 for Kemper
Investment Grade Bond, Kemper Contrarian Value, Kemper Small Cap Value, Kemper
Value+Growth, Kemper Horizon 20+, Kemper Horizon 10+, Kemper Horizon 5 and
Scudder Global Discovery; 5/1/97 for Kemper Global Income and Kemper Blue Chip;
5/1/87 for Scudder International; and 7/16/85 for Scudder Capital Growth.
32
<PAGE>
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNT,
INVESTORS FUND SERIES AND SCUDDER VARIABLE
LIFE INVESTMENT FUND
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its principal office ("Principal Office") is located at
440 Lincoln Street, Worcester, MA 01653, Telephone 508-855-1000. Allmerica
Financial is subject to the laws of the State of Delaware governing insurance
companies and to regulation by the Commissioner of Insurance of Delaware. In
addition, Allmerica Financial is subject to the insurance laws and regulations
of other states and jurisdictions in which it is licensed to operate. As of
December 31, 1997, Allmerica Financial had over $9.4 billion in assets and over
$26.6 billion of life insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is an indirectly wholly owned subsidiary of First Allmerica
Financial Life Insurance Company which, in turn is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica") organized
under the laws of Massachusetts in 1844, is the fifth oldest life insurance
company in America. As of December 31, 1997, First Allmerica and its
subsidiaries had over $16.3 billion in combined assets and over $43.8 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its present
name. First Allmerica is a wholly owned subsidiary of AFC. First Allmerica's
principal office is located at 440 Lincoln Street, Worcester, MA 01653,
Telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
33
<PAGE>
THE VARIABLE ACCOUNT. Each Company maintains a separate investment account
called the Separate Account KG ("Variable Account") with 24 Sub-Accounts. Unless
otherwise specified, any reference to the "Company" in this Prospectus shall
refer exclusively to Allmerica Financial for contracts issued in the District of
Columbia, Puerto Rico, the Virgin Islands and any state except Hawaii and New
York and exclusively to First Allmerica for contracts issued in Hawaii and New
York. The assets used to fund the variable portions of the Contract are set
aside in Sub-Accounts kept separate from the general assets of the Company. Each
Sub-Account invests in a corresponding investment series ("Portfolio") of
Investors Fund Series and Scudder Variable Life Investment Fund. Each
Sub-Account is administered and accounted for as part of the general business of
the Company. The income, capital gains, or capital losses of each Sub-Account,
however, are allocated to each Sub-Account, without regard to any other income,
capital gains or capital losses of the Company. Under Delaware and Massachusetts
law, the assets of the Variable Account may not be charged with any liabilities
arising out of any other business of the Company.
The Variable Accounts of Allmerica Financial and of First Allmerica were
authorized by votes of the Board of Directors of the Companies on June 13, 1996.
The Variable Accounts meet the definition of "separate account" under federal
securities laws, and are registered with the SEC as unit investment trusts under
the 1940 Act. This registration does not involve the supervision of management
or investment practices or policies of the Variable Accounts by the SEC.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts.
INVESTORS FUND SERIES. Investors Fund Series ("Kemper INFS"), is a series-type
mutual fund registered with the SEC as an open-end, management investment
company. Registration of Kemper INFS does not involve supervision of its
management, investment practices or policies by the SEC. Kemper INFS is designed
to provide an investment vehicle for certain variable annuity contracts and
variable life insurance policies. Shares of the Portfolios of Kemper INFS are
sold only to insurance company separate accounts. Scudder Kemper Investments,
Inc. serves as the investment adviser of Kemper INFS.
SCUDDER VARIABLE LIFE INVESTMENT FUND. Scudder Variable Life Investment Fund
("Scudder VLIF") is an open-end, diversified management investment company
established as a Massachusetts business trust on March 15, 1985, and registered
with the SEC under the 1940 Act. Scudder Kemper Investments, Inc. serves as the
investment adviser of Scudder VLIF.
34
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Portfolios is set
forth below. More detailed information regarding the investment objectives,
restrictions and risks, expenses paid by the Underlying Portfolios and other
relevant information regarding Kemper INFS and Scudder VLIF may be found in
their respective prospectuses, which accompany this Prospectus. Please read them
carefully before investing. The Statements of Additional Information of the
Underlying Portfolios are available upon request.
KEMPER INFS PORTFOLIOS:
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO -- seeks long-term capital
appreciation by investing primarily in common stocks and other equity securities
of companies in the financial services industry believed by the Portfolio's
investment manager to be undervalued.
KEMPER SMALL CAP GROWTH PORTFOLIO -- seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
KEMPER SMALL CAP VALUE PORTFOLIO -- seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO -- seeks to achieve a high rate of
total return.
KEMPER INTERNATIONAL PORTFOLIO -- seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of
capital and current income, primarily from foreign equity securities.
KEMPER GLOBAL BLUE CHIP PORTFOLIO -- seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
KEMPER GROWTH PORTFOLIO -- seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
KEMPER CONTRARIAN VALUE PORTFOLIO -- seeks to achieve a high rate of total
return from a portfolio primarily of value stocks of larger companies. This
Portfolio was formerly known as the Kemper Value Portfolio.
KEMPER BLUE CHIP PORTFOLIO -- seeks growth of capital and of income.
KEMPER VALUE+GROWTH PORTFOLIO -- seeks growth of capital through professional
management of a portfolio of growth and value stocks.
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KEMPER HORIZON 20+ PORTFOLIO -- designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
KEMPER TOTAL RETURN PORTFOLIO -- seeks a high total return, a combination of
income and capital appreciation, by investing in a combination of debt
securities and common stocks.
KEMPER HORIZON 10+ PORTFOLIO -- designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
KEMPER HIGH YIELD PORTFOLIO -- seeks to provide a high level of current income
by investing in fixed-income securities.
KEMPER HORIZON 5 PORTFOLIO -- designed for investors with approximately a five
year investment horizon, seeks income consistent with preservation of capital,
with growth of capital as a secondary objective.
KEMPER GLOBAL INCOME PORTFOLIO -- seeks to provide high current income
consistent with prudent total return asset management.
KEMPER INVESTMENT GRADE BOND PORTFOLIO -- seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities
KEMPER GOVERNMENT SECURITIES PORTFOLIO -- seeks high current return consistent
with preservation of capital from a portfolio composed primarily of U.S.
Government securities.
KEMPER MONEY MARKET PORTFOLIO -- seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in 12 months or less.
SCUDDER VLIF PORTFOLIOS:
SCUDDER INTERNATIONAL PORTFOLIO -- seeks long term growth of capital principally
from a diversified portfolio of foreign equity securities.
SCUDDER GLOBAL DISCOVERY PORTFOLIO -- seeks above average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
SCUDDER CAPITAL GROWTH PORTFOLIO -- seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
SCUDDER GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
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Certain Underlying Portfolios have investment objectives and/or policies similar
to those of other Underlying Portfolios. To choose the Sub-Accounts which best
meet individual needs and objectives, carefully read the Underlying Portfolio
prospectuses. In some states, insurance regulations may restrict the
availability of particular Sub-Accounts.
INVESTMENT MANAGEMENT SERVICES
Responsibility for overall management of Kemper INFS rests with the Board of
Trustees and officers of Kemper INFS. Responsibility for overall management of
Scudder VLIF rests with its Board of Trustees and officers. Scudder Kemper
Investments, Inc. ("Scudder Kemper") is the investment manager of all the
Portfolios available under this Contract. Scudder Investments (U.K.) Limited, an
affiliate of Scudder Kemper, is a sub-adviser for the Kemper International
Portfolio and the Kemper Global Income Portfolio. Dreman Value Management,
L.L.C. serves as the sub-advisor for the Kemper-Dreman Financial Services
Portfolio and Kemper-Dreman High Return Equity Portfolio.
For its services, Scudder Kemper receives a management fee, payable monthly at
1/12 of the following annual rates based on the average daily net assets of each
Portfolio: Money Market (.50%), Total Return (.55%), High Yield (.60%), Growth
(.60%), Government Securities (.55%), International (.75%), Small Cap Growth
(.65%), Investment Grade Bond (.60%), Contrarian Value (.75%), Small Cap Value
(.75%), Value+Growth (.75%), Horizon 20+ (.60%), Horizon 10+ (.60%), Horizon 5
(.60%), Blue Chip (.65%), Global Income (.75%) and International Growth and
Income (1.00%).
The High Return Equity, Financial Services and Global Blue Chip Portfolios each
pay Scudder Kemper an investment management fee, payable monthly, at 1/12 of the
annual rates shown below.
<TABLE>
<S> <C>
High Return Equity
Portfolio and
Financial Services
Portfolio............. .75% for the first $250 million, .72% for
the next $750 million, .70% for the next
$1.5 billion, .68% for the next $2.5
billion, .65% for the next $2.5 billion,
.64% for the next $2.5 billion, .63% for the
next $2.5 billion and .62% over $12.5
billion.
Global Blue Chip
Portfolio............. 1.00% for the first $250 million, .95% for
the next $750 million and .90% over $1
billion.
</TABLE>
Scudder Kemper pays Scudder Investments (U.K.) Limited for its services as sub-
adviser for the Kemper International Portfolio and the Kemper Global Income
Portfolio a sub-advisory fee, payable monthly, at 1/12 of the annual rate of
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0.35% of average daily net assets of the Kemper International Portfolio and
0.30% of average daily net assets of the Kemper Global Income Portfolio. Scudder
Kemper also pays Dreman Value Management, L.L.C. a fee for its services to the
Kemper-Dreman Financial Services Portfolio and Kemper-Dreman High Return Equity
Portfolio. A sub-advisory fee, payable monthly at the annual rate of .24% of the
first $250 million of each Portfolio's average daily net assets, .23% of average
daily net assets between $250 million and $1 billion, .224% of average daily net
assets between $1 billion and $2.5 billion, .218% of average daily net assets
between $2.5 billion and $5 billion, .208% of average daily net assets between
$5 billion and $7.5 billion, .205% of average daily net assets between $7.5
billion and $10 billion, .202% of average daily net assets between $10 billion
and $12.5 billion and .198% of each Portfolio's average daily net assets over
$12 billion.
For its investment management services to the Scudder VLIF Portfolios, Scudder
Kemper receives compensation monthly at the following annual rates for each
Portfolio: Scudder International Portfolio (0.875% for the first $500,000,000
and 0.775% for amounts in excess of $500,000,000); Scudder Global Discovery
Portfolio (0.975%); Scudder Capital Growth Portfolio (0.475%) and Scudder Growth
and Income Portfolio (0.475%.)
For more information, see the Kemper INFS and Scudder VLIF prospectuses and
SAIs.
DESCRIPTION OF THE CONTRACT
Unless otherwise specified, any reference to the "Company" in this Prospectus
shall refer exclusively to Allmerica Financial Life Insurance and Annuity
Company for contracts issued in the District of Columbia, Puerto Rico, the
Virgin Islands and any state except Hawaii and New York and exclusively to First
Allmerica Financial Life Insurance Company for contracts issued in Hawaii and
New York.
A. PAYMENTS
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements may also include the
proper completion of an application; however, where permitted, the Company may
issue a Contract without completion of an application for certain classes of
annuity contracts.
Payments are to be made payable to the Company. A net payment is equal to the
payment received less the amount of any applicable premium tax. The initial net
payment will be credited to the Contract and allocated among the requested
accounts as of the date that all issue requirements are properly met. If all
issue
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requirements are not complied with within five business days of the Company's
receipt of the initial payment, the payment will be returned unless the Owner
specifically consents to the holding of the initial payment until completion of
any outstanding issue requirements. Subsequent payments will be credited as of
the Valuation Date received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$25,000. Each subsequent payment must be at least $100. The minimum allocation
to a Guarantee Period Account is $1,000. If less than $1,000 is allocated to a
Guarantee Period Account, the Company reserves the right to apply that amount to
the Kemper Money Market Portfolio.
From time to time where permitted by law, the Company may credit amounts to
Contracts when Contracts are sold to individuals or groups of individuals in a
manner that reduces sales expenses. The Company will consider factors such as
the following: (1) the size and type of group or class, and the persistency
expected from that group or class; (2) the total amount of payments to be
received and the manner in which payments are remitted; (3) the purpose for
which the Contracts are being purchased and whether that purpose makes it likely
that costs and expenses will be reduced; (4) other transactions where sales
expenses are likely to be reduced; or (5) the level of commissions paid to
selling broker-dealers or certain financial institutions with respect to
Contracts within the same group or class (for example, broker-dealers who offer
this Contract in connection with financial planning services offered on a fee
for service basis). The Company may also credit amounts to Contracts where
either the Owner or the Annuitant on the issue date is within the following
classes of individuals ("eligible persons"): employees and registered
representatives of any broker-dealer which has entered into a Sales Agreement
with the Company to sell the Contract; employees of the Company, its affiliates
or subsidiaries; officers, directors, trustees and employees of any of the
Portfolios, investment managers or sub-advisers; and the spouses of and
immediate family members residing in the same household with such eligible
persons. "Immediate family members" means children, siblings, parents and
grandparents.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. As
of the date of this Prospectus, payments may be allocated to a maximum of
seventeen variable Sub-Accounts during the life of the Contract and prior to the
Annuity Date in addition to the Kemper Money Market Portfolio. There are no
restrictions on the number of times the Fixed Account and the Guarantee Period
Accounts may be used over the life of the Contract.
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The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
be honored. The Company will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of an Owner identify themselves by name and identify the Annuitant by
name, date of birth and social security number. All transfer instructions by
telephone are tape-recorded.
B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased or to the
Company's Principal Office at 440 Lincoln Street, Worcester, MA 01653. Mailing
or delivery must occur on or before ten days after receipt of the Contract for
cancellation to be effective.
Within seven days the Company will provide a refund equal to the gross
payment(s) received. In some states, however, the refund may equal the greater
of (a) gross payments or (b) any amounts allocated to the Fixed Account and the
Guarantee Period Accounts plus the Accumulated Value of amounts allocated to the
Variable Account plus any amounts deducted under the Contract or by the
Portfolios for taxes, charges or fees. At the time the Contract is issued, the
"Right to Examine" provision on the cover of the Contract will specifically
indicate whether the refund will be equal to gross payments or equal to the
greater of (a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO CANCEL ALL OTHER CONTRACTS
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund.
Generally, the Company will pay to the Owner an amount equal to the sum of (1)
the difference between the payment paid, including fees, and any amount
allocated to the Variable Account, and (2) the Accumulated Value of amounts
allocated to the Variable Account as of the date the request is received. If the
Contract was
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<PAGE>
purchased as an IRA, the IRA revocation right described above may be utilized in
lieu of the special surrender right. At the time the Contract is issued, the
"Right to Examine" provision on the cover of the Contract will specifically
indicate what the refund will be and the time period allowed to exercise the
right to cancel.
D. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, an Owner may have amounts transferred
among accounts subject to the seventeen variable Sub-Account restriction
discussed in "A. Payments." Transfer values will be effected at the Accumulation
Value next computed after receipt of the transfer order. The Company will make
transfers pursuant to written or telephone requests. As discussed in "A.
Payments," a properly completed authorization form must be on file before
telephone requests will be honored. In Oregon and Massachusetts, payments and
transfers to the Fixed Account are subject to certain restrictions. See APPENDIX
A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Kemper Money
Market Portfolio. Transfers from a Guarantee Period Account prior to the
expiration of the Guarantee Period will be subject to a Market Value Adjustment.
The Owner may authorize an independent third party to transact allocations and
transfers in accordance with an asset allocation strategy or other investment
strategy. The Company may provide administrative or other support services to
these independent third parties, however, the Company does not engage any third
parties to offer allocation or other investment services under this Contract,
does not endorse or review any allocation or transfer recommendations and is not
responsible for the investment results of such allocations or transfers
transacted on the Owner's behalf. In addition, the Company reserves the right to
discontinue services or limit the number of Portfolios that it may provide such
services for as well as to restrict such transactions altogether when exercised
by a market timing firm or any other third party authorized to initiate
allocations, transfers or exchanges on behalf of multiple Contract owners. The
Company does not charge the Owner for providing additional support services.
As indicated above, the Company reserves the right to restrict transfer
privileges when exercised by a market timing firm or any other third party
authorized to initiate allocations, transfers or exchanges on behalf of multiple
Contract owners. The Company may, among other things, not accept (1) the
transfer or exchange instructions of any agent acting under a power of attorney
on behalf of more than one Contract owner, or (2) the transfer or exchange
instructions of
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<PAGE>
individual Contract owners who have executed pre-authorized transfer or exchange
forms which are submitted by market timing firms or other third parties on
behalf of more than one Contract owner at the same time.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Sub-Account investing in the Kemper Money
Market Portfolio or the Kemper Government Securities Portfolio, or from the
Fixed Account (the source account) to one or more of the Sub-Accounts. Automatic
transfers may not be made into the Fixed Account, the Guarantee Period Accounts
or, if applicable, the Portfolio being used as the source account. If an
automatic transfer would reduce the balance in the source account to less than
$100, the entire balance will be transferred proportionately to the chosen
Portfolios. Automatic transfers will continue until the amount in the source
account on a transfer date is zero or the Owner's request to terminate the
option is received by the Company. If additional amounts are allocated to the
source account after its balance has fallen to zero, this option will not
restart automatically, and the Owner must provide a new request to the Company.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments which are deposited into the Fixed Account and which utilize
the Fixed Account as the source account for the payment from which to process
automatic transfers. For more information see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
specified percentage allocations. As frequently as requested, the Company will
review the percentage allocations in the Portfolios and, if necessary, transfer
amounts to ensure conformity with the designated percentage allocation mix. If
the amount necessary to re-establish the mix on any scheduled date is less than
$100, no transfer will be made. Automatic Account Rebalancing will continue
until the Owner's request to terminate or change the option is received by the
Company. As such, subsequent payments allocated in a manner different from the
percentage allocation mix in effect on the date the payment is received will be
reallocated in accordance with the existing mix on the next scheduled date
unless the Owner's timely request to change the mix or terminate the option is
received by the Company.
The Company reserves the right to limit the number of Portfolios that may be
utilized for automatic transfers and rebalancing, and to discontinue either
option upon advance written notice. The first automatic transfer and all
subsequent transfers of that request in the same Contract year count as one
transfer towards
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the 12 transfers which are guaranteed to be free of a transfer charge in each
Contract year. Currently, Dollar Cost Averaging and Automatic Account
Rebalancing may not be in effect simultaneously. Either option may be elected
when the Contract is purchased or at a later date.
E. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Accumulated Value adjusted for any Market Value Adjustment
("Surrender Value") and applicable tax withholding. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The amount payable to the Owner upon surrender
will be based on the Contract's Accumulated Value as of the Valuation Date on
which the request and the Contract are received at the Principal Office.
The Contract fee will be deducted upon surrender of the Contract.
After the Annuity Date, only a Contract under which future annuity benefit
payments are limited to a specified period (as specified in the Period Certain
Annuity Option) may be surrendered. The Surrender Amount is the commuted value
of any unpaid annuity benefit payments, computed on the basis of the assumed
interest rate incorporated in such annuity benefit payments.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has, by order, permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of Portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The Company reserves the right to defer surrenders and withdrawals of amounts
allocated to the Company's Fixed Account and Guarantee Period Accounts for a
period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "FEDERAL TAX CONSIDERATIONS," "Tax-Sheltered Annuities" and
"Texas Optional Retirement Program."
Where an Owner who is a trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Contract to
other contracts issued by the Company and owned by the trustee. Any such
reallocation will be at the unit values for the Sub-Accounts as of the Valuation
Date on which a written, signed request is received at the Principal Office.
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For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must file a signed, written request for withdrawals, satisfactory to
the Company, at the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. Amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment against the remaining value, as described under "GUARANTEE
PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a Sub-
Account will result in cancellation of a number of units equivalent in value to
the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "E. Surrender."
After the Annuity Date, only a Contract under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see "FEDERAL TAX
CONSIDERATIONS," "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100. If elected at the time of
purchase, the Owner must designate in writing the specific dollar amount of each
withdrawal and the percentage of this amount which should be taken from each
designated Sub-Account and/or the Fixed Account. Systematic
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withdrawals then will begin on the date indicated on the application. If elected
after the issue date, the Owner may elect, by written request, a specific dollar
amount and the percentage of this amount to be taken from each designated Sub-
Account and/or the Fixed Account, or the Owner may elect to withdraw a specific
percentage of the Accumulated Value calculated as of the withdrawal dates, and
may designate the percentage of this amount which should be taken from each
account. The first withdrawal will take place on the date the written request is
received at the Principal Office or, if later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals by written request to the Principal Office only.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date the Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option by returning
a properly signed LED request form to the Principal Office. The LED option
permits the Owner to make systematic withdrawals from the Contract over his or
her lifetime. The amount withdrawn from the Contract changes each year, because
life expectancy changes each year that a person lives. For example, actuarial
tables indicate that a person age 70 has a life expectancy of 16 years, but a
person who attains age 86 has a life expectancy of another 6.5 years. While an
LED is in effect, the Owner must remain the Annuitant.
Where the Owner is a trust or other non-natural person, the Owner may elect the
LED option based on the Annuitant's life expectancy.
If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one) and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner may elect monthly, bi-monthly, quarterly, semi-
annual, or annual distributions, and may terminate the LED option at any time.
Under contracts issued in Hawaii and New York, the LED option will terminate
automatically on the maximum Annuity Date permitted under the Contract at which
time an Annuity Option must be elected. The Owner also may elect to receive
distributions under an LED option which is determined on the joint life
expectancy of the Owner and a beneficiary. The Company also may offer other
systematic withdrawal options.
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If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS" and "B. Taxation of the Contracts in General."
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. DEATH BENEFIT
In the event that an Owner or (in the event the Owner is a non-natural person)
an Annuitant dies prior to the Annuity Date, the Company will pay the
beneficiary a death benefit, except where the Contract is continued as provided
in "H. The Spouse of the Owner as Beneficiary."
DEATH OF AN OWNER PRIOR TO THE ANNUITY DATE. Upon the death of an Owner (or an
Annuitant if the Owner is a non-natural person), a death benefit will be paid.
The standard death benefit will be equal to the GREATER of (a) the Accumulated
Value under the Contract increased by any positive Market Value Adjustment; or
(b) gross payments, decreased proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit under
this option immediately prior to the withdrawal multiplied by the withdrawal
amount and divided by the Accumulated Value immediately prior to the
withdrawal);
ENHANCED DEATH BENEFIT RIDER. At the time of application for the Contract, the
Owner may elect an optional Enhanced Death Benefit Rider. Under the Enhanced
Death Benefit Rider:
I. If an Owner (or an Annuitant if the Owner is a non-natural person) dies prior
to the Annuity Date and before the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATEST of:
(a) the Accumulated Value increased by any positive Market Value Adjustment (the
"Accumulated Value"); or
(b) gross payments compounded daily at an annual rate of 5%, decreased
proportionately to reflect withdrawals (5% compounding not available in
Hawaii and New York); or
(c) the highest Accumulated Value of all Contract anniversaries, as determined
after the Accumulated Value of each contract anniversary is increased for
subsequent payments and decreased proportionately for subsequent
withdrawals.
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The (c) value is determined on each Contract anniversary. A snapshot is taken of
the current (a) value and compared to snapshots taken of the (a) value on all
prior Contract anniversaries, AFTER all of the (a) values have been adjusted to
reflect subsequent payments and decreased proportionately for subsequent
withdrawals. The highest of all of these adjusted (a) values then becomes the
(c) value. This (c) value becomes the floor below which the death benefit will
not drop and is locked-in until the next Contract anniversary. The values of (b)
and (c) will be decreased proportionately if withdrawals are taken.
II. If an Owner (or an Annuitant if the Owner is a non-natural person) dies
prior to the Annuity Date but after the oldest Owner's 90th birthday, the death
benefit will be equal to the GREATER of:
(a) the Accumulated Value increased by any positive Market Value Adjustment; or
(b) the death benefit, as calculated under I, that would have been payable on
the Contract anniversary immediately prior to the oldest Owner's 90th
birthday, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
See APPENDIX C, "THE DEATH BENEFIT" for specific examples of death benefit
calculations.
A separate charge is made for an optional Enhanced Death Benefit Rider. On the
last day of each month and on the date the Rider is terminated, a charge equal
to 1/12th of an annual rate of 0.25% is made against the Accumulated Value of
the Contract at that time. The charge is deducted in arrears through a pro-rata
reduction (based on relative values) of Accumulation Units in the Sub-Accounts,
of dollar amounts in the Fixed Account, and of dollar amounts in the Guarantee
Period Accounts.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Kemper Money Market Portfolio. The excess, if any, of the death benefit
over
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the Accumulated Value also will be transferred to the Sub-Account investing in
the Kemper Money Market Portfolio. The beneficiary may, by written request,
effect transfers and withdrawals during the deferral period and prior to
annuitization under (2), but may not make additional payments. The death benefit
will reflect any earnings or losses experienced during the deferral period. If
there are multiple beneficiaries, the consent of all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. The spouse will then become the Owner and Annuitant subject to the
following: (1) any value in the Guarantee Period Accounts will be transferred to
the Sub-Account investing in the Kemper Money Market Portfolio and (2) the
excess, if any, of the death benefit over the Contract's Accumulated Value also
will be added to the Sub-Account investing in the Kemper Money Market Portfolio.
Additional payments may be made. All other rights and benefits provided in the
Contract will continue, except that any subsequent spouse of such new Owner will
not be entitled to continue the Contract upon such new Owner's death.
I. ASSIGNMENT
The Contract, other than those sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and prior to
the death of an Owner (see "FEDERAL TAX CONSIDERATIONS"). The Company will not
be deemed to have knowledge of an assignment unless it is made in writing and
filed at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay to the
assignee, in one sum, that portion of the Surrender Value of the Contract to
which the assignee appears to be entitled. The Company will pay the balance, if
any, in one sum to the Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
J. ELECTING THE FORM OF ANNUITY AND ANNUITY DATE
The Annuity Date is selected by the Owner. To the extent permitted by state law,
the Annuity Date may be the first day of any month (1) before the Owner's 85th
birthday, if the Owner's age on the issue date of the Contract is 75 or under;
or
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(2) within ten years from the issue date of the Contract and before the Owner's
90th birthday, if the Owner's age on the issue date is between 76 and 90. The
Owner may elect to change the Annuity Date by sending a request to the Principal
Office at least one month before the Annuity Date. To the extent permitted by
state law, the new Annuity Date must be the first day of any month occurring
before the Owner's 99th birthday. If there are Joint Owners, the age of the
younger will determine the Annuity Date. The Internal Revenue Code ("the Code")
and the terms of qualified plans impose limitations on the age at which annuity
benefit payments may commence and the type of annuity option selected. See
"FEDERAL TAX CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity payout option under which annuity benefit payments are to be
made, and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the Accounts
selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account, and the annuity benefit payments will be fixed
in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout, a payment to the Owner, or the payee the Owner
designates, equal to the value of the fixed number of Annuity Units in the
Sub-Accounts is made monthly, quarterly, semi-annually or annually. Since the
value of an Annuity Unit in a Sub-Account will reflect the investment
performance of the Sub-Account, the amount of each annuity benefit payment will
vary.
The annuity payout option selected must produce an initial payment of at least
$50 (a lower amount may be required in some states). The Company reserves the
right to increase this minimum amount. If the annuity payout option selected
does not produce an initial payment which meets this minimum, a single payment
will be made. Once the Company begins making annuity benefit payments, the Owner
cannot make withdrawals or surrender the annuity benefit, except where the Owner
has elected a commutable period certain option. Beneficiaries entitled to
receive remaining payments under either a commutable or non-commutable "period
certain" may elect instead to receive a lump sum settlement. See "K. Description
of Variable Annuity Payout Options."
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
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If an owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity payout option after annuitization, the Company may permit such
owner to exchange the fixed contract for a Contract offered in this Prospectus.
The proceeds of the fixed contract will be applied towards the variable annuity
option desired by the owner. The number of Annuity Units under the option will
be calculated using the Annuity Unit values as of the 15th of the month
preceding the Annuity Date.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company currently provides the variable annuity payout options described
below. Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Kemper Investment Grade Bond, Kemper Value+Growth,
Kemper Horizon 10+ and Kemper Horizon 5 Portfolios. The Company also provides
these same options funded through the Fixed Account (fixed-amount annuity
option). Regardless of how payments were allocated during the accumulation
period, any of the variable annuity options or the fixed-amount options may be
selected, or any of the variable annuity options may be selected in combination
with any of the fixed-amount annuity options. Other annuity options may be
offered by the Company. IRS regulations may not permit certain of the available
annuity options when used in connection with certain qualified Contracts.
If the Owner (or, if there are Joint Owners, the surviving Joint Owner) dies on
or after the Annuity Date, the beneficiary will become the Owner of the contract
and receive any remaining annuity benefit payments in accordance with the terms
of the annuity benefit payment option selected prior to the Annuity Date. If
there are Joint Owners on or after the Annuity Date, upon the first Owner death,
any remaining annuity benefit payments will continue to the surviving Joint
Owner in accordance with the terms of the annuity benefit payment option
selected prior to the Annuity Date.
If the Owner selects an annuity payout option which provides for the
continuation of payments after the death of an Annuitant, upon the death of an
Annuitant on or after the Annuity Date, any remaining payments will continue to
be paid to the Owner or the payee the Owner has designated.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the Annuitant with the
guarantee that if the Annuitant should die before the guaranteed number of
payments have been made, the remaining guaranteed payments will continue to be
paid.
VARIABLE LIFE ANNUITY PAYABLE PERIODICALLY DURING THE LIFETIME OF THE ANNUITANT
ONLY. This variable annuity is payable during the Annuitant's life. It
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would be possible under this option for the Owner to receive only one annuity
benefit payment if the Annuitant dies prior to the due date of the second
annuity benefit payment, two annuity benefit payments if the Annuitant dies
before the due date of the third annuity benefit payment, and so on. Payments
will continue, however, during the lifetime of the Annuitant, no matter how long
he or she lives.
UNIT FUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically during
the lifetime of the Annuitant with the guarantee that if the Annuitant dies and
(1) exceeds (2) then periodic variable annuity benefit payments will continue
until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the Annuitant.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
during the joint lifetime of the Annuitant and another individual (i.e. the
beneficiary or a Joint Annuitant), and then continues thereafter during the
lifetime of the survivor. The amount of each payment during the lifetime of the
survivor is based on the same number of Annuity Units which applied during their
joint lifetime. There is no minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable during the joint lifetime of the Annuitant and one other individual
(i.e., the beneficiary or a Joint Annuitant), and then continues thereafter
during the lifetime of the survivor. The amount of each periodic payment during
the lifetime of the survivor, however, is based upon two-thirds of the number of
Annuity Units which applied during their joint lifetime. There is no minimum
number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30. If the Annuitant dies
before the end of the period, remaining payments will continue to be paid. This
option may be commutable, that is, the Owner reserves the right to receive a
lump sum in place of installments, or it becomes non-commutable. The Owner must
reserve this right at the time benefits begin.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under the period
certain option to elect to convert to a variable annuity involving a life
contingency. The
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Company may discontinue or change this practice at any time, but not with
respect to election of the option made prior to the date of any change in this
practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of the possible
adverse tax consequences of selecting a period certain option.
L. ANNUITY BENEFIT PAYMENTS
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account on its inception date
was set at $1.00. The value of an Annuity Unit under a Sub-Account on any
Valuation Date thereafter is equal to the value of such unit on the immediately
preceding Valuation Date, multiplied by the product of (1) the net investment
factor of the Sub-Account for the current Valuation Period, and (2) a factor to
adjust benefits to neutralize the assumed interest rate. The assumed interest
rate, discussed below, is incorporated in the variable annuity options offered
in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life contingency options and non-commutable period certain options of
ten or more years (six or more years under New York contracts), the annuity
value is the Accumulated Value less any premium taxes and adjusted for any
Market Value Adjustment. For commutable period certain options or any period
certain option less than ten years (less than six years under New York
contracts), the value is Surrender Value less any premium tax. For a death
benefit annuity, the annuity value will be the amount of the death benefit. The
annuity rates in the Contract are based on a modification of the 1983(a)
Individual Mortality Table on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. NORRIS Decision") and age of the Annuitant
and/or beneficiary, if applicable, and the value of the amount applied under the
annuity option. The variable annuity options offered by the Company are based on
a 3.5% assumed interest rate. Variable payments are affected by the assumed
interest rate used in calculating the annuity option rates. Variable annuity
benefit payments will increase over periods when the actual net investment
result of the Sub-Accounts funding the annuity exceeds the equivalent of the
assumed interest
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rate for the period. Variable annuity benefit payments will decrease over
periods when the actual net investment result of the respective Sub-Account is
less than the equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
(six or more years under New York contracts) is determined by multiplying (1)
the Accumulated Value applied under that option (after application of any Market
Value Adjustment and less premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For
commutable period certain options and any period certain option of less than ten
years (less than six years under New York contracts), the Surrender Value less
premium taxes, if any, is used rather than the Accumulated Value. The dollar
amount of the first variable annuity benefit payment then is divided by the
value of an Annuity Unit of the selected Sub-Accounts to determine the number of
Annuity Units represented by the first payment. This number of Annuity Units
remains fixed under all annuity options except the joint and two-thirds survivor
annuity option. For each subsequent payment, the dollar amount of the variable
annuity benefit payment is determined by multiplying this fixed number of
Annuity Units by the value of an Annuity Unit on the applicable Valuation Date.
After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Accounts. The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.
From time to time, the Company may offer Owners both fixed and variable annuity
rates more favorable than those contained in the Contract. Any such rates will
be applied uniformly to all Owners of the same class.
For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
M. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
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Company's unisex non-guaranteed current annuity option rates, or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
N. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received in good order at the Company's
Principal Office. The number of Accumulation Units resulting from each payment
will remain fixed unless changed by a subsequent split of Accumulation Unit
value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account, and will reflect
the investment performance, expenses and charges of its Portfolios. The value of
an Accumulation Unit at inception was set at $1.00 on the first Valuation Date
for each Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company. See "GUARANTEE PERIOD ACCOUNTS" and APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
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(4) is an administrative charge equal to 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of Accumulation Unit calculation using a
hypothetical example see the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Portfolios are described in the prospectuses and SAIs of Kemper INFS
and Scudder VLIF.
A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a daily charge equal to an
annual rate of 1.25% of the value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
period and the annuity payout period. The mortality risk arises from the
Company's guarantee that it will make annuity benefit payments in accordance
with annuity rate provisions established at the time the Contract is issued for
the life of the Annuitant (or in accordance with the annuity option selected),
no matter how long the Annuitant (or other individual) lives and no matter how
long all Annuitants as a class live. Therefore, the mortality charge is deducted
during the annuity payout period on all Contracts, including those that do not
involve a life contingency, even though the Company does not bear direct
mortality risk with respect to variable annuity settlement options that do not
involve life contingencies. The expense risk arises from the Company's guarantee
that the charges it makes will not exceed the limits described in the Contract
and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each.
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ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation phase and the
annuity payout phase. The daily administrative expense charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given Contract and
the amount of expenses actually attributable to that Contract.
Deductions for the Contract fee (described under "B. Contract Fee") and for the
administrative expense charge are designed to reimburse the Company for the cost
of administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.
OTHER CHARGES. Because the Sub-Accounts hold shares of the Underlying
Portfolios, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying
Portfolios. The prospectuses and SAIs of the Underlying Portfolios contain
additional information concerning expenses of the Portfolios.
B. CONTRACT FEE
A $35 Contract fee ($30 for contracts issued in Hawaii, New York, North Dakota
and Pennsylvania) currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$75,000. Where Contract value has been allocated to more than one account, a
percentage of the total Contract fee will be deducted from the value in each
account. The portion of the charge deducted from each account will be equal to
the percentage which the value in that account bears to the Accumulated Value
under the Contract. The deduction of the Contract fee from a Sub-Account will
result in cancellation of a number of Accumulation Units equal in value to the
percentage of the charge deducted from that account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
classes of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries;
officers, directors, trustees and employees of any of the Portfolios; investment
managers
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or Sub-Advisers; and the spouses of and immediate family members residing in the
same household with such eligible persons. "Immediate family members" means
children, siblings, parents and grandparents.
C. OPTIONAL BENEFIT RIDER
Subject to state availability, the Company offers an optional Enhanced Death
Benefit Rider that may be elected by the Owner. A separate monthly charge is
made for the rider. On the last day of each month and on the date the rider is
terminated, a charge equal to 1/12th of an annual rate of 0.25% is made against
the Accumulated Value of the Contract at that time. The charge is deducted in
arrears and made through a pro-rata reduction (based on relative values in
Accumulation Units of the Sub-Accounts, of dollar amounts in the Fixed Account,
and of dollar amounts in the Guarantee Period Accounts).
For a description of this rider, see "G. Death Benefit" under "DESCRIPTION OF
THE CONTRACT," above.
D. PREMIUM TAXES
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. The Company makes a
charge for state and municipal premium taxes, when applicable, and deducts the
amount paid as a premium tax charge. The current practice of the Company is to
deduct the premium tax charge in one of two ways:
1. if the premium tax was paid by the Company when payments were received, the
premium tax charge is deducted on a pro-rata basis when withdrawals are
made, upon surrender of the Contract, or when annuity benefit payments
begin (the Company reserves the right instead to deduct the premium tax
charge for these Contracts at the time the payments are received); or
2. the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law. If no amount for premium tax was deducted
at the time the payment was received, but subsequently tax is determined to be
due prior to the Annuity Date, the Company reserves the right to deduct the
premium tax from the Contract value at the time such determination is made.
E. TRANSFER CHARGE
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer
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charge, but reserves the right to assess a charge, guaranteed never to exceed
$25, for each subsequent transfer in a Contract year. For more information, see
"D. Transfer Privilege" under "DESCRIPTION OF THE CONTRACT."
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Fixed Account are not
registered as an investment company under the provisions of the Securities Act
of 1933 (the "1933 Act") or the 1940 Act. Accordingly, the staff of the SEC has
not reviewed the disclosures in this Prospectus relating to the Guarantee Period
Accounts or the Fixed Account. Nevertheless, disclosures regarding the Guarantee
Period Accounts and the Fixed Account of the Contract or any benefits offered
under these accounts may be subject to the provisions of the 1933 Act relating
to the accuracy and completeness of statements made in the Prospectus.
INVESTMENT OPTIONS. In most jurisdictions, there currently are nine Guarantee
Periods available under the Contract with durations of two, three, four, five,
six, seven, eight, nine and ten years. Each Guarantee Period Account established
for the Owner is accounted for separately in a non-unitized segregated account.
Each Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period. Owners may
allocate net payments or make transfers from any of the Sub-Accounts, the Fixed
Account or an existing Guarantee Period Account to establish a new Guarantee
Period Account at any time prior to the Annuity Date. (In Oregon and
Massachusetts, payments and transfers to the Fixed Account are subject to
certain restrictions. See APPENDIX A.) Transfers from a Guarantee Period Account
on any date other than on the day following the expiration of that Guarantee
Period will be subject to a Market Value Adjustment. The Company establishes a
separate investment account each time the Owner allocates or transfers amounts
to a Guarantee Period Account except that amounts allocated to the same
Guarantee Period on the same day will be treated as one Guarantee Period
Account. The minimum that may be allocated to establish a Guarantee Period
Account is
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$1,000. If less than $1,000 is allocated, the Company reserves the right to
apply that amount to the Kemper Money Market Portfolio. The Owner may allocate
amounts to any of the Guarantee Periods available.
At least 45 days (but not more than 75 days) prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration unless
(1) less than $1,000 would remain in the Guarantee Period Account on its
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Sub-Account investing in the Kemper Money
Market Portfolio. Where amounts have been renewed automatically in a new
Guarantee Period, it is the Company's current practice to give the Owner an
additional 30 days to transfer out of the Guarantee Period Account without
application of a Market Value Adjustment. This practice may be discontinued or
changed at the Company's discretion. Under contracts issued in New York, the
Company will transfer monies out of the Guarantee Period Account without
application of a Market Value Adjustment if the Owner's request is received
within ten days of the renewal date.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit. However a positive Market Value
Adjustment, if any, will increase the value of the death benefit when based on
the Contract's Accumulated Value. See "G. Death Benefit." A Market Value
Adjustment will apply to all other transfers, withdrawals or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account by
the market value factor. The market value factor for each Guarantee Period
Account is equal to:
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[(1+i)/(1+j)] to the power of n/365-1
<TABLE>
<S> <C>
where: i is the Guaranteed Interest Rate expressed as a decimal (for
example: 3% = 0.03) being credited to the current Guarantee
Period;
j is the new Guaranteed Interest Rate, expressed as a
decimal, for a Guarantee Period with a duration equal to the
number of years remaining in the current Guarantee Period,
rounded to the next higher number of whole years. If that
rate is not available, the Company will use a suitable rate
or index allowed by the Department of Insurance; and
n is the number of days remaining from the effective
Valuation Date to the end of the current Guarantee Period.
</TABLE>
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX B, "THE MARKET VALUE
ADJUSTMENT."
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that on the last day of the Guarantee Period it will equal the amount
of the entire initial payment. The required amount then will be allocated to the
pre-selected Guarantee Period Account and the remaining balance to the other
investment options selected by the Owner in accordance with the procedures
described in "A. Payments."
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following
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provisions also apply to withdrawals from a Guarantee Period Account: (1) a
Market Value Adjustment will apply to all withdrawals, unless made at the end of
the Guarantee Period; and (2) the Company reserves the right to defer payments
of amounts withdrawn from a Guarantee Period Account for up to six months from
the date it receives the withdrawal request. If deferred for 30 days or more,
the Company will pay interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable.
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FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Contract, on withdrawals
or surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, or beneficiary depends upon a variety of factors. The following
discussion is based upon the Company's understanding of current federal income
tax laws as they are interpreted as of the date of this Prospectus. No
representation is made regarding the likelihood of continuation of current
federal income tax laws or of current interpretations by the IRS.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
Under Section 817(h) of the Code a variable annuity contract will not be treated
as an annuity contract for any period during which the investments made by the
Separate Account or Underlying Fund are not adequately diversified in accordance
with regulations prescribed by the Treasury Department. If a Contract is not
treated as an annuity contract, the income on a contract, for any taxable year
of an owner, would be treated as ordinary income received or accrued by the
owner. The IRS has issued regulations relating to the diversification
requirements for variable annuity and variable life insurance contracts under
Section 817(h) of the Code. The regulations provide that the investments of a
segregated asset account underlying a variable annuity contract are adequately
diversified if no more than 55% of the value of its assets is represented by any
one investment, no more than 70% by any two investments, no more than 80% by any
three investments, and no more than 90% by any four investments. It is
anticipated that the Portfolios will comply with the diversification
requirements.
In addition, in order for a variable annuity contract to qualify for tax
deferral, the Company, and not the variable contract owner, must be considered
to be the
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owner for tax purposes of the assets in the segregated asset account underlying
the variable annuity contract. In certain circumstances, however, variable
annuity contract owners may be considered the owners of these assets for federal
income tax purposes. Specifically, the IRS has stated in published rulings that
a variable annuity contract owner may be considered the owner of segregated
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 investment diversification, that those regulations "do
not provide guidance governing the circumstances in which investor control of
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 states 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." As of the date of this Prospectus, no such
guidance has been issued. The Company therefore additionally reserves the right
to modify the Contract as necessary in order to attempt to prevent a contract
owner from being considered the owner of a pro rata share of the assets of the
segregated asset account underlying the variable annuity contracts.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary according to whether they are made from a qualified contract or a
non-qualified contract. For more information on the tax provisions applicable to
qualified Contracts, see "D. Provisions Applicable to Qualified Employer Plans."
B. TAXATION OF THE CONTRACTS IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owners" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
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current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
contract" is the total of all payments to the Contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-qualified
deferred annuity contracts issued by the same insurance company to the same
owner during a single calendar year be treated as one contract in determining
taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the investment in the Contract bears to
the expected return under the Contract. The portion of the payment in excess of
this excludable amount is taxable as ordinary income. Once all the investment in
the Contract is recovered, the entire payment is taxable to the Owner, whether
or not the Owner is receiving the payments. If an Owner dies before the total
investment in the Contract is recovered, a deduction for the difference is
allowed on the Owner's final tax return.
PENALTY ON DISTRIBUTION. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the owner (or, if the owner is not an
individual, the death of the primary annuitant, as defined in the Code) or, in
the case of the owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the Owner. This requirement is met when the owner elects to have
distributions made over the owner's life expectancy, or over the joint life
expectancy of the owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the owner's age 59 1/2 or five years, will subject
the owner to the 10% penalty tax on the prior distributions. In addition to the
exceptions above, the penalty tax will not apply to withdrawals from a qualified
contract made to an employee who has terminated employment after reaching age
55.
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In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under the LED option prior to age 59 1/2. Subsequent Private Letter Rulings,
however, have treated LED-type withdrawal programs as effectively avoiding the
10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions.
NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer and are subject to the claims of the employer's general creditors.
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C. TAX WITHHOLDING
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
The tax rules applicable to qualified employer plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to the Owner of a
non-qualified Contract. Individuals purchasing a qualified Contract should
carefully review any such changes or limitations which may include restrictions
to ownership, transferability, assignability, contributions and distributions.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND PROFIT SHARING
PLANS. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
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Individual Retirement Annuity ("IRA"). Note: this term covers all IRAs permitted
under Section 408(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to revoke the Contract as described
in this Prospectus. See "B. Right to Revoke Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
IRAs. Employer contributions that may be made to such plans are larger than the
amounts that may be contributed to regular IRAs, and may be deductible to the
employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to annuity contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA Contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA Contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Portfolios. The Company also will furnish an annual report
to the Owner containing a statement of his or her account, including unit values
and other information as required by applicable law, rules and regulations.
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LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated to the Kemper Money Market Portfolio
instead.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Portfolio no longer are available for investment or if in the Company's judgment
further investment in any Portfolio should become inappropriate in view of the
purposes of the Variable Account or the affected Sub-Account, the Company may
redeem the shares of that Portfolio and substitute shares of another registered
open-end management company. The Company will not substitute any shares
attributable to a Contract interest in a Sub-Account without notice to the Owner
and prior approval of the SEC and state insurance authorities, to the extent
required by the 1940 Act or other applicable law. The Variable Account may, to
the extent permitted by law, purchase other securities for other contracts or
permit a conversion between contracts upon request by an Owner.
The Company also reserves the right to establish additional sub-accounts of the
Variable Account, each of which would invest in shares corresponding to a new
portfolio or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one
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or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Portfolios also are issued to separate accounts of other insurance
companies which issue variable life contracts ("mixed funding"). Shares of the
Portfolios also are issued to other unaffiliated insurance companies ("shared
funding"). It is conceivable that in the future such mixed funding or shared
funding may be disadvantageous for variable life owners or variable annuity
owners. Although the Company, Kemper INFS and Scudder VLIF do not currently
foresee any such disadvantages to either variable life insurance owners or
variable annuity owners, the Company and the trustees of Kemper INFS and Scudder
VLIF intend to monitor events in order to identify any material conflicts
between such Owners and to determine what action, if any, should be taken in
response thereto. If the trustees were to conclude that separate portfolios
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change, and will notify Owners of all such changes. If the Company deems it to
be in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration no longer is required, or may be combined with
other sub-accounts or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law and to
the provisions of the Participation Agreements to (1) transfer assets from the
Variable Account or Sub-Account to another of the Company's variable accounts or
sub-accounts having assets of the same class, (2) to operate the Variable
Account or any Sub-Account as a management investment company under the 1940 Act
or in any other form permitted by law, (3) to deregister the Variable Account
under the 1940 Act in accordance with the requirements of the 1940 Act, (4) to
substitute the shares of any other registered investment company for the
Portfolio shares held by a Sub-Account, in the event that Portfolio shares are
unavailable for investment, or if the Company determines that further investment
in such Portfolio shares is inappropriate in view of the purpose of the Sub-
Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the Sub-
Accounts. In no event will the changes described be made without notice to
Owners in accordance with the 1940 Act.
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CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered. The Company also reserves the right to
make any change to provisions of the Contract to comply with, or give Owners the
benefit of, any federal or state statute, rule or regulation, including but not
limited to requirements for annuity contracts and retirement plans under the
Code. Any such changes will apply uniformly to all Contracts that are affected.
You will be given written notice of such changes.
VOTING RIGHTS
The Company will vote Portfolio shares held by each Sub-Account in accordance
with instructions received from Owners. Each person having a voting interest in
a Sub-Account will be provided with proxy materials of the Portfolio, together
with a form with which to give voting instructions to the Company. Shares for
which no timely instructions are received will be voted in proportion to the
instructions which are received. The Company also will vote shares in a Sub-
Account that it owns and which are not attributable to the Contract in the same
proportion. If the 1940 Act or any rules thereunder should be amended, or if the
present interpretation of the 1940 Act or such rules should change, and as a
result the Company determines that it is permitted to vote shares in its own
right (whether or not such shares are attributable to the Contract) the Company
reserves the right to do so.
The number of votes which an Owner may cast will be determined by the Company as
of the record date established by the Portfolio. During the accumulation phase,
the number of Portfolio shares attributable to each Owner will be determined by
dividing the dollar value of the Accumulation Units of the Sub-Account credited
to the Contract by the net asset value of one Portfolio share. During the
annuity payout phase, the number of Portfolio shares attributable to each Owner
will be determined by dividing the reserve held in each Sub-Account for the
Owner's variable annuity by the net asset value of one Portfolio share.
Ordinarily, the Owner's voting interest in the Portfolio will decrease as the
reserve for the variable annuity is depleted.
DISTRIBUTION
The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers, including representatives of Allmerica Investments,
Inc. (the Principal Underwriter) which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. ("NASD").
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The Company pays commissions, not to exceed 1.0% of payments, to broker-dealers
which sell the Contract, plus ongoing annual compensation of up to 1% of
Contract value. To the extent permitted by NASD rules, promotional incentives or
payments also may be provided to such broker-dealers based on sales volumes, the
assumption of wholesaling functions, or other sales-related criteria. Additional
payments may be made for other services not directly related to the sale of the
Contract, including the recruitment and training of personnel, production of
promotional literature, and similar services.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, Telephone
1-800-782-8380.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Portfolios in return for providing certain
services to Owners. Currently, the Company receives service fees with respect to
the Scudder International Portfolio, Scudder Global Discovery Portfolio, Scudder
Capital Growth Portfolio and Scudder Growth and Income Portfolio. The Company
receives service fees at an annual rate of 0.15% per annum of the aggregate net
asset value of shares held by the Variable Account. The Company may in the
future render services for which it will receive compensation from the
investment advisers or other service providers of other Underlying Portfolios.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
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APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the Contract and the Fixed Account may be subject to the provisions
of the 1933 Act concerning the accuracy and completeness of statements made in
this Prospectus. The disclosures in this APPENDIX A have not been reviewed by
the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to separate
accounts. Allocations to the Fixed Account become part of the assets of the
Company, and are used to support insurance and annuity obligations. A portion or
all of net payments may be allocated to accumulate at a fixed rate of interest
in the Fixed Account. Such net amounts are guaranteed by the Company as to
principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If the Contract is issued prior to the Annuitant's 60th birthday,
allocations to the Fixed Account will be permitted until the Annuitant's
61st birthday. On and after the Annuitant's 61st birthday, no additional
Fixed Account allocations will be accepted. If the Contract is issued on or
after the Annuitant's 60th birthday, up through and including the
Annuitant's 81st birthday, Fixed Account allocations will be permitted
during the first Contract year. On and after the first Contract anniversary,
no additional allocations to the Fixed Account will be permitted. If a
Contract is issued after the Annuitant's 81st birthday, no payments to the
Fixed Account will be permitted at any time.
In Oregon, no payments to the Fixed Account will be permitted if the Contract is
issued after the Annuitant's 81st birthday. Further, no additional allocations
will be accepted into the Fixed Account on or after the third Contract
anniversary.
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due to
the limitations outlined above, the monies will be allocated to the Kemper Money
Market Portfolio.
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To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (Dollar Cost Averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company.
An eligible payment must be automatically transferred out of the Fixed Account
over a continuous six month period. The enhanced rate will apply during the six
month period to any portion of the eligible payment remaining in the Fixed
Account. Amounts automatically transferred out of the Fixed Account will no
longer earn the enhanced rate of interest and, as of the date of transfer, will
be subject to the variable investment performance of the sub-account(s)
transferred into. If the automatic transfer option is terminated prior to the
end of the six month period, the enhanced rate will no longer apply. The Company
reserves the right to extend the period of time that the enhanced rate will
apply.
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APPENDIX B
THE MARKET VALUE ADJUSTMEN
MARKET VALUE ADJUSTMENT - The following are examples of how the Market Value
Adjustment works:
The market value factor is: [(1+i)/(1+j)] to the power of n/365-1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.10)] to the power of 2555/365-1
= (.98182) to the power of 7-1
= -1.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
= .12054 X $62,985.60
= -$7,592.11
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.07)] to the power of 2555/365-1
= (1.0093) to the power of 7-1
= .06694
The market value adjustment = the market value factor multiplied by the
withdrawal
= .06694 X $62,985.60
= $4,216.26
B-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.11)] to the power of 2555/365-1
= (.97297) to the power of 7-1
= -.17454
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the negative of the excess
interest earned over 3%
= Minimum of (-.17454X$62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
The market value factor = [(1+i)/(1+j)]n/365-1
= [(1+.08)/(1+.06)]2555/365-1
= (1.01887)7-1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by
the withdrawal or the excess interest earned over
3%
= Minimum of (.13981X$62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
B-2
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1: DEATH OF THE OWNER -- WITHOUT ENHANCED DEATH BENEFIT RIDER
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are no withdrawals. The table below presents
examples of the Death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT VALUE (a) VALUE (b) DEATH BENEFIT
- --------- ------------- ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
1 $106,000.00 $ 0.00 $ 106,000.00 $ 100,000.00 $ 106,000.00
2 107,060.00 1,000.00 108,060.00 100,000.00 108,060.00
3 117,766.00 0.00 117,766.00 100,000.00 117,766.00
4 105,989.40 1,000.00 106,989.40 100,000.00 106,989.40
5 116,588.34 0.00 116,588.34 100,000.00 116,588.34
6 128,247.18 1,000.00 129,247.18 100,000.00 129,247.18
7 141,071.90 0.00 141,071.90 100,000.00 141,071.90
8 155,179.08 1,000.00 156,179.08 100,000.00 156,179.08
9 170,696.98 0.00 170,696.98 100,000.00 170,696.98
10 187,766.68 0.00 187,766.68 100,000.00 187,766.68
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments reduced proportionately to reflect withdrawals.
The Hypothetical Death Benefit is equal to the greater of Values (a) and (b).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are withdrawals. The table below presents
examples of the Death Benefit based on the Hypothetical Accumulated Value.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE WITHDRAWALS ADJUSTMENT VALUE (a) VALUE (b) DEATH BENEFIT
- --------- ------------- ------------ ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
1 $106,000.00 $ 0.00 $ 0.00 $ 106,000.00 $ 100,000.00 $ 106,000.00
2 107,060.00 0.00 1,000.00 108,060.00 100,000.00 108,060.00
3 7,766.00 100,000.00 0.00 7,766.00 7,206.35 7,766.00
4 6,989.40 0.00 1,000.00 7,989.40 7,206.35 7,989.40
5 7,688.34 0.00 0.00 7,688.34 7,206.35 7,688.34
6 8,457.18 0.00 1,000.00 9,457.18 7,206.35 9,457.18
7 9,302.90 0.00 0.00 9,302.90 7,206.35 9,302.90
8 10,233.18 0.00 1,000.00 11,233.18 7,206.35 11,233.18
9 11,256.50 0.00 0.00 11,256.50 7,206.35 11,256.50
10 1,382.14 10,000.00 0.00 1,382.14 875.07 1,382.14
</TABLE>
C-1
<PAGE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments reduced proportionately to reflect withdrawals.
The Hypothetical Death Benefit is equal to the greater of Values (a) and (b).
PART 2: DEATH OF THE OWNER -- WITH ENHANCED DEATH BENEFIT RIDER (FOR CONTRACTS
OTHER THAN THOSE ISSUED IN HAWAII AND NEW YORK)
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are no withdrawals. The table below presents
examples of the death benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT VALUE (a) VALUE (b) VALUE (c) DEATH BENEFIT
- --------- ------------- ------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
1 $106,000.00 $ 0.00 $ 106,000.00 $ 105,000.00 $ 106,000.00 $ 106,000.00
2 107,060.00 1,000.00 108,060.00 110,250.00 108,060.00 110,250.00
3 117,766.00 0.00 117,766.00 115,762.50 117,766.00 117,766.00
4 105,989.40 1,000.00 106,989.40 121,550.63 117,766.00 121,550.63
5 116,588.34 0.00 116,588.34 127,628.16 117,766.00 127,628.16
6 128,247.18 1,000.00 129,247.18 134,009.56 129,247.18 134,009.56
7 141,071.90 0.00 141,071.90 140,710.04 141,071.90 141,071.90
8 155,179.08 1,000.00 156,179.08 147,745.54 156,179.08 156,179.08
9 170,696.98 0.00 170,696.98 155,132.82 170,696.98 170,696.98
10 187,766.68 0.00 187,766.68 162,889.46 187,766.68 187,766.68
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments compounded daily at an annual rate of 5%,
decreased proportionately to reflect prior withdrawals.
Value (c) is the highest Accumulated Value increased by any positive Market
Value Adjustment of all Contract anniversaries, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Values (a), (b) or
(c).
C-2
<PAGE>
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are withdrawals as detailed in the table below.
The table below presents examples of the death benefit based on the hypothetical
Accumulated Value.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE
YEAR VALUE WITHDRAWAL ADJUSTMENT VALUE (a)
- --------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
1 $106,000.00 $ 0.00 $ 0.00 $ 106,000.00
2 107,060.00 0.00 1,000.00 108,060.00
3 7,766.00 100,000.00 0.00 7,766.00
4 6,989.40 0.00 1,000.00 7,989.40
5 7,688.34 0.00 0.00 7,688.34
6 8,457.18 0.00 1,000.00 9,457.18
7 9,302.90 0.00 0.00 9,302.90
8 10,233.18 0.00 1,000.00 11,233.18
9 11,256.50 0.00 0.00 11,256.50
10 1,382.14 10,000.00 0.00 1,382.14
</TABLE>
<TABLE>
<CAPTION>
HYPOTHETICAL
YEAR VALUE (b) VALUE (c) DEATH BENEFIT
- --------- ------------ ------------ --------------
<S> <C> <C> <C>
1 $ 105,000.00 $ 106,000.00 $ 106,000.00
2 110,250.00 108,060.00 110,250.00
3 8,342.26 7,787.19 8,342.26
4 8,759.37 7,787.19 8,759.37
5 9,197.34 7,787.19 9,197.34
6 9,657.20 7,787.19 9,657.20
7 10,140.06 7,787.19 10,140.06
8 10,647.07 7,787.19 11,233.18
9 11,179.42 7,787.19 11,256.50
10 1,425.40 945.60 1,425.40
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments compounded daily at an annual rate of 5%,
decreased proportionately to reflect prior withdrawals.
Value (c) is the highest Accumulated Value increased by any positive Market
Value Adjustment of all Contract anniversaries, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Values (a), (b) or
(c).
C-3
<PAGE>
PART 3: DEATH OF THE OWNER -- WITH ENHANCED DEATH BENEFIT RIDER (FOR CONTRACTS
ISSUED IN HAWAII AND NEW YORK)
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are no withdrawals. The table below presents
examples of the death benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT VALUE (a) VALUE (b) VALUE (c) DEATH BENEFIT
- --------- ------------- ------------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
1 $106,000.00 $ 0.00 $ 106,000.00 $ 100,000.00 $ 106,000.00 $ 106,000.00
2 107,060.00 1,000.00 108,060.00 100,000.00 108,060.00 108,060.00
3 117,766.00 0.00 117,766.00 100,000.00 117,766.00 117,766.00
4 105,989.40 1,000.00 106,989.40 100,000.00 117,766.00 117,766.00
5 116,588.34 0.00 116,588.34 100,000.00 117,766.00 117,766.00
6 128,247.18 1,000.00 129,247.18 100,000.00 129,247.18 129,247.18
7 141,071.90 0.00 141,071.90 100,000.00 141,071.90 141,071.90
8 155,179.08 1,000.00 156,179.08 100,000.00 156,179.08 156,179.08
9 170,696.98 0.00 170,696.98 100,000.00 170,696.98 170,696.98
10 187,766.68 0.00 187,766.68 100,000.00 187,766.68 187,766.68
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments, decreased proportionately to reflect prior
withdrawals.
Value (c) is the highest Accumulated Value increased by any positive Market
Value Adjustment of all Contract anniversaries, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Values (a), (b) or
(c).
C-4
<PAGE>
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $100,000 is made on the issue date and no additional
payments are made. Assume there are withdrawals as detailed in the table below.
The table below presents examples of the death benefit based on the hypothetical
Accumulated Value.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE
YEAR VALUE WITHDRAWAL ADJUSTMENT VALUE (a)
- --------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
1 $106,000.00 $ 0.00 $ 0.00 $ 106,000.00
2 107,060.00 0.00 1,000.00 108,060.00
3 7,766.00 100,000.00 0.00 7,766.00
4 6,989.40 0.00 1,000.00 7,989.40
5 7,688.34 0.00 0.00 7,688.34
6 8,457.18 0.00 1,000.00 9,457.18
7 9,302.90 0.00 0.00 9,302.90
8 10,233.18 0.00 1,000.00 11,233.18
9 11,256.50 0.00 0.00 11,256.50
10 1,382.14 10,000.00 0.00 1,382.14
</TABLE>
<TABLE>
<CAPTION>
HYPOTHETICAL
YEAR VALUE (b) VALUE (c) DEATH BENEFIT
- --------- ------------ ------------ --------------
<S> <C> <C> <C>
1 $ 100,000.00 $ 106,000.00 $ 106,000.00
2 100,000.00 108,060.00 108,060.00
3 7,206.35 7,787.19 7,787.19
4 7,206.35 7,787.19 7,989.40
5 7,206.35 7,787.19 7,787.19
6 7,206.35 7,787.19 9,457.18
7 7,206.35 7,787.19 9,302.90
8 7,206.35 7,787.19 11,233.18
9 7,206.35 7,787.19 11,256.50
10 875.07 945.60 1,382.14
</TABLE>
Value (a) is the Accumulated Value increased by any positive Market Value
Adjustment.
Value (b) is the gross payments, decreased proportionately to reflect prior
withdrawals.
Value (c) is the highest Accumulated Value increased by any positive Market
Value Adjustment of all Contract anniversaries, increased for subsequent
payments and decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Values (a), (b) or
(c).
C-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED THROUGH
SEPARATE ACCOUNT KG
INVESTING IN SHARES OF INVESTORS FUND SERIES AND
SCUDDER VARIABLE LIFE INVESTMENT FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE ABOVE SUB-ACCOUNTS OF SEPARATE
ACCOUNT KG, DATED __________, 1998 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE
OBTAINED FROM ANNUITY CLIENT SERVICES, ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE
1-800-782-8380.
DATED __________, 1998
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . . . .2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
UNDERWRITERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ANNUITY BENEFIT PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . .4
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . .6
TAX-DEFERRED ACCUMULATION . . . . . . . . . . . . . . . . . . . . . . . . .8
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
</TABLE>
GENERAL INFORMATION AND HISTORY
Separate Account KG (the "Variable Account") is a separate investment account of
Allmerica Financial Life Insurance and Annuity Company (the "Company")
authorized by vote of its Board of Directors on June 13, 1996. The Company is a
life insurance company organized under the laws of Delaware in July 1974. Its
principal office (the "Principal Office") is located at 440 Lincoln Street,
Worcester, Massachusetts 01653, telephone 508-855-1000. The Company is subject
to the laws of the State of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1997, the
Company had over $9.4 billion in assets and over $26.6 billion of life insurance
in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1997, First Allmerica and its subsidiaries
(including the Company) had over $16.3 billion in combined assets and over
$43.8 billion in life insurance in force.
Currently, 24 Sub-Accounts of the Variable Account are available under
Contract Form 3027-98 (the "Contract"). Each Sub-Account invests in a
corresponding Kemper investment portfolio of Investors Fund Series ("Kemper
INFS") or a corresponding portfolio of Scudder Variable Life Investment Fund
("Scudder VLIF"), open-end, registered management investment companies.
Twenty different portfolios of Kemper INFS are available under the Contract:
the Kemper-Dreman Financial Services Portfolio, Kemper Small Cap Growth
Portfolio, Kemper Small Cap Value Portfolio, Kemper-Dreman
2
<PAGE>
High Return Equity Portfolio, Kemper International Portfolio, Kemper
International Growth and Income Portfolio, Kemper Global Blue Chip Portfolio,
Kemper Growth Portfolio, Kemper Contrarian Value Portfolio, Kemper Blue Chip
Portfolio, Kemper Value + Growth Portfolio, Kemper Horizon 20+ Portfolio,
Kemper Total Return Portfolio, Kemper Horizon 10+ Portfolio, Kemper High
Yield Portfolio, Kemper Horizon 5 Portfolio, Kemper Global Income Portfolio,
Kemper Investment Grade Bond Portfolio, Kemper Government Securities
Portfolio, and Kemper Money Market Portfolio. Four portfolios of Scudder
VLIF are available under the Contract: the Scudder International Portfolio,
Scudder Global Discovery Portfolio, Scudder Capital Growth Portfolio, and
Scudder Growth and Income Portfolio (together, the "Underlying Portfolios").
Each Underlying Portfolio available under the Contract has its own investment
objectives and certain attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contract or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Underlying Portfolio shares owned by the Sub-Accounts are held
on an open account basis. A Sub-Account's ownership of Underlying Portfolio
shares is reflected on the records of the Underlying Portfolio and is not
represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1997 and
1996 and for each of the two years in the period ended December 31, 1997, and
the financial statements of the Separate Account KG--Kemper Gateway Elite of
the Company as of December 31, 1997 and for the periods indicated, included
in this Statement of Additional Information constituting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contract.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered broker-
dealer under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica
3
<PAGE>
Investments, the Company and the Variable Account. Allmerica Investments
distributes the Contract on a best-efforts basis. Allmerica Investments,
Inc., 440 Lincoln Street, Worcester, Massachusetts 01653, was organized in
1969 as a wholly owned subsidiary of First Allmerica, and presently is
indirectly wholly owned by First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable annuity
contracts.
All persons selling the Contract are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
contracts. The Company pays commissions, not to exceed 1.0% of purchase
payments, to entities which sell the Contract. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
entities based on sales volumes, the assumption of wholesaling functions or
other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature
and similar services. A Promotional Allowance of 0.40% of total payments is
paid to Kemper Distributors, Inc. for administrative and support services
with respect to the distribution of the Contract; however, Kemper
Distributors, Inc. may direct the Company to pay a portion of said allowance
to broker-dealers who provide support services directly.
Commissions paid by the Company do not result in any charge to Owners or to the
Variable Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus.
No underwriting commissions were paid for sales of the Contract since it was
not offered until _____________.
The aggregate amounts of underwriting commissions paid to Zurich Kemper, Inc.
and to independent broker-dealers, respectively, for sales of all other
contracts funded by Separate Account KG were $477,542.97 and $24,302,221.55
in 1997 and $10,507.07 and $269,658.91 in 1996. Sales of these contracts
began in 1996.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period. . . . . . . . . . . . . . $ 1.135000
(2) Value of Assets -- Beginning of Valuation Period. . . . . . . . . . . . . . . . $5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses . . . . . . . . . . . $1,675
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2). . . . 0.000335
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
(5) Annual Charge (one-day equivalent of 1.40% per annum) . . . . . . . . . . . . . . 0.000039
(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . . . . . . . . . . . 0.000296
(7) Net Investment Factor 1.000000 + (6). . . . . . . . . . . . . . . . . . . . . . . 1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7) . . . . . . . . . . . . . . .$1.135336
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity benefit payments is described
in detail under "Determination of the First and Subsequent Annuity Benefit
Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example:
Assume an Annuitant has 40,000 Accumulation Units in a Separate Account, and
that the value of an Accumulation Unit on the Valuation Date used to determine
the amount of the first variable annuity payment is $1.120000. Therefore, the
Accumulation Value of the Contract is $44,800 (40,000 x $1.120000). Assume also
that the Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax or contingent
deferred sales charge, the first monthly payment would be 44.800 multiplied by
$6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum
for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit Values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment, the number of Annuity Units represented by that payment
is determined to be 267.5818. The value of this same number of Annuity Units
will be paid in each subsequent month under most options. Assume further that
the net investment factor for the Valuation Period applicable to the next
annuity benefit payment is 1.000190. Multiplying this factor by .999906 (the
one-day adjustment factor for the assumed interest rate of 3.5% per annum)
produces a factor of 1.000096. This then is multiplied by the Annuity Unit
value on the immediately preceding Valuation Date (assumed here to be
$1.105000). The result is an Annuity Unit value of $1.105106 for the current
monthly payment. The current monthly payment then is determined by multiplying
the number of Annuity Units by the current Annuity Unit value, or 267.5818 times
$1.105106, which produces a current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both
commutable and non-commutable period certain annuity options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The commuted value is the present
value of remaining payments calculated at 3.5% interest. The determination of
the commuted value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather than the Accumulated Value. Assume this
results in 250.0000 Annuity Units. Assume the commuted value is requested with
60 monthly payments remaining and a current Annuity Unit Value of $1.200000.
Based on these assumptions, the dollar amount of remaining payments would be
$300 a month for 60 months. The present value at 3.5% of all remaining payments
would be $16,560.72.
5
<PAGE>
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on
various topics of interest to Owners and prospective Owners. These topics
may include the relationship between sectors of the economy and the economy
as a whole and its effect on various securities markets, investment
strategies and techniques (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the contract and the
characteristics of and market for such financial instruments. Total return
data and supplemental total return information may be advertised based on the
period of time that an Underlying Portfolio and an underlying Sub-Account
have been in existence, even if longer than the period of time that the
Contract has been offered. The results for any period prior to a Contract
being offered will be calculated as if the Contract had been offered during
that period of time, with all charges assumed to be those applicable to the
Contract.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Account's asset charge.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). The quotations are
computed by finding the average annual compounded rates of return over the
specified periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable Account
of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at
the end of the specified period
The calculation of Total Return includes the annual charges against the asset of
the Sub-Account. This charge is 1.40% on an annual basis. The calculation of
ending redeemable value assumes (1) the Contract was issued at the beginning of
the period, and (2) a complete surrender of the Contract at the end of the
period.
6
<PAGE>
The calculations of Total Return reflect the deduction of the $35 (or lower,
depending on the state of contract issue) annual Contract fee.
YIELD AND EFFECTIVE YIELD -- THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1997:
<TABLE>
<S> <C>
Yield 4.12%
Effective Yield 4.21%
</TABLE>
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, subtracting
a charge reflecting the annual 1.40% deduction for mortality and expense risk
and the administrative charge, dividing the difference by the value of the
account at the beginning of the same period to obtain the base period return,
and then multiplying the return for a seven-day base period by (365/7), with the
resulting yield carried to the nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period
7
<PAGE>
return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $35 (or lower,
depending on the state of contract issue) annual Contract fee.
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
-------------------------
TAXABLE AFTER-TAX
LUMP CONTRIBUTIONS
NO SUM AND TAXABLE
WITHDRAWALS WITHDRAWAL EARNINGS
----------- ---------- -------------
<S> <C> <C> <C>
10 Years......... $107,946 $ 86,448 $ 81,693
20 Years......... 233,048 165,137 133,476
30 Years......... 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract with a conventional savings plan. Contributions
to the non-qualified annuity contract and the conventional savings plan are made
after tax. Only the gain in the non-qualified annuity contract will be subject
to income tax in a taxable lump sum withdrawal. The chart assumes a 37.1%
federal marginal tax rate and an 8% annual return. The 37.1% federal marginal
tax is based on a marginal tax rate of 36%, representative of the target market,
adjusted to reflect a decrease of $3 of itemized deductions for each $100 of
income over $117,950. Tax rates are subject to change as is the tax-deferred
treatment of the Contract. Income on non-qualified annuity contracts is taxed
as ordinary income upon withdrawal. A 10% tax penalty may apply to early
withdrawals. See "Federal Income Taxes" in the Prospectus.
The chart does not reflect the following charges and expenses under the
Contract: 1.25% for mortality and expense risk; 0.15% administration charges;
and $35 (or lower, depending on the state of contract issue) annual Contract
fee. The tax-deferred accumulation would be reduced if these charges were
reflected. No implication is intended by the use of these assumptions that
the return shown is guaranteed in any way or that the return shown represents
an average or expected rate of return over the period of the Contract.
(IMPORTANT -- THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.)
Unlike savings plans, contributions to non-qualified annuity contracts provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a non-qualified annuity contract (and you have
many different options on how you receive your funds), they are subject to
income tax. At the time of receipt, if the person receiving the monies is
retired, not working or has additional tax exemptions, these monies may be taxed
at a lesser rate.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Separate Account KG.
8
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholder's equity, and of cash
flows present fairly, in all material respects, the financial position of
Allmerica Financial Life Insurance and Annuity Company at 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. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1998
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- --------- ---------
<S> <C> <C>
REVENUES
Premiums..................................... $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 212.2 176.2
Net investment income...................... 164.2 171.7
Net realized investment gains (losses)..... 2.9 (3.6)
Other income............................... 1.4 0.9
--------- ---------
Total revenues......................... 403.5 377.9
--------- ---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 187.8 192.6
Policy acquisition expenses................ 2.8 49.9
Loss from cession of disability income
business................................. 53.9 --
Other operating expenses................... 101.3 86.6
--------- ---------
Total benefits, losses and expenses.... 345.8 329.1
--------- ---------
Income before federal income taxes............. 57.7 48.8
--------- ---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 13.9 26.9
Deferred................................... 7.1 (9.8)
--------- ---------
Total federal income tax expense....... 21.0 17.1
--------- ---------
Net income..................................... $ 36.7 $ 31.7
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,340.5 and $1,660.2)............................ $1,402.5 $1,698.0
Equity securities at fair value (cost of $34.4 and
$33.0)............................................ 54.0 41.5
Mortgage loans...................................... 228.2 221.6
Real estate......................................... 12.0 26.1
Policy loans........................................ 140.1 131.7
Other long term investments......................... 20.3 7.9
---------- ----------
Total investments............................... 1,857.1 2,126.8
---------- ----------
Cash and cash equivalents............................. 31.1 18.8
Accrued investment income............................. 34.2 37.7
Deferred policy acquisition costs..................... 765.3 632.7
Reinsurance receivables on paid and unpaid losses,
benefits and unearned premiums...................... 251.1 81.5
Other assets.......................................... 10.7 8.2
Separate account assets............................... 7,567.3 4,524.0
---------- ----------
Total assets.................................... $10,516.8 $7,429.7
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $2,097.3 $2,171.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 18.5 16.1
Unearned premiums................................... 1.8 2.7
Contractholder deposit funds and other policy
liabilities....................................... 32.5 32.8
---------- ----------
Total policy liabilities and accruals........... 2,150.1 2,222.9
---------- ----------
Expenses and taxes payable............................ 77.6 77.3
Reinsurance premiums payable.......................... 4.9 --
Deferred federal income taxes......................... 75.9 60.2
Separate account liabilities.......................... 7,567.3 4,523.6
---------- ----------
Total liabilities............................... 9,875.8 6,884.0
---------- ----------
Commitments and contingencies (Note 13)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,521 and 2,518 shares issued and
outstanding......................................... 2.5 2.5
Additional paid in capital............................ 386.9 346.3
Unrealized appreciation on investments, net........... 38.5 20.5
Retained earnings..................................... 213.1 176.4
---------- ----------
Total shareholder's equity...................... 641.0 545.7
---------- ----------
Total liabilities and shareholder's equity...... $10,516.8 $7,429.7
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
----------------------------------------------- --------- ---------
<S> <C> <C>
COMMON STOCK
Balance at beginning of period............. $ 2.5 $ 2.5
Issued during year......................... -- --
--------- ---------
Balance at end of period................... 2.5 2.5
--------- ---------
ADDITIONAL PAID IN CAPITAL
Balance at beginning of period............. 346.3 324.3
Contribution from Parent................... 40.6 22.0
--------- ---------
Balance at end of period................... 386.9 346.3
--------- ---------
RETAINED EARNINGS
Balance at beginning of period............. 176.4 144.7
Net income................................. 36.7 31.7
--------- ---------
Balance at end of period................... 213.1 176.4
--------- ---------
NET UNREALIZED APPRECIATION ON INVESTMENTS
Balance at beginning of period............. 20.5 23.8
Net appreciation (depreciation) on
available for sale securities............ 27.0 (5.1)
(Provision) benefit for deferred federal
income taxes............................. (9.0) 1.8
--------- ---------
Balance at end of period................... 38.5 20.5
--------- ---------
Total shareholder's equity............. $641.0 $545.7
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
-------------------------------------------- ---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (2.9) 3.6
Net amortization and depreciation... -- 3.5
Loss from cession of disability
income business................... 53.9 --
Deferred federal income taxes....... 7.1 (9.8)
Payment related to cession of
disability income business........ (207.0) --
Change in deferred acquisition
costs............................. (181.3) (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable........................... 3.9 (0.2)
Change in accrued investment
income............................ 3.5 1.2
Change in policy liabilities and
accruals, net..................... (72.4) (39.9)
Change in reinsurance receivable.... 22.1 (1.5)
Change in expenses and taxes
payable........................... 0.2 32.3
Separate account activity, net...... 0.4 10.5
Other, net.......................... (7.5) (0.2)
---------- ----------
Net used in operating
activities.................... (343.3) (35.6)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 909.7 809.4
Proceeds from disposals of equity
securities............................ 2.4 1.5
Proceeds from disposals of other
investments........................... 23.7 17.4
Proceeds from mortgages matured or
collected............................. 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (579.7) (795.8)
Purchase of equity securities........... (3.2) (13.2)
Purchase of other investments........... (79.4) (36.2)
Other investing activities, net......... -- (2.0)
---------- ----------
Net cash provided by investing
activities........................ 336.4 15.1
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 19.2 22.0
---------- ----------
Net cash provided by financing
activities........................ 19.2 22.0
---------- ----------
Net change in cash and cash equivalents..... 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 18.8 17.3
---------- ----------
Cash and cash equivalents, end of period.... $ 31.1 $ 18.8
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 3.4
Income taxes paid....................... $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a
wholly-owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company and its results of operations
for the month of December, 1997. Somerset Square, Inc. was transferred from
SMAFCO effective November 30, 1997. (See Significant Transactions.)
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Certain reclassifications have been
made to the 1996 financial statements in order to conform to the 1997
presentation.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result of this decision real estate held by the
Company and real estate joint ventures were written down to the estimated fair
value less cost to sell. Depreciation is not recorded on these assets while they
are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
or a group of investments is determined, a realized investment loss is recorded.
Changes in the valuation allowance for mortgage loans and real estate are
included in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities, and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, management believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains, and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6% for
life insurance and 2% to 9 1/2% for
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
annuities. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life include deposits received from customers and investment earnings
on their fund balances, less administrative charges. Universal life fund
balances are also assessed mortality and surrender charges. Individual health
benefit liabilities for active lives are estimated using the net level premium
method, and assumptions as to future morbidity, withdrawals and interest which
provide a margin for adverse deviation. Benefit liabilities for disabled lives
are estimated using the present value of benefits method and experience
assumptions as to claim terminations, expenses and interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned on
a pro-rata basis over the contract period.
The unexpired portion of these premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values. Certain policy charges that represent compensation
for services to be provided in future periods are deferred and amortized over
the period benefited using the same assumptions used to amortize capitalized
acquisition costs.
I. FEDERAL INCOME TAXES
AFC, its life insurance subsidiaries, FAFLIC and AFLIAC, and its non-life
insurance domestic subsidiaries file a life-nonlife consolidated United States
Federal income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life insurance company taxable
operating losses that can be applied to offset life insurance company taxable
income. Allmerica P&C and its subsidiaries will be included in the AFC
consolidated return as part of the
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
non-life insurance company subgroup for the period July 17, 1997 through
December 31, 1997. For the period January 1, 1997 through July 16, 1997,
Allmerica P&C and its subsidiaries will file a separate consolidated United
States Federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109). These differences result primarily from loss reserves, policy acquisition
expenses, and unrealized appreciation/depreciation on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This statement establishes standards for
the way that public enterprises report information about operating segments in
annual financial statements and requires that selected information about those
operating segments be reported in interim financial statements. This statement
supersedes Statement No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Statement No. 131 requires that all public enterprises report
financial and descriptive information about their reportable operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates no impact from the adoption of
Statement No. 131.
In June 1997, the FASB also issued Statement No. 130, REPORTING COMPREHENSIVE
INCOME, which established standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income are to be reported in
a financial statement that is displayed with the same prominence as other
financial statements. This statement stipulates that comprehensive income
reflect the change in equity of an enterprise during a period from transactions
and other events and circumstances from non-owner sources. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
anticipates that the adoption of Statement No. 130 will result primarily in
reporting the changes in unrealized gains and losses on investments in debt and
equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income under a 100% coinsurance
agreement to Metropolitan Life Insurance Company. The coinsurance agreement
became effective October 1, 1997. The transaction has resulted in the
recognition of a $53.9 million pre-tax loss in the first quarter of 1997.
During the 4th quarter of 1997, SMAFCO contributed $40.6 million of additional
paid in capital to the Company. The nature of the contribution was $19.2 million
in cash and $21.4 million in other assets including Somerset Square, Inc.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Effective January 1, 1998, the Company entered into an agreement with
Reinsurance Group of America, Inc. to reinsure the mortality risk on the
universal life and variable universal life blocks of business. Management
believes that this agreement will not have a material effect on the results of
operations or financial position of the Company.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1997
--------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 6.3 $ .5 $-- $ 6.8
States and political subdivisions....... 2.8 .2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,340.5 $66.6 $ 4.6 $1,402.5
---------- -------- --------- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
---------- -------- --------- --------
---------- -------- --------- --------
1996
--------------------------------------------
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1997, the amortized
cost and market value of these assets on deposit were $276.8 million and $291.7
million, respectively. At December 31, 1996, the amortized cost and market value
of these assets on deposit were $284.9 million and $292.2 million, respectively.
In addition, fixed maturities, excluding those securities on deposit in New
York, with an amortized cost of $4.2 million were on deposit with various state
and governmental authorities at December 31, 1997 and 1996.
There were no contractual fixed maturity investment commitments at December 31,
1997 and 1996, respectively.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1997
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 63.0 $ 63.5
Due after one year through five years....................... 328.8 343.9
Due after five years through ten years...................... 649.5 679.9
Due after ten years......................................... 299.2 315.2
--------- ---------
Total....................................................... $1,340.5 $1,402.5
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS
FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------------------------------------------------------ ---------- ------ ------
<S> <C> <C> <C>
1997
Fixed maturities............................................ $702.9 $ 11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $20.5
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ----- ------
9.4 8.6 18.0
---------- ----- ------
Net appreciation, end of year............................... $ 22.1 $16.4 $38.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ----- ------
(7.7) 4.4 (3.3)
---------- ----- ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ----- ------
---------- ----- ------
</TABLE>
(1) Includes net appreciation on other investments of $11.1 million in 1997, and
$2.2 million in 1996.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Mortgage loans.............................................. $228.2 $221.6
Real estate:
Held for sale............................................. 12.0 26.1
Held for production of income............................. -- --
---------- ------
Total real estate....................................... $ 12.0 $ 26.1
---------- ------
Total mortgage loans and real estate........................ $240.2 $247.7
---------- ------
---------- ------
</TABLE>
Reserves for mortgage loans were $9.4 million and $9.5 million at December 31,
1997 and 1996, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. As a result, real estate assets with a carrying
amount of $15.7 million were written down to the estimated fair value less cost
to sell of $12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation is not recorded on these assets while they are held for
disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1997. During 1996, non-cash investing
activities included real estate acquired through foreclosure of mortgage loans,
which had a fair value of $0.9 million.
At December 31, 1997, contractual commitments to extend credit under commercial
mortgage loan agreements amounted to approximately $18.7 million. These
commitments generally expire within one year.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Property type:
Office building........................................... $101.7 $ 86.1
Residential............................................... 19.3 39.0
Retail.................................................... 42.2 55.9
Industrial/warehouse...................................... 61.9 52.6
Other..................................................... 24.5 25.3
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
Geographic region:
South Atlantic............................................ $ 68.7 $ 72.9
Pacific................................................... 56.6 37.0
East North Central........................................ 61.4 58.3
Middle Atlantic........................................... 29.8 35.0
West South Central........................................ 6.9 5.7
New England............................................... 12.4 21.9
Other..................................................... 13.8 28.1
Valuation allowances...................................... (9.4) (11.2)
---------- ------
Total....................................................... $240.2 $247.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, scheduled mortgage loan maturities were as follows: 1998
- -- $52.0 million; 1999 -- $17.1 million; 2000 -- $46.3 million; 2001 -- $7.0
million; 2002 -- $11.7 million; and $94.1 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1997, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS DECEMBER 31
- ------------------------------------------------------------ ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1997
Mortgage loans.............................................. $ 9.5 $1.1 $1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ---- ---- -----
Total................................................... $11.2 $4.8 $6.6 $ 9.4
----- ---- ---- -----
----- ---- ---- -----
1996
Mortgage loans.............................................. $12.5 $4.5 $7.5 $ 9.5
Real estate................................................. 2.1 ---- 0.4 1.7
----- ---- ---- -----
Total................................................... $14.6 $4.5 $7.9 $11.2
----- ---- ---- -----
----- ---- ---- -----
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Deductions of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect writedowns to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $20.6 million and $21.5 million, with
related reserves of $7.1 million and $7.3 million as of December 31, 1997 and
1996, respectively. All impaired loans were reserved as of December 31, 1997 and
1996.
The average carrying value of impaired loans was $19.8 million and $26.3
million, with related interest income while such loans were impaired of $2.2
million and $3.4 million as of December 31, 1997 and 1996, respectively.
D. OTHER
At December 31, 1997, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $130.0 $137.2
Mortgage loans.............................................. 20.4 22.0
Equity securities........................................... 1.3 0.7
Policy loans................................................ 10.8 10.2
Real estate................................................. 3.9 6.2
Other long-term investments................................. 1.0 0.8
Short-term investments...................................... 1.4 1.4
---------- ------
Gross investment income..................................... 168.8 178.5
Less investment expenses.................................... (4.6) (6.8)
---------- ------
Net investment income....................................... $164.2 $171.7
---------- ------
---------- ------
</TABLE>
At December 31, 1997, mortgage loans on non-accrual status were $2.8 million,
which were all restructured loans. There were no fixed maturities on non-accrual
status at December 31, 1997. The effect of non-accruals, compared with amounts
that would have been recognized in accordance with the original terms of the
investment, had no impact in 1997, and reduced net income by $0.1 million in
1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $21.1 million and $25.4 million at December 31, 1997 and 1996,
respectively. Interest income on restructured mortgage loans that would have
been recorded in accordance with the original terms of such loans amounted to
$1.9 million and $3.6 million in 1997 and 1996, respectively. Actual interest
income on these loans included in net investment income aggregated $2.1 million
and $2.2 million in 1997 and 1996, respectively.
There were no fixed maturities or mortgage loans which were non-income producing
for the twelve months ended December 31, 1997.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Fixed maturities............................................ $ 3.0 $ (3.3)
Mortgage loans.............................................. (1.1) (3.2)
Equity securities........................................... 0.5 0.3
Real estate................................................. (1.5) 2.5
Other....................................................... 2.0 0.1
---------- ------
Net realized investment losses.............................. $ 2.9 $ (3.6)
---------- ------
---------- ------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 31.1 $ 31.1 $ 18.8 $ 18.8
Fixed maturities.......................................... 1,402.5 1,402.5 1,698.0 1,698.0
Equity securities......................................... 54.0 54.0 41.5 41.5
Mortgage loans............................................ 228.2 239.8 221.6 229.3
Policy loans.............................................. 140.1 140.1 131.7 131.7
Reinsurance receivables................................... 251.1 251.1 72.5 72.5
--------- --------- --------- ---------
$2,107.0 $2,118.6 $2,184.1 $2,191.8
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual annuity contracts.............................. 876.0 850.6 910.2 885.9
Supplemental contracts without life contingencies......... 15.3 15.3 15.9 15.9
Other individual contract deposit funds................... 0.3 0.3 0.3 0.3
--------- --------- --------- ---------
$ 891.6 $ 866.2 $ 926.4 $ 902.1
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. DEBT
In 1997 the Company incurred no debt. During 1996, the Company utilized
repurchase agreements to finance certain investments.
Interest expense was $3.4 million in 1996, relating to the repurchase
agreements, and is recorded in other operating expenses.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- ------
<S> <C> <C>
Federal income tax expense (benefit)
Current................................................... $13.9 $26.9
Deferred.................................................. 7.1 (9.8)
----- -----
Total....................................................... $21.0 $17.1
----- -----
----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes. The deferred
tax (assets) liabilities are comprised of the following at December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Deferred tax (assets) liabilitie
Loss reserves............................................. $(175.8) $(137.0)
Deferred acquisition costs................................ 226.4 186.9
Investments, net.......................................... 27.0 14.2
Bad debt reserve.......................................... (2.0) (1.1)
Other, net................................................ 0.3 (2.8)
---------- -------------
Deferred tax liability, net............................... $ 75.9 $ 60.2
---------- -------------
---------- -------------
</TABLE>
Gross deferred income tax liabilities totaled $253.7 million and $201.1 million
at December 31, 1997 and 1996. Gross deferred income tax assets totaled $177.8
million and $140.9 at December 31, 1997 and 1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
8. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $124.1 million and $112.4 million in 1997 and 1996. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $15.0 million and $13.3 million at
December 31, 1997 and 1996.
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1998, AFLIAC could pay dividends of $33.9 million to FAFLIC
without prior approval.
10. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Insurance premiums:
Direct.................................................... $ 48.8 $ 53.3
Assumed................................................... 2.6 3.1
Ceded..................................................... (28.6) (23.7)
---------- ------
Net premiums................................................ $ 22.8 $ 32.7
---------- ------
---------- ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $226.0 $206.4
Assumed................................................... 4.2 4.5
Ceded..................................................... (42.4) (18.3)
---------- ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $187.8 $192.6
---------- ------
---------- ------
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Balance at beginning of year................................ $632.7 $555.7
Acquisition expenses deferred............................. 184.1 116.6
Amortized to expense during the year...................... (53.0) (49.9)
Adjustment to equity during the year...................... (10.2) 10.3
Adjustment for cession of disability income insurance..... (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... 50.3 --
---------- ------
Balance at end of year...................................... $765.3 $632.7
---------- ------
---------- ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
12. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's accident and health business was
$219.9 million and $226.2 million at December 31, 1997 and 1996. Accident and
health claim liabilities have been re-estimated for all prior years and were
increased by $-0- million in 1997 and $3.2 million in 1996. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
accident and health business to the Metropolitan, management believes that no
material adverse development of losses will occur. However, the amount of the
liabilities could be revised in the near term if the estimates are revised.
13. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit was instituted in Louisiana against Allmerica Financial
Corp. and certain of its subsidiaries by individual plaintiffs alleging fraud,
unfair or deceptive acts, breach of contract, misrepresentation and related
claims in the sale of life insurance policies. In October 1997, plaintiffs
voluntarily dismissed the Louisiana suit and refiled the action in Federal
District Court in Worcester, Massachusetts. The plaintiffs
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
seek to be certified as a class. The case is in the early stages of discovery
and the Company is evaluating the claims. Although the Company believes it has
meritorious defenses to plaintiffs' claims, there can be no assurance that the
claims will be resolved on a basis which is satisfactory to the Company.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the opinion of management, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Although the Company does not
believe that there is a material contingency associated with the Year 2000
project, there can be no assurance that exposure for material contingencies will
not arise.
14. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment reserves are based on different assumptions,
life insurance reserves are based on different assumptions and income tax
expense reflects only taxes paid or currently payable. Statutory net income and
surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1997 1996
- ------------------------------------------------------------ ---------- -------------
<S> <C> <C>
Statutory net income........................................ $ 31.5 $ 5.4
Statutory Surplus........................................... $307.1 $234.0
---------- ------
---------- ------
</TABLE>
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and Policyowners of the Separate Account KG - Kemper Gateway Elite of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities and the
related statements of operations and of changes in net assets present fairly,
in all material respects, the financial position of each of the Sub-Accounts
(Small Cap Value, Small Cap Growth, Value, International, Growth,
Value+Growth, Horizon 20+, Total Return, Horizon 10+, Horizon 5, High Yield,
Investment Grade Bond, Government Securities, Money Market, Global Income,
and Blue Chip) constituting the Separate Account KG - Kemper Gateway Elite of
Allmerica Financial Life Insurance and Annuity Company at December 31, 1997,
the results of each of their operations and the changes in each of their net
assets for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Allmerica Financial Life Insurance and Annuity Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1997 by correspondence with the
Fund, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 25, 1998
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP
VALUE GROWTH VALUE INTERNATIONAL GROWTH
------------ -------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series.................................... $36,319,776 $21,383,894 $ 71,433,849 $33,878,268 $ 28,810,926
Dividend receivable......................... -- -- -- -- --
------------ -------------- ------------- -------------- -----------------
Total assets.............................. 36,319,776 21,383,894 71,433,849 33,878,268 28,810,926
LIABILITIES: -- -- -- -- --
------------ -------------- ------------- -------------- -----------------
Net assets................................ $36,319,776 $21,383,894 $ 71,433,849 $33,878,268 $ 28,810,926
------------ -------------- ------------- -------------- -----------------
------------ -------------- ------------- -------------- -----------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 8,737,082 $ 5,249,240 $ 16,264,284 $ 9,005,285 $ 6,743,486
Non-qualified variable annuity policies... 27,582,694 16,134,654 55,169,565 24,872,983 22,067,440
------------ -------------- ------------- -------------- -----------------
$36,319,776 $21,383,894 $ 71,433,849 $33,878,268 $ 28,810,926
------------ -------------- ------------- -------------- -----------------
------------ -------------- ------------- -------------- -----------------
Qualified units outstanding, December 31,
1997...................................... 7,119,810 4,010,896 12,211,487 8,184,227 5,661,039
Net asset value per qualified unit, December
31, 1997.................................. $ 1.227151 $ 1.308745 $ 1.331884 $ 1.100322 $ 1.191210
Non-qualified units outstanding, December
31, 1997.................................. 22,477,017 12,328,340 41,422,200 22,605,186 18,525,230
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.227151 $ 1.308745 $ 1.331884 $ 1.100322 $ 1.191210
<CAPTION>
VALUE+GROWTH HORIZON 20+ TOTAL RETURN
------------------ -------------- ------------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series.................................... $37,551,945 $9,186,037 $36,407,201
Dividend receivable......................... -- -- --
------------------ -------------- ------------------
Total assets.............................. 37,551,945 9,186,037 36,407,201
LIABILITIES: -- -- --
------------------ -------------- ------------------
Net assets................................ $37,551,945 $9,186,037 $36,407,201
------------------ -------------- ------------------
------------------ -------------- ------------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 7,973,987 $2,628,987 $ 7,041,822
Non-qualified variable annuity policies... 29,577,958 6,557,050 29,365,379
------------------ -------------- ------------------
$37,551,945 $9,186,037 $36,407,201
------------------ -------------- ------------------
------------------ -------------- ------------------
Qualified units outstanding, December 31,
1997...................................... 6,571,200 2,223,241 6,050,814
Net asset value per qualified unit, December
31, 1997.................................. $ 1.213475 $ 1.182502 $ 1.163781
Non-qualified units outstanding, December
31, 1997.................................. 24,374,592 5,545,065 25,232,737
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.213475 $ 1.182502 $ 1.163781
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
HORIZON 10+ HORIZON 5 HIGH YIELD GRADE BOND SECURITIES
-------------- ------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series.................................... $11,767,916 $ 8,785,811 $ 72,923,051 $8,904,644 $8,338,664
Dividend receivable......................... -- -- -- -- --
-------------- ------------- --------------- -------------- --------------
Total assets.............................. 11,767,916 8,785,811 72,923,051 8,904,644 8,338,664
LIABILITIES: -- -- -- -- --
-------------- ------------- --------------- -------------- --------------
Net assets................................ $11,767,916 $ 8,785,811 $ 72,923,051 $8,904,644 $8,338,664
-------------- ------------- --------------- -------------- --------------
-------------- ------------- --------------- -------------- --------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 3,695,703 $ 1,668,530 $ 13,793,824 $1,896,373 $1,974,946
Non-qualified variable annuity policies... 8,072,213 7,117,281 59,129,227 7,008,271 6,363,718
-------------- ------------- --------------- -------------- --------------
$11,767,916 $ 8,785,811 $ 72,923,051 $8,904,644 $8,338,664
-------------- ------------- --------------- -------------- --------------
-------------- ------------- --------------- -------------- --------------
Qualified units outstanding, December 31,
1997...................................... 3,202,904 1,497,939 12,282,576 1,758,115 1,850,925
Net asset value per qualified unit, December
31, 1997.................................. $ 1.153860 $ 1.113884 $ 1.123040 $ 1.078640 $ 1.067005
Non-qualified units outstanding, December
31, 1997.................................. 6,995,834 6,389,607 52,651,043 6,497,322 5,964,094
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.153860 $ 1.113884 $ 1.123040 $ 1.078640 $ 1.067005
<CAPTION>
GLOBAL
MONEY MARKET INCOME BLUE CHIP
--------------- -------------- ---------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Investors Fund
Series.................................... $16,376,834 $ 1,342,245 $ 14,565,694
Dividend receivable......................... 37,744 -- --
--------------- -------------- ---------------
Total assets.............................. 16,414,578 1,342,245 14,565,694
LIABILITIES: -- -- --
--------------- -------------- ---------------
Net assets................................ $16,414,578 $ 1,342,245 $ 14,565,694
--------------- -------------- ---------------
--------------- -------------- ---------------
Net asset distribution by category:
Qualified variable annuity policies....... $ 4,003,371 $ 272,539 $ 4,076,751
Non-qualified variable annuity policies... 12,411,207 1,069,706 10,488,943
--------------- -------------- ---------------
$16,414,578 $ 1,342,245 $ 14,565,694
--------------- -------------- ---------------
--------------- -------------- ---------------
Qualified units outstanding, December 31,
1997...................................... 3,843,630 267,439 3,688,616
Net asset value per qualified unit, December
31, 1997.................................. $ 1.041560 $ 1.019069 $ 1.105225
Non-qualified units outstanding, December
31, 1997.................................. 11,915,979 1,049,689 9,490,324
Net asset value per non-qualified unit,
December 31, 1997......................... $ 1.041560 $ 1.019069 $ 1.105225
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP
VALUE GROWTH VALUE INTERNATIONAL GROWTH
---------- ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 47,080 $ 16,845 $ 74,722 $ 88,112 $ 34,351
---------- ------------ ----------- ------------ ---------------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 178,545 100,403 351,384 200,312 160,465
Administrative expense fees............... 21,426 12,048 42,166 24,038 19,256
---------- ------------ ----------- ------------ ---------------
Total expenses.......................... 199,971 112,451 393,550 224,350 179,721
---------- ------------ ----------- ------------ ---------------
Net investment income (loss)............ (152,891) (95,606) (318,828) (136,238) (145,370)
---------- ------------ ----------- ------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsor................................. -- 320,050 -- 308,389 1,391,185
Net realized gain (loss) from sales of
investments............................. 18,177 15,233 12,074 (283) 6,716
---------- ------------ ----------- ------------ ---------------
Net realized gain (loss)................ 18,177 335,283 12,074 308,106 1,397,901
Net unrealized gain (loss)................ 1,759,941 2,010,568 6,408,577 (393,562) 734,032
---------- ------------ ----------- ------------ ---------------
Net realized and unrealized gain........ 1,778,118 2,345,851 6,420,651 (85,456) 2,131,933
---------- ------------ ----------- ------------ ---------------
Net increase in net assets from
operations............................ $1,625,227 $2,250,245 $6,101,823 $(221,694) $ 1,986,563
---------- ------------ ----------- ------------ ---------------
---------- ------------ ----------- ------------ ---------------
<CAPTION>
VALUE+GROWTH HORIZON 20+ TOTAL RETURN
----------------- ------------- -----------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 40,431 $ 16,264 $ 155,748
----------------- ------------- -----------------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 177,197 44,550 174,956
Administrative expense fees............... 21,263 5,346 20,994
----------------- ------------- -----------------
Total expenses.......................... 198,460 49,896 195,950
----------------- ------------- -----------------
Net investment income (loss)............ (158,029) (33,632) (40,202)
----------------- ------------- -----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsor................................. -- -- 640,299
Net realized gain (loss) from sales of
investments............................. 16,087 19,104 (1,220)
----------------- ------------- -----------------
Net realized gain (loss)................ 16,087 19,104 639,079
Net unrealized gain (loss)................ 1,966,784 534,900 1,196,085
----------------- ------------- -----------------
Net realized and unrealized gain........ 1,982,871 554,004 1,835,164
----------------- ------------- -----------------
Net increase in net assets from
operations............................ $1,824,842 $ 520,372 $1,794,962
----------------- ------------- -----------------
----------------- ------------- -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HORIZON INVESTMENT GOVERNMENT
10+ HORIZON 5 HIGH YIELD GRADE BOND SECURITIES
---------- ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 14,964 $ 14,508 $1,692,326 $ 13,330 $ 130,640
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 58,622 42,009 418,706 43,570 47,309
Administrative expense fees............... 7,035 5,042 50,245 5,229 5,677
---------- ------------ ----------- ------------ ---------------
Total expenses.......................... 65,657 47,051 468,951 48,799 52,986
---------- ------------ ----------- ------------ ---------------
Net investment income (loss)............ (50,693) (32,543) 1,223,375 (35,469) 77,654
---------- ------------ ----------- ------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsor................................. -- -- -- -- --
Net realized gain (loss) from sales of
investments............................. 12,017 6,148 (1,819) 1,923 6,594
---------- ------------ ----------- ------------ ---------------
Net realized gain (loss)................ 12,017 6,148 (1,819) 1,923 6,594
Net unrealized gain (loss)................ 517,554 371,802 2,081,418 359,468 229,723
---------- ------------ ----------- ------------ ---------------
Net realized and unrealized gain
(loss)................................. 529,571 377,950 2,079,599 361,391 236,317
---------- ------------ ----------- ------------ ---------------
Net increase (decrease) in net assets
from operations........................ $ 478,878 $ 345,407 $3,302,974 $ 325,922 $ 313,971
---------- ------------ ----------- ------------ ---------------
---------- ------------ ----------- ------------ ---------------
<CAPTION>
GLOBAL
MONEY MARKET INCOME* BLUE CHIP*
----------------- ------------- -----------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 650,734 $ -- $ --
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 157,220 4,683 42,643
Administrative expense fees............... 18,866 562 5,117
-------- ------------- --------
Total expenses.......................... 176,086 5,245 47,760
-------- ------------- --------
Net investment income (loss)............ 474,648 (5,245) (47,760)
-------- ------------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsor................................. -- -- --
Net realized gain (loss) from sales of
investments............................. -- 1,016 10,843
-------- ------------- --------
Net realized gain (loss)................ -- 1,016 10,843
Net unrealized gain (loss)................ -- 15,990 361,450
-------- ------------- --------
Net realized and unrealized gain
(loss)................................. -- 17,006 372,293
-------- ------------- --------
Net increase (decrease) in net assets
from operations........................ $ 474,648 $ 11,761 $ 324,533
-------- ------------- --------
-------- ------------- --------
</TABLE>
* For the period 5/1/97 (date of initial investment) to 12/31/97.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP VALUE SMALL CAP GROWTH VALUE
YEAR PERIOD YEAR PERIOD YEAR PERIOD
ENDED FROM 11/13/96** ENDED FROM 12/4/96** ENDED FROM 11/13/96**
12/31/97 TO 12/31/96 12/31/97 TO 12/31/96 12/31/97 TO 12/31/96
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (152,891) $ (150) $ (95,606) $ (87) $ (318,828) $ (114)
Net realized gain
(loss)................ 18,177 -- 335,283 10 12,074 30
Net unrealized gain
(loss)................ 1,759,941 5,752 2,010,568 2,454 6,408,577 (1,300)
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase (decrease)
in net assets from
operations............ 1,625,227 5,602 2,250,245 2,377 6,101,823 (1,384)
--------------- --------------- --------------- --------------- --------------- ---------------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 26,418,229 234,777 14,614,458 143,030 51,755,894 299,524
Withdrawals............. (581,435) -- (229,859) -- (1,012,429) --
Annuity benefits........ (94,481) -- (76,198) -- (267,497) --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 8,631,512 80,345 4,618,050 61,791 14,528,095 29,823
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- -- --
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase in net
assets from capital
transactions.......... 34,373,825 315,122 18,926,451 204,821 65,004,063 329,347
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase in net
assets................ 35,999,052 320,724 21,176,696 207,198 71,105,886 327,963
NET ASSETS:
Beginning of period....... 320,724 -- 207,198 -- 327,963 --
--------------- --------------- --------------- --------------- --------------- ---------------
End of period............. $36,319,776 $ 320,724 $21,383,894 $ 207,198 $71,433,849 $ 327,963
--------------- --------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- --------------- ---------------
<CAPTION>
INTERNATIONAL
YEAR PERIOD
ENDED FROM 11/13/96**
12/31/97 TO 12/31/96
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (136,238) $ (164)
Net realized gain
(loss)................ 308,106 --
Net unrealized gain
(loss)................ (393,562) 7,273
--------------- ---------------
Net increase (decrease)
in net assets from
operations............ (221,694) 7,109
--------------- ---------------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 27,242,757 278,257
Withdrawals............. (479,373) --
Annuity benefits........ (173,076) --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 7,143,107 81,181
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- --
--------------- ---------------
Net increase in net
assets from capital
transactions.......... 33,733,415 359,438
--------------- ---------------
Net increase in net
assets................ 33,511,721 366,547
NET ASSETS:
Beginning of period....... 366,547 --
--------------- ---------------
End of period............. $33,878,268 $ 366,547
--------------- ---------------
--------------- ---------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GROWTH VALUE+GROWTH HORIZON 20+
YEAR PERIOD YEAR PERIOD YEAR PERIOD
ENDED FROM 12/4/96** ENDED FROM 11/29/96** ENDED FROM 12/5/96**
12/31/97 TO 12/31/96 12/31/97 TO 12/31/96 12/31/97 TO 12/31/96
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (145,370) $ (202) $ (158,029) $ (101) $ (33,632) $ (104)
Net realized gain
(loss)................ 1,397,901 (8) 16,087 8 19,104 --
Net unrealized gain
(loss)................ 734,032 5,786 1,966,784 (1,562) 534,900 917
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase (decrease)
in net assets from
operations............ 1,986,563 5,576 1,824,842 (1,655) 520,372 813
--------------- --------------- --------------- --------------- --------------- ---------------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 21,528,673 230,457 28,556,776 191,169 6,639,510 178,818
Withdrawals............. (466,604) -- (566,546) (50) (104,209) --
Annuity benefits........ (186,633) -- (20,598) -- -- --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 5,580,514 132,380 7,564,687 3,320 1,905,063 45,670
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- -- --
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase in net
assets from capital
transactions.......... 26,455,950 362,837 35,534,319 194,439 8,440,364 224,488
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase in net
assets................ 28,442,513 368,413 37,359,161 192,784 8,960,736 225,301
NET ASSETS:
Beginning of period....... 368,413 -- 192,784 -- 225,301 --
--------------- --------------- --------------- --------------- --------------- ---------------
End of period............. $28,810,926 $ 368,413 $37,551,945 $ 192,784 $9,186,037 $ 225,301
--------------- --------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- --------------- ---------------
<CAPTION>
TOTAL RETURN
YEAR PERIOD
ENDED FROM 11/29/96**
12/31/97 TO 12/31/96
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (40,202) $ (198)
Net realized gain
(loss)................ 639,079 1
Net unrealized gain
(loss)................ 1,196,085 1,263
--------------- ---------------
Net increase (decrease)
in net assets from
operations............ 1,794,962 1,066
--------------- ---------------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 27,606,532 209,674
Withdrawals............. (499,571) (150)
Annuity benefits........ (160,213) --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 7,318,010 136,891
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- --
--------------- ---------------
Net increase in net
assets from capital
transactions.......... 34,264,758 346,415
--------------- ---------------
Net increase in net
assets................ 36,059,720 347,481
NET ASSETS:
Beginning of period....... 347,481 --
--------------- ---------------
End of period............. $36,407,201 $ 347,481
--------------- ---------------
--------------- ---------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
HORIZON 10+ HORIZON 5 HIGH YIELD
YEAR PERIOD YEAR PERIOD YEAR PERIOD
ENDED FROM 12/23/96** ENDED FROM 12/23/96** ENDED FROM 11/13/96**
12/31/97 TO 12/31/96 12/31/97 TO 12/31/96 12/31/97 TO 12/31/96
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (50,693) $ (8) $ (32,543) $ (11) $1,223,375 $ (490)
Net realized gain
(loss)................ 12,017 -- 6,148 -- (1,819) 5
Net unrealized gain
(loss)................ 517,554 (74) 371,802 (48) 2,081,418 7,253
--------------- ------- --------------- ------- --------------- ---------------
Net increase (decrease)
in net assets from
operations............ 478,878 (82) 345,407 (59) 3,302,974 6,768
--------------- ------- --------------- ------- --------------- ---------------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 8,487,755 37,517 6,722,321 52,677 58,758,080 319,074
Withdrawals............. (109,586) -- (170,981) -- (1,747,189) (813)
Annuity benefits........ -- -- (3,258) -- (651,247) --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 2,871,985 1,449 1,839,532 172 12,299,596 635,808
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- -- -- -- -- --
--------------- ------- --------------- ------- --------------- ---------------
Net increase in net
assets from capital
transactions.......... 11,250,154 38,966 8,387,614 52,849 68,659,240 954,069
--------------- ------- --------------- ------- --------------- ---------------
Net increase in net
assets................ 11,729,032 38,884 8,733,021 52,790 71,962,214 960,837
NET ASSETS:
Beginning of period....... 38,884 -- 52,790 -- 960,837 --
--------------- ------- --------------- ------- --------------- ---------------
End of period............. $11,767,916 $ 38,884 $8,785,811 $ 52,790 $72,923,051 $ 960,837
--------------- ------- --------------- ------- --------------- ---------------
--------------- ------- --------------- ------- --------------- ---------------
<CAPTION>
INVESTMENT GRADE BOND
YEAR PERIOD
ENDED FROM 12/12/96**
12/31/97 TO 12/31/96
--------------- ---------------
<S> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................ $ (35,469) $ (14)
Net realized gain
(loss)................ 1,923 --
Net unrealized gain
(loss)................ 359,468 63
--------------- -------
Net increase (decrease)
in net assets from
operations............ 325,922 49
--------------- -------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 7,165,204 21,984
Withdrawals............. (122,182) --
Annuity benefits........ (110,978) --
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)..... 1,624,645 --
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance and
Annuity Company
(Sponsor)............. -- --
--------------- -------
Net increase in net
assets from capital
transactions.......... 8,556,689 21,984
--------------- -------
Net increase in net
assets................ 8,882,611 22,033
NET ASSETS:
Beginning of period....... 22,033 --
--------------- -------
End of period............. $8,904,644 $ 22,033
--------------- -------
--------------- -------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES MONEY MARKET GLOBAL INCOME BLUE CHIP
YEAR PERIOD YEAR PERIOD PERIOD PERIOD
ENDED FROM 12/4/96** ENDED FROM 11/20/96** FROM 5/1/97** FROM 5/1/97**
12/31/97 TO 12/31/96 12/31/97 TO 12/31/96 TO 12/31/97 TO 12/31/97
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income
(loss)................. $ 77,654 $ (283) $ 474,648 $ 3,311 $ (5,245) $ (47,760)
Net realized gain
(loss)................. 6,594 (20) -- -- 1,016 10,843
Net unrealized gain
(loss)................. 229,723 (875) -- -- 15,990 361,450
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase (decrease)
in net assets from
operations............. 313,971 (1,178) 474,648 3,311 11,761 324,533
--------------- --------------- --------------- --------------- --------------- ---------------
FROM CAPITAL TRANSACTIONS
(NOTE 5):
Net purchase payments... 8,695,248 523,745 90,905,689 3,146,005 1,077,346 12,085,430
Withdrawals............. (341,177) -- (1,106,116) -- (39,522) (250,802)
Annuity benefits........ (71,442) -- (16,619) -- -- (10,417)
Other transfers from
(to) the General
Account of Allmerica
Financial Life
Insurance and Annuity
Company (Sponsor)...... (752,446) (28,057) (75,754,449) (1,237,891) 292,660 2,416,952
Net increase (decrease)
in investment by
Allmerica Financial
Life Insurance
and Annuity Company
(Sponsor).............. -- -- -- -- -- (2)
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase in net
assets from capital
transactions........... 7,530,183 495,688 14,028,505 1,908,114 1,330,484 14,241,161
--------------- --------------- --------------- --------------- --------------- ---------------
Net increase in net
assets................. 7,844,154 494,510 14,503,153 1,911,425 1,342,245 14,565,694
NET ASSETS:
Beginning of period....... 494,510 -- 1,911,425 -- -- --
--------------- --------------- --------------- --------------- --------------- ---------------
End of period............. $8,338,664 $ 494,510 $16,414,578 $1,911,425 $1,342,245 $14,565,694
--------------- --------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- --------------- ---------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account KG-Kemper Gateway Elite (Separate Account KG) is a separate
investment account of Allmerica Financial Life Insurance and Annuity Company
(the Company), established on November 13, 1996 for the purpose of separating
from the general assets of the Company those assets used to fund certain
variable annuity contracts issued by the Company. The Company is a wholly-owned
subsidiary of First Allmerica Financial Life Insurance Company (First
Allmerica). First Allmerica is a wholly-owned subsidiary of Allmerica Financial
Corporation (AFC). Under applicable insurance law, the assets and liabilities of
Separate Account KG are clearly identified and distinguished from the other
assets and liabilities of the Company. Separate Account KG cannot be charged
with liabilities arising out of any other business of the Company.
Separate Account KG is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account KG
currently offers sixteen Sub-Accounts under the Kemper Gateway Elite variable
annuity contracts. Each Sub-Account invests exclusively in a corresponding
investment portfolio of Investors Fund Series (IFS). All investments portfolios,
other than the Value and Small Cap Value Portfolios, are managed by Zurich
Kemper Investments, Inc. (ZKI). The Value and Small Cap Value Portfolios are
managed by Dreman Value Advisors, Inc. (DVA), a wholly-owned subsidiary of ZKI.
IFS (the "Fund") is an open-end management investment company registered under
the 1940 Act.
Separate Account KG funds two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408 of the Internal Revenue Code, while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of IFS. Net realized gains and losses on
securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of IFS at
net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return with First Allmerica. The Company
anticipates no tax liability resulting from the operations of Separate Account
KG. Therefore, no provision for income taxes has been charged against Separate
Account KG.
SA-9
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in IFS at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ------------------------------------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
Small Cap Value........................................ 29,588,895 $ 34,554,083 $ 1.227
Small Cap Growth....................................... 10,860,281 19,370,872 1.969
Value.................................................. 47,072,446 65,026,573 1.518
International.......................................... 20,979,984 34,264,556 1.615
Growth................................................. 9,600,826 28,071,107 3.001
Value+Growth........................................... 26,352,427 35,586,722 1.425
Horizon 20+............................................ 6,668,533 8,650,220 1.378
Total Return........................................... 12,900,291 35,209,852 2.822
Horizon 10+............................................ 9,132,114 11,250,436 1.289
Horizon 5.............................................. 7,179,710 8,414,057 1.224
High Yield............................................. 56,264,313 70,834,380 1.296
Investment Grade Bond.................................. 7,962,020 8,545,113 1.118
Government Securities.................................. 6,906,870 8,109,815 1.207
Money Market........................................... 16,376,834 16,376,834 1.000
Global Income.......................................... 1,304,772 1,326,255 1.029
Blue Chip.............................................. 13,058,250 14,204,244 1.115
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
A contract fee of $35 is currently deducted on the contract anniversary date
and upon full surrender of the contract when the accumulated value is less than
$50,000. The contract fee is waived for contracts issued to and maintained by
the Trustee of a 401(k) plan. For the year ended December 31, 1997 and the
period ended December 31, 1996, contract fees deducted from accumulated value in
Separate Account KG amounted to $1,384 and $0, respectively. These amounts are
included on the statements of changes in net assets with other transfers to the
General Account.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of Separate Account KG, and does not receive any compensation for sales of the
contracts. Commissions are paid to registered representatives of Allmerica
Investments by the Company. As the current series of contracts have a contingent
deferred sales charge, no deduction is made for sales charges at the time of the
sale. For the year ended December 31, 1997 and the period ended December 31,
1996, the Company received $34,464 and $0, respectively, for contingent deferred
sales charges applicable to Separate Account KG.
SA-10
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
UNITS AMOUNT UNITS AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Small Cap Value
Issuance of Units......................... 31,975,472 $ 36,833,168 313,799 $ 315,122
Redemption of Units....................... (2,692,444) (2,459,343) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 29,283,028 $ 34,373,825 313,799 $ 315,122
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Small Cap Growth
Issuance of Units......................... 17,793,898 $ 20,525,939 209,555 $ 204,821
Redemption of Units....................... (1,664,217) (1,599,488) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 16,129,681 $ 18,926,451 209,555 $ 204,821
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Value
Issuance of Units......................... 57,737,606 $ 68,909,586 316,647 $ 329,347
Redemption of Units....................... (4,420,566) (3,905,523) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 53,317,040 $ 65,004,063 316,647 $ 329,347
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
International
Issuance of Units......................... 34,446,548 $ 37,444,700 359,646 $ 359,438
Redemption of Units....................... (4,016,781) (3,711,285) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 30,429,767 $ 33,733,415 359,646 $ 359,438
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Growth
Issuance of Units......................... 26,615,425 $ 29,159,670 370,113 $ 362,837
Redemption of Units....................... (2,799,269) (2,703,720) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 23,816,156 $ 26,455,950 370,113 $ 362,837
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Value+Growth
Issuance of Units......................... 33,482,451 $ 38,000,583 196,642 $ 194,489
Redemption of Units....................... (2,733,249) (2,466,264) (52) (50)
-------------- ---------------- -------------- ----------------
Net increase............................ 30,749,202 $ 35,534,319 196,590 $ 194,439
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Horizon 20+
Issuance of Units......................... 7,925,733 $ 8,720,181 226,543 $ 224,631
Redemption of Units....................... (383,808) (279,817) (162) (143)
-------------- ---------------- -------------- ----------------
Net increase............................ 7,541,925 $ 8,440,364 226,381 $ 224,488
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Total Return
Issuance of Units......................... 33,289,148 $ 36,351,700 353,674 $ 346,832
Redemption of Units....................... (2,358,846) (2,086,942) (425) (417)
-------------- ---------------- -------------- ----------------
Net increase............................ 30,930,302 $ 34,264,758 353,249 $ 346,415
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
</TABLE>
SA-11
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
UNITS AMOUNT UNITS AMOUNT
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Horizon 10+
Issuance of Units......................... 10,824,499 $ 11,378,438 38,809 $ 38,966
Redemption of Units....................... (664,570) (128,284) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 10,159,929 $ 11,250,154 38,809 $ 38,966
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Horizon 5
Issuance of Units......................... 8,218,267 $ 8,735,360 52,677 $ 52,849
Redemption of Units....................... (383,398) (347,746) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 7,834,869 $ 8,387,614 52,677 $ 52,849
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
High Yield
Issuance of Units......................... 76,297,806 $ 81,860,370 942,573 $ 954,838
Redemption of Units....................... (12,305,958) (13,201,130) (802) (769)
-------------- ---------------- -------------- ----------------
Net increase............................ 63,991,848 $ 68,659,240 941,771 $ 954,069
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Investment Grade Bond
Issuance of Units......................... 8,795,744 $ 8,964,639 21,965 $ 21,984
Redemption of Units....................... (562,272) (407,950) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 8,233,472 $ 8,556,689 21,965 $ 21,984
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Government Securities
Issuance of Units......................... 10,864,889 $ 10,997,891 526,154 $ 523,745
Redemption of Units....................... (3,547,883) (3,467,708) (28,141) (28,057)
-------------- ---------------- -------------- ----------------
Net increase............................ 7,317,006 $ 7,530,183 498,013 $ 495,688
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Money Market
Issuance of Units......................... 103,574,850 $ 99,792,728 3,138,846 $ 3,146,005
Redemption of Units....................... (89,719,351) (85,764,223) (1,234,736) (1,237,891)
-------------- ---------------- -------------- ----------------
Net increase............................ 13,855,499 $ 14,028,505 1,904,110 $ 1,908,114
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Global Income
Issuance of Units......................... 1,502,424 $ 1,418,266 -- $ --
Redemption of Units....................... (185,296) (87,782) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 1,317,128 $ 1,330,484 -- $ --
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
Blue Chip
Issuance of Units......................... 14,107,528 $ 14,719,710 -- $ --
Redemption of Units....................... (928,588) (478,549) -- --
-------------- ---------------- -------------- ----------------
Net increase............................ 13,178,940 $ 14,241,161 -- $ --
-------------- ---------------- -------------- ----------------
-------------- ---------------- -------------- ----------------
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT KG -- KEMPER GATEWAY ELITE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account KG satisfies the current
requirements of the regulations, and it intends that Separate Account KG will
continue to meet such requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of IFS shares by Separate Account
KG during the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ----------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Small Cap Value.................................................. $ 34,674,442 $ 453,508
Small Cap Growth................................................. 19,567,325 416,430
Value............................................................ 64,910,584 225,349
International.................................................... 35,400,637 1,495,070
Growth........................................................... 28,010,904 309,139
Value+Growth..................................................... 35,639,469 263,179
Horizon 20+...................................................... 8,667,339 260,607
Total Return..................................................... 35,134,043 269,188
Horizon 10+...................................................... 11,663,071 463,610
Horizon 5........................................................ 8,526,807 171,736
High Yield....................................................... 73,404,448 3,521,833
Investment Grade Bond............................................ 8,686,554 165,334
Government Securities............................................ 9,060,721 1,452,884
Money Market..................................................... 45,671,963 31,203,898
Global Income.................................................... 1,418,226 92,987
Blue Chip........................................................ 14,563,790 370,389
------------ ------------
Totals........................................................... $435,000,323 $ 41,135,141
------------ ------------
------------ ------------
</TABLE>
SA-13
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for Allmerica Financial Life Insurance and Annuity
Company
Financial Statements for Separate Account KG of Allmerica
Financial Life Insurance and Annuity Company
Financial Statements Included in Part C
None
(B) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated June 13, 1996 was previously filed on
August 9, 1996 in Registrant's initial Registration
Statement and is incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the Registrant NOT pursuant
to a trust indenture or other such instrument.
EXHIBIT 3 (A) Wholesaling Agreement was previously filed on August 9,
1996 in Registrant's initial Registration Statement
and is incorporated by reference herein.
(B) Underwriting and Administrative Services Agreement was
previously filed on April 30, 1998 in Registration
Statement No. 811-7767, Post-Effective Amendment No. 3
and is incorporated by reference herein.
(C) Form of Revised commission schedule is filed herewith.
Sales Agreements with Commission Schedule were previously
filed on April 30, 1998 in Registration Statement No.
811-7767, Post-Effective Amendment No. 3 and are
incorporated by reference herein.
(D) Sales Agreement with Chase was previously filed on
April 30, 1998 in Registration Statement No. 811-7767,
Post-Effective Amendment No. 3 and is incorporated by
reference herein.
(E) General Agent's Agreement was previously filed on
April 30, 1998 in Registration Statement No. 811-7767,
Post-Effective Amendment No. 3 and is incorporated by
reference herein.
(F) Career Agent Agreement was previously filed on
April 30, 1998 in Registration Statement No. 811-7767,
Post-Effective Amendment No. 3 and is incorporated by
reference herein.
(G) Registered Representative's Agreement was previously
filed on April 30, 1998 in Registration Statement No.
811-7767, Post-Effective Amendment No. 3 and is
incorporated by reference herein.
(H) Form of Indemnification Agreement with Scudder Kemper
was previously filed on April 30, 1998 in Registration
Statement No. 811-7767, Post-Effective Amendment No. 3
and is incorporated by reference herein.
EXHIBIT 4 Draft Contract Form 3027-98 is filed herewith.
<PAGE>
EXHIBIT 5 Application Form SML1446K is filed herewith.
EXHIBIT 6 The Depositor's Articles of Incorporation, as amended,
effective October 1, 1995 to reflect its new name, and
Bylaws were previously filed on August 9, 1996 in
Registrant's initial Registration Statement and are
incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) BFDS Agreements for lockbox and mailroom services were
previously filed on April 30, 1998 in Registration
Statement No. 811-7767, Post-Effective Amendment No. 3
and are incorporated by reference herein.
(b) Form of Scudder Services Agreement was previously
filed on April 30, 1998 in Registration Statement No.
811-7767, Post-Effective Amendment No. 3 and is
incorporated by reference herein.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement with Kemper was previously
filed on November 6, 1996 in Pre-Effective Amendment No.
1 and is incorporated by reference herein.
(b) Form of Participation Agreement with Scudder Kemper was
previously filed on April 30, 1998 in Registration
Statement No. 811-7767, Post-Effective Amendment No. 3
and is incorporated by reference herein.
ITEM 25. DIRECTORS AND EXECUTIVE OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
- ----------------- ------------------------------
<S> <C>
Bruce C. Anderson Director of First Allmerica since 1996;
Director Vice President, First Allmerica since 1984
Abigail M. Armstrong Secretary of First Allmerica since 1996;
Secretary and Counsel Counsel, First Allmerica since 1991
Robert E. Bruce Director and Chief Information Officer of First
Director and Chief Information Officer Allmerica since 1997; Vice President of First
Allmerica since 1995; Corporate Manager, Digital
Equipment Corporation 1979 to 1995
<PAGE>
John P. Kavanaugh Director and Chief Investment Officer of
Director, Vice President and First Allmerica since 1996; Vice
Chief Investment Officer President, First Allmerica since 1991
John F. Kelly Director of First Allmerica since 1996; Senior Vice
Director, Vice President and President, First Allmerica since 1986; General Counsel,
General Counsel First Allmerica since 1981; Assistant Secretary,
First Allmerica since 1991
J. Barry May Director of First Allmerica since 1996; Director and
Director President, The Hanover Insurance Company since 1996;
Vice President, The Hanover Insurance Company, 1993
to 1996; General Manager, The Hanover Insurance
Company 1989 to 1993
James R. McAuliffe Director of First Allmerica since 1996; Director of
Director Citizens Insurance Company of America since 1992,
President since 1994, and CEO since 1996;
Vice President, First Allmerica 1982 to 1994;
Chief Investment Officer, First Allmerica 1986 to 1994
John F. O'Brien Director, Chairman of the Board, President and
Director, Chairman of the Board, Chief Executive Officer, First Allmerica since 1989
President and Chief Executive Officer
Edward J. Parry, III Director and Chief Financial Officer of First
Director, Vice President, Allmerica since 1996; Vice President and Treasurer,
Chief Financial Officer and Treasurer First Allmerica since 1993; Assistant Vice President
1992 to 1993
Richard M. Reilly Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Director,
Allmerica Investments, Inc. since 1990; Director
and President, Allmerica Financial Investment
Management Services, Inc. since 1990
Robert P. Restrepo, Jr. Chief Executive Officer of Travelers Property &
Director Casualty Company 1996-1998; Senior Vice
President of Aetna Life & Casualty Company 1993-
1996
Eric A. Simonsen Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1990; Chief
Financial Officer, First Allmerica 1990 to 1996
Phillip E. Soule Director of First Allmerica since 1996; Vice
Director and Vice President President, First Allmerica since 1987
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
See attached organization chart.
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
______________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
30% _______________________________________________ _____________
| | |
100% 100% 100%
Logan Wells SMA First Sterling
Water Company, Financial Corp. Reinsurance
Inc. Company
Limited
New Jersey Massachusetts Bermuda
|
______________________________________________________________________________________________________________________
| | | | | |
70% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica Allmerica Allmerica
Property Management Trust Investments, Financial Financial Life
& Casualty Services, Inc. Company, N.A. Inc. Investment Insurance and
Companies, Inc. Management Annuity Company
Services, Inc.
Federally
Delaware Delaware Chartered Massachusetts Massachusetts Delaware
|
___________________________________________________________________________ ______|_______
| | | | |
100% 100% 100% 100% 100%
APC The Hanover Allmerica Citizens Somerset
Funding Corp. Insurance Financial Insurance Square, Inc.
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois Massachusetts
|
______________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Plus American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
</TABLE>
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
_______________________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
_____________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 100%
Allmerica Allmerica Allmerica Allmerica Allmerica
Investment Asset Financial Services Asset Benefits
Management Management, Insurance Management, Inc.
Company, Inc. Inc. Agency, Inc. Limited
Massachusetts Massachusetts Massachusetts Bermuda Florida
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | -------------- Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica
Alliance Investment Trust Securities
Insurance Trust
Company
Massachusetts Massachusetts
New Hampshire Massachusetts
|
_______________
|
100% -------------- Affiliated Management Investment Companies
Lloyds
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
-------------- Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of The Hanover
Insurance Company
AAM AAM
Growth & High
Income Fund Yield Fund,
L.P. L.L.C.
Delaware Massachusetts
-------------- L.P. or L.L.C. established for the benefit of
First Allmerica, Allmerica
Financial Life, Hanover and
Citizens
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund L.P. 440 Lincoln Street Limited Partnership
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Benefit 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life 440 Lincoln Street Life insurance, accident and
Insurance and Annuity Company Worcester MA 01653 health insurance, annuities,
(formerly known as SMA Life variable annuities and variable
Assurance Company) life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. Worcester MA 01653
(formerly known as Allmerica
Institutional Services, Inc.)
Allmerica Investment 440 Lincoln Street Investment advisory services
Management Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
<PAGE>
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust company
Worcester MA 01653
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding vehicle
Worcester MA 01653 for commercial paper
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company 645 West Grand River Multi-line property and casualty
of America Howell MI 48843 insurance
Citizens Insurance Company 333 Pierce Road Multi-line property and casualty
of Illinois Itasca IL 60143 insurance
Citizens Insurance Company 3950 Priority Way Multi-line property and casualty
of the Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company 8101 N. High Street Multi-line property and casualty
of Ohio P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity, accident
Insurance Company (formerly Worcester MA 01653 and health insurance company
State Mutual Life Assurance
Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance 440 Lincoln Street Reinsurance Company
Company Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
<PAGE>
Hanover Texas Insurance 801 East Campbell Road Attorney-in-fact for Hanover
Management Company, Inc. Richardson TX 75081 Lloyd's Insurance Company
Hanover Lloyd's Insurance Company 801 East Campbell Road Multi-line property and casualty
Richardson TX 75081 insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service franchises
Worcester MA 01653
Logan Wells Water Company, Inc. 603 Heron Drive Water Company serving land
Bridgeport NJ 08014 development investment
Massachusetts Bay Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of June 30, 1998, the Variable Account had 3,399 Qualified
Contract Owners and 9,556 Non-Qualified Contract Owners funded by the
Registrant under Registration Statement No. 333-9965
As of June 30, 1998, there were no Contract Form 3027-98 Owners since
sales had not yet begun.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of Allmerica Financial Life Insurance and
Annuity Company (the Depositor) states: Each Director and each Officer
of the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation
against all expenses actually and necessarily incurred by him in the
defense or reasonable settlement of any action, suit, or proceeding in
which he is made a party by reason of his being or having been a Director
or Officer of the Corporation, including any sums paid in settlement or to
discharge judgment, except in relation to matters as to which he shall be
finally adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of his duties as such Director
or Officer; and the foregoing right of indemnification or reimbursement
shall not affect any other rights to which he may be entitled under the
Articles of Incorporation, any statute, bylaw, agreement, vote of
stockholders, or otherwise.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for
the following:
<PAGE>
- VEL Account, VEL II Account, Inheiritance Account, Group Vel Account,
Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H, VA-K, VA-P, Allmerica
Select Separate Account, Fulcrum Separate Account, Fulcrum Variable
Life Separate Account, Inheiritage Account and Separate Account KGC
of Allmerica Financial Life Insurance and Annuity Company
- Inheiritage Account, Separate Accounts I, VA-K, VA-P, VEL II Account,
Inheiritage Account, Group VEL Account, Allmerica Select Separate
Account ,Separate Account KGC, Separate Account KG and Fulcrum
Separate Account of First Allmerica Financial Life Insurance
Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors
and Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
<S> <C>
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Philip J. Coffey Vice President
Thomas P. Cunningham Vice President, Chief Financial Officer and Controller
Philip L. Herffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
</TABLE>
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by
Section 31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester,
Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services
for the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned registrant hereby
undertakes to file with the Securities and Exchange Commission
("SEC") such supplementary and periodic information, documents, and
reports as may be prescribed by any rule or regulation of the SEC
heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
(b) The registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The registrant hereby undertakes to deliver a Statement of
Additional Information promptly upon written or oral request,
according to the requirements of Form N-4.
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement
or otherwise, Registrant has been advised that, in the opinion of
the SEC, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by Registrant of expenses incurred or paid by a
Director, Officer or Controlling Person of Registrant in the
successful defense of any action, suit or proceeding) is asserted
by such Director, Officer or Controlling Person in connection with
the securities being registered, Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
(e) The Company hereby represents that the aggregate fees and charges
under the Contracts are reasonable in relation to the services
rendered, expenses expected to be incurred, and risks assumed by
the Company.
ITEM 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Registrant, a separate account of Allmerica Financial Life Insurance and
Annuity Company
<PAGE>
("Company"), states that it is (a) relying on Rule 6c-7 under the 1940
Act with respect to withdrawal restrictions under the Texas Optional
Retirement Program ("Program") and (b) relying on the "no-action" letter
(Ref. No. IP-6-88) issued on November 28, 1988 to the American Council
of Life Insurance, in applying the withdrawal restrictions of Internal
Revenue Code Section 403(b)(11). Registrant has taken the following
steps in reliance on the letter:
1. Appropriate disclosures regarding the redemption restrictions
imposed by the Program and by Section 403(b)(11) have been included
in the prospectus of each registration statement used in connection
with the offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions
imposed by the Program and by Section 403(b)(11) have been included
in sales literature used in connection with the offer of the
Company's variable contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption restrictions imposed by the Program and by Section
403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of
(I) the restrictions on redemption imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available
under the employer's arrangement will be obtained from each
participant who purchases a variable annuity contract prior to or
at the time of purchase.
Registrant hereby represents that it will not act to deny or limit a
transfer request except to the extent that a Service-Ruling or written
opinion of counsel, specifically addressing the fact pattern involved
and taking into account the terms of the applicable employer plan,
determines that denial or limitation is necessary for the variable
annuity contracts to meet the requirements of the Program or of Section
403(b). Any transfer request not so denied or limited will be effected
as expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this initial Registration
Statement under the Securities Act of 1933 and amendment under the Investment
Company Act of 1940 to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of Worcester, and Commonwealth of Massachusetts
on the 1st day of September, 1998.
SEPARATE ACCOUNT KG OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /S/ ABIGAIL M. ARMSTRONG
-------------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this initial
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
/S/ JOHN F. O'BRIEN Director and Chairman of September 1, 1998
- ----------------------------- the Board
John F. O'Brien
/S/ BRUCE C. ANDERSON Director
- -----------------------------
Bruce C. Anderson
/S/ ROBERT E. BRUCE Director and Chief
- ----------------------------- Information Officer
Robert E. Bruce
/S/ JOHN P. KAVANAUGH Director, Vice President and
- ----------------------------- Chief Investment Officer
John P. Kavanaugh
/S/ JOHN F. KELLY Director, Vice President
- ----------------------------- and General Counsel
John F. Kelly
/S/ J. BARRY MAY Director
- -----------------------------
J. Barry May
/S/ JAMES R. MCAULIFFE Director
- -----------------------------
James R. McAuliffe
/S/ EDWARD J. PARRY III Director, Vice President,
- ----------------------------- Chief Financial Officer
Edward J. Parry III (Controller) and Treasurer
/S/ RICHARD M. REILLY Director, President and
- ----------------------------- Chief Executive Officer
Richard M. Reilly
/S/ ROBERT P. RESTREPO, JR. Director
- -----------------------------
Robert P. Restrepo, Jr.
/S/ ERIC A. SIMONSEN Director and Vice President
- -----------------------------
Eric A. Simonsen
/S/ PHILLIP E. SOULE Director
- -----------------------------
Phillip E. Soule
</TABLE>
<PAGE>
EXHIBIT TABLE
Exhibit 3(c) Form of Revised Commission Schedule
Exhibit 4 Draft Contract Form 3027-98
Exhibit 5 Application Form SML1446K
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
<PAGE>
<TABLE>
<S> <C>
ALLMERICA GATEWAY ADVISOR FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
VARIABLE ANNUITY ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY CO.
PRINCIPAL OFFICE: 440 LINCOLN ST. ; WORCESTER, MA 01653
----------------
</TABLE>
BROKER COMMISSION SCHEDULE
(PERCENT OF PREMIUM)
- ------------------------------------------------------------------------------
INDIVIDUAL ANNUITIES
--------------------
COMMISSION SCHEDULE PCV - 1 (Rev. 1/99) (Applicable to Individual Annuities
Issued on or after January 5, 1999)
FLEXIBLE PREMIUM VARIABLE ANNUITY CONTRACTS
- -------------------------------------------
Issued by Allmerica Financial Life Insurance and Annuity Company (First
Allmerica Financial Life Insurance Company in New York and Hawaii).
COMMISSION PERCENTAGE
- ---------------------
1. All contracts where the owner or annuitant is less than age 75 at date
of contract issue.
The following choices are available:
- -----------------------------------
(a) 1.00% of each premium paid, 1.00% annual trail commission
(b) .25% of each premium paid, 1.00% annual trail commission
2. All contracts where the owner or annuitant is beyond age 75 at date of
contract issue and less than age 85.
The following choices are available:
- -----------------------------------
(a) .90% of each premium paid, .90% annual trail commission
(b) .2250% of each premium paid, .90% annual trail commission
3. Contracts issued where the owner or annuitant is beyond age 85 at date
of issue.
The following choices are available:
- -----------------------------------
(a) .75% of each premium paid, .75% annual trail commission
(b) .1875% of each premium paid, .75% annual trail commission
RULES FOR TRAIL COMMISSION PAYMENTS
- -----------------------------------
A Commission Option must be selected for each eligible contract on the back
of the contract application unless the Broker has pre-selected a particular
option for all contracts. If no commission selection is made, the commission
will be payable under the default commission pre-selected by the Broker. If
the Broker has not pre-selected a default option and no commission selection
is made, the commission will be payable under option (a) above.
Trail commissions will be paid quarterly in January, April, July and October
for option (a) or paid quarterly in January, April, July and October
following the fourth contract month for option (b). The first trail
commission for a contract will be paid on the first quarterly payment date
following the first anniversary for option (a) and the fourth contract month
for option (b) of the date of issue, e.g., for option (a), if a contract is
issued on July 5, 1998, the first trail commission will be payable in October
1999. Trail commissions will continue to be paid while the Sales Agreement
remains in force and will be paid on a particular contract until the contract
is surrendered or annuity benefits begin to be paid under an annuity option.
Quarterly trail commissions will be a percentage of the unloaned account
value of each eligible contract. For purposes of trail commission
calculations, "unloaned account value" means the cash value of the contract
on the last day of the calendar quarter immediately preceding the payment
date less the principal of any contract loan and accrued interest thereon.
The quarterly trail commission percentage will be 25% of the applicable
annual rate (e.g., .0625% if the annual rate is .25%, .125% if the annual
rate is .50%).
If a First Allmerica or Allmerica Financial Life annuity contract is
exchanged for another First Allmerica or Allmerica Financial Life annuity
contract, the commission rate, including any applicable trail commission
rate, will be applicable to the exchanged contract. No commissions other
than continuing trail commissions are payable on the rollover amount
allocated to the new contract. Trails will be paid as described above based
on the issue date of the new contract.
NOTE: NO TRAIL COMMISSIONS WILL BE PAYABLE AFTER THE DATE THE SALES
AGREEMENT IS TERMINATED FOR ANY REASON.
- ------------------------------------------------------------------------------
<PAGE>
PLEASE READ THIS CONTRACT CAREFULLY
ANNUITY BENEFIT PAYMENTS AND OTHER VALUES PROVIDED BY THIS CONTRACT, WHEN BASED
ON THE INVESTMENT PERFORMANCE OF THE VARIABLE ACCOUNT, MAY INCREASE OR DECREASE
AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. PLEASE REFER TO THE VALUE OF
THE VARIABLE ACCOUNT SECTION FOR ADDITIONAL INFORMATION.
VALUES REMOVED FROM A GUARANTEE PERIOD ACCOUNT PRIOR TO THE END OF ITS
GUARANTEE PERIOD MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT THAT MAY
INCREASE OR DECREASE THE VALUES. A NEGATIVE MARKET VALUE ADJUSTMENT WILL
NEVER BE APPLIED TO THE DEATH BENEFIT. A POSITIVE MARKET VALUE ADJUSTMENT,
IF APPLICABLE, WILL BE ADDED TO THE DEATH BENEFIT WHEN THE BENEFIT PAID IS
THE CONTRACT'S ACCUMULATED VALUE. PLEASE REFER TO THE MARKET VALUE ADJUSTMENT
SECTION FOR ADDITIONAL INFORMATION.
RIGHT TO EXAMINE CONTRACT
The Owner may cancel this contract by returning it to the Company or one of
its authorized representatives within ten days after receipt. If returned,
the Company will refund an amount equal to the sum of (1) gross payments,
less any amounts allocated to the Variable Account, (2) the Accumulated Value
of amounts allocated to the Variable Account on the date the returned
contract is received at the Principal Office and (3) any fees or other
charges imposed on the amounts allocated to the Variable Account. If,
however, the contract is issued as an Individual Retirement Annuity (IRA),
the Company will refund the greater of the above or the gross payments.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
Home Office: Dover, Delaware
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653
This is a legal contract between Allmerica Financial Life Insurance and
Annuity Company (the Company) and the Owner and is issued in consideration of
the initial payment shown on the Specifications page. Additional payments
are permitted. Payments may be allocated to Variable Sub-Accounts, the
Fixed Account or Guarantee Period Accounts. While this contract is in
effect, the Company agrees to pay annuity benefits beginning on the Annuity
Date or to pay a death benefit to the Beneficiary if an Owner dies prior to
the Annuity Date.
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY
NON-PARTICIPATING
1
<PAGE>
TABLE OF CONTENTS
SPECIFICATIONS........................................................... 3
DEFINITIONS.............................................................. 5
OWNER, ANNUITANT AND BENEFICIARY......................................... 7
PAYMENTS................................................................. 8
VALUES................................................................... 8
TRANSFERS................................................................ 10
WITHDRAWAL AND SURRENDER................................................. 10
DEATH BENEFIT............................................................ 11
ANNUITY BENEFIT.......................................................... 12
ANNUITY OPTION TABLES.................................................... 15
GENERAL PROVISIONS....................................................... 18
2
<PAGE>
SPECIFICATIONS
<TABLE>
<S> <C>
Owner: [ ] Contract Number: [zz00600000]
Joint Owner: [ ]
Issue Date: [ ] Contract Type: [NQ]
Annuitant: [ ] Annuitant Date of Birth: [xx/xx/xx]
Joint Annuitant: [ ] Joint Annuitant Date of Birth [xx/xx/xx]
Annuitant Sex: [ ] Owner Date of Birth: [xx/xx/xx]
Joint Annuitant Sex: [ ] Joint Owner Date of Birth: [xx/xx/xx]
Annuity Date: [xx/xx/xx] Primary Beneficiary: [ ]
Contingent Beneficiary: [ ]
Minimum Fixed Account Guaranteed Interest Rate: [3%] Minimum Additional Payment: [$100.00]
Minimum Guarantee Period Account Interest Rate: [3%] Minimum Guarantee Period [$1,000.00]
Account Allocation Amount:
Minimum Withdrawal Amount: [$100.00] Minimum Accumulated Value [$1,000.00]
After Withdrawal:
Minimum Annuity Benefit Payment: [$50.00] Maximum Alternative [xx/xx/xx]
Annuity Date:
Mortality and Expense Risk Charge: [1.25%] on an annual basis of the daily value of the Sub-Account assets.
Administrative Charge: [.15%] on an annual basis of the daily value of the Sub-Account assets.
Contract Fee: [$35, if the Accumulated Value is less than $75,000.00]
[Enhanced Death Benefit Rider [.25%]
Annual Percentage Rate Charge:
[Enhanced Death Benefit Rider [5%]
Effective Annual Yield
Principal Office: 440 Lincoln Street, Worcester, Massachusetts 01653 (1-800-782-8380)
3
<PAGE>
SPECIFICATIONS (continued)
Owner: [ ] Contract Number:
Joint Owner: [ ] [zz00600000]
Initial Net Payment: [$25,000.00]
Initial Net Payment Allocation:
''Variable Sub-Accounts
----------------------
''[
'' ]
[There are 24 variable sub-accounts. You may invest in up to 17 over the life of your contract.]
''Fixed Account
--------------
''Initial Interest Rate:
''Guarantee Period Accounts
--------------------------
Guaranteed
``Guarantee ``Interest Expiration
````Period ``Rate ``Date
------------- ---------- -----------
[``2 years
```3 years
```4 years
```5 years
```6 years
```7 years
```8 years
```9 years
`10 years ]
____
100% TOTAL
</TABLE>
4
<PAGE>
DEFINITIONS
<TABLE>
<S> <C>
ACCUMULATED VALUE The aggregate value of all accounts in this contract before
the Annuity Date. As long as the Accumulated Value is
greater than zero, the contract will stay in effect.
ACCUMULATION UNIT A measure used to calculate the value of a Sub-Account
before annuity benefit payments begin.
ANNUITANT At issue, the person whose age is used to determine the
Annuity Date. On and after the Annuity Date, the person
upon whose continuation of life annuity benefit payments
involving life contingency depend. Joint Annuitants are
permitted and unless otherwise indicated, any reference to
Annuitant shall include joint Annuitants.
ANNUITY DATE The date annuity benefit payments begin. The Annuity Date
is shown on the Specifications page.
ANNUITY UNIT A measure used to calculate annuity benefit payments under a
variable annuity option.
BENEFICIARY The person, persons or entity entitled to the death benefit
prior to the Annuity Date or any annuity benefit payments
upon the death of an Owner who is not also an Annuitant on or
after the Annuity Date.
COMPANY Allmerica Financial Life Insurance and Annuity Company.
CONTRACT YEAR A one year period based on the date of issue or an
anniversary thereof.
FIXED ACCOUNT The part of the Company's General Account to which all or a
portion of a payment or transfer may be allocated.
FUND Each separate investment company, investment series or
portfolio eligible for investment by a Sub-Account of the
Variable Account.
GENERAL ACCOUNT All assets of the Company that are not allocated to a
Separate Account.
GUARANTEE PERIOD The number of years that a Guaranteed Interest Rate may be
credited to a Guarantee Period Account. The Guarantee
Period may range from two to ten years.
GUARANTEE PERIOD An account which corresponds to a Guaranteed Interest Rate
ACCOUNT for a specified Guarantee Period and is supported by assets in
a Separate Account.
GUARANTEED INTEREST RATE The annual effective rate of interest after daily
compounding credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT A positive or negative adjustment to earnings in a Guarantee
Period Account assessed if any portion of a Guarantee Period
Account is withdrawn or transferred prior to the end of its
Guarantee Period.
OWNER The person, persons or entity entitled to exercise the
rights and privileges under this contract. Joint Owners are
permitted if one of the two is an Annuitant and unless
otherwise indicated, any reference to Owner shall include
joint Owners.
5
<PAGE>
PRINCIPAL OFFICE The Company's office at 440 Lincoln Street, Worcester,
Massachusetts, 01653.
PRO RATA How a payment or withdrawal may be allocated among the
accounts. A Pro Rata allocation or withdrawal will be made
in the same proportion that the value of each account bears
to the Accumulated Value.
SEPARATE ACCOUNT A segregated account established by the Company. The assets
in a Separate Account are not commingled with the Company's
general assets and obligations. The assets of a Separate
Account are not subject to claims arising out of any other
business the Company may conduct.
SUB-ACCOUNT A Variable Account subdivision that invests exclusively in
shares of a corresponding Fund.
SURRENDER VALUE The amount payable to the Owner on full surrender after
application of any Market Value Adjustment and contract fee.
TELEPHONE REQUEST A request by telephone to the Principal Office. A signed
authorization must be on file for such requests to be
honored.
VALUATION DATE A day the values of all units are determined. Valuation
Dates occur on each day the New York Stock Exchange is open
for trading, or such other dates when there is sufficient
trading in a Fund's portfolio securities so that the current
unit value may be materially affected.
VALUATION PERIOD The interval between two consecutive Valuation Dates.
VARIABLE ACCOUNT The Company's Separate Account, consisting of Sub-Accounts
that invest in the underlying Funds.
WRITTEN REQUEST A request or notice in writing satisfactory to the Company
OR WRITTEN NOTICE and filed at the Principal Office.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
OWNER, ANNUITANT AND BENEFICIARY
OWNER When the contract is issued, the Owner will be as shown on
the Specifications page. The Owner may be changed in
accordance with the terms of this contract. Upon the death
of an Owner prior to the Annuity Date, a death benefit is paid.
The Owner may exercise all rights and options granted in
this contract or by the Company, subject to the consent of
any irrevocable Beneficiary. Where the contract is owned
jointly, the consent of both is required in order to exercise
any ownership rights.
ASSIGNMENT Prior to the Annuity Date and prior to the death of an
Owner, the Owner may be changed at any time. Only the Owner
may assign this contract. An absolute assignment will
transfer ownership to the assignee. This contract may also
be collaterally assigned as security. The limitations on
ownership rights while the collateral assignment is in
effect are stated in the assignment. Additional limitations
may exist for contracts issued under provisions of the
Internal Revenue Code.
An assignment will take place only when the Company has
received Written Notice and recorded the change at the
Principal Office. The Company will not be deemed to know of
the assignment until it has received Written Notice. When
recorded, the assignment will take effect as of the date it
was signed. The assignment will be subject to payments made
or actions taken by the Company before the change was recorded.
The Company will not be responsible for the validity of any
assignment nor the extent of any assignee's interest. The
interests of the Annuitant and the Beneficiary will be
subject to any assignment.
ANNUITANT The Annuitant will be as shown on the Specifications page
unless changed in accordance with the terms of this
contract. Prior to the Annuity Date, an Annuitant may be
replaced or added unless the Owner is a non-natural person.
At all times there must be at least one Annuitant. If an
Annuitant dies and a replacement is not named, the owner
will be considered to be the new Annuitant.
BENEFICIARY The Beneficiary is as named on the Specifications page
unless subsequently changed. The Owner may declare any
Beneficiary to be revocable or irrevocable. A revocable
Beneficiary may be changed at any time prior to the Annuity
Date and before the death of an Owner or after the Annuity
Date and before the death of an Annuitant. An irrevocable
Beneficiary must consent in writing to any change. Unless
otherwise indicated, the Beneficiary will be revocable.
A Beneficiary change must be made in writing on a
Beneficiary designation form and will be subject to the
rights of any assignee of record. When the Company receives
the form, the change will take place as of the date it was
signed, even if the Owner or Annuitant dies after the form
is signed but prior to the Company's receipt of the form.
Any rights created by the change will be subject to payments
made or actions taken by the Company before the change was
recorded.
All death benefits provided by this contract will be divided
equally among the surviving Beneficiaries of the same class,
unless the Owner directs otherwise. If there is no
surviving Beneficiary, the deceased Beneficiary's interest
will pass to the Owner or the Owner's estate.
7
<PAGE>
PROTECTION OF PROCEEDS To the extent allowed by law, this contract and any
payments made under it will be exempt from the claims of
creditors. Neither the Annuitant nor the Beneficiary can
assign, transfer, commute, anticipate or encumber the proceeds
or payments unless given that right by the Owner.
PAYMENTS
INITIAL PAYMENT The Initial Payment is shown on the Specifications page.
ADDITIONAL PAYMENTS Prior to the Annuity Date and while the contract is in
force, the Owner may make additional payments of at least
the Minimum Additional Payment (see Specifications page).
Total payments made may not exceed $5,000,000 without the
Company's consent.
NET PAYMENTS Each Net Payment is equal to the gross payment less the
amount of any applicable premium tax. The Company reserves
the right to deduct the amount of the premium tax from the
Accumulated Value at a later date rather than when the
premium tax liability tax is first incurred by the Company.
In no event will an amount be deducted for premium taxes
before the Company has incurred a tax liability under
applicable state law.
NET PAYMENT ALLOCATIONS The initial Net Payment is allocated as shown on the
Specifications page. Additional Net Payments will be
allocated in the same proportion as the initial Net
Payment, unless changed by the Owner's Written or Telephone
Request.
The minimum amount that may be allocated to a Guarantee
Period Account is shown on the Specifications page. If the
Owner requests an allocation less than the minimum amount,
the Company reserves the right to apply that amount to the
Money Market Sub-Account.
VALUES
VALUE OF THE VARIABLE The value of a Sub-Account on a Valuation Date is determined
ACCOUNT by multiplying the Accumulation Units in that Sub-Account
by the Accumulation Unit Value as of the Valuation Date.
Accumulation Units are credited when an amount is allocated
to a Sub-Account. The number of Accumulation Units credited
equals that amount divided by the applicable Accumulation
Unit Value as of the Valuation Date.
ACCUMULATION UNIT The value of a Sub-Account Accumulation Unit as of any
VALUES Valuation Date is determined by multiplying the value of an
Accumulation Unit for the preceding Valuation Date by the
net investment factor for that Valuation Period.
NET INVESTMENT FACTOR The net investment factor measures the investment performance
of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing
(a) by (b) and subtracting (c) and (d) where:
(a) is the investment income of a Sub-Account for
the Valuation Period, including realized or unrealized
capital gains and losses during the Valuation Period,
adjusted for provisions made for taxes, if any;
8
<PAGE>
(b) is the value of that Sub-Account's assets at the
beginning of the Valuation Period;
(c) is the Mortality and Expense Risk Charge (see
Specifications page); and
(d) is the Administrative Charge (see Specifications page).
The Company assumes the risk that its actual mortality
experience and expenses may exceed the amounts provided
under the contract. The Company guarantees that the charge
for mortality and expense risks and the administrative
charge will not be increased. Subject to applicable state
and federal laws, these charges may be decreased or the
method used to determine the net investment factor may be
changed.
VALUE OF THE FIXED Amounts allocated to the Fixed Account are credited interest
ACCOUNT at rates periodically set by the Company. The Company guarantees
that the rate of interest in effect when an amount is allocated
to the Fixed Account will remain in effect for that amount for
one year. Thereafter, the rate of interest for that amount will be
the Company's current interest rate, but no less than the
Minimum Fixed Account Guaranteed Interest Rate (see
Specifications page).
The value of the Fixed Account on any date is the sum of
amounts allocated to the Fixed Account plus interest
compounded and credited daily at the rates applicable to
those amounts. The value of the Fixed Account will be at
least equal to the minimum required by law in the state in
which this contract is delivered.
VALUE OF THE GUARANTEE A Guarantee Period Account will be established on the date a
PERIOD ACCOUNTS Net Payment or transfer is allocated to a specific
Guarantee Period. Amounts allocated to the same Guarantee Period
on the same day will be treated as one Guarantee Period Account.
The interest rate in effect when an amount is allocated to a
Guarantee Period is guaranteed for the duration of the
Guarantee Period. Additional amounts allocated to Guarantee
Periods of the same or different durations will result in
additional Guarantee Period Accounts, each with its own
Guaranteed Interest Rate and expiration date.
The value of a Guarantee Period Account on any date is the
sum of the amounts allocated to that Guarantee Period
Account plus interest compounded and credited daily at the
rate applicable to that amount.
GUARANTEED INTEREST The Company will periodically set Guaranteed Interest Rates
RATES for each available Guarantee Period. These rates will be
guaranteed for the duration of the respective Guarantee Periods.
A Guaranteed Interest Rate will never be less than the Minimum
Guarantee Period Account Interest Rate (see Specifications page.)
RENEWAL GUARANTEE At least 45 days (but not more than 75 days) prior to the end of a
PERIODS Guarantee Period, the Company will notify the Owner in
writing of the expiration of that Guarantee Period. The Owner
may transfer amounts to the Sub-Accounts, the Fixed Account or
establish a new Guarantee Period Account of any duration then offered
by the Company as of the day following the expiration of the
Guarantee Period. The transfer will not be subject to a
Market Value Adjustment; see "Market Value Adjustment," page 11.
Guaranteed Interest Rates corresponding to the available Guarantee
Periods may be higher or lower than the previous Guaranteed Interest
Rate. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the Guarantee Period
Account value will be automatically applied to a new Guarantee
Period Account with the same Guarantee Period unless:
9
<PAGE>
(a) less than the Minimum Guarantee Period Account Allocation
(see Specifications page) remains in the Guarantee Period
Account on its expiration date; or
(b) the Guarantee Period would extend beyond the Annuity Date
or is no longer available.
In such cases, the Guarantee Period Account value will be
transferred to the Money Market Sub-Account.
CONTRACT FEE The Company will deduct a contract fee (see Specifications
page) Pro Rata on each contract anniversary prior to the
Annuity Date and when the contract is surrendered.
TRANSFERS
Prior to the Annuity Date, the Owner may transfer amounts
among accounts by Written or Telephone Request to the
Principal Office. Transfers to a Guarantee Period Account
must be at least equal to the Minimum Guarantee Period
Account Allocation Amount (see Specifications page). If the
Owner requests the transfer of a smaller amount to the
Guarantee Period Account, the Company may transfer that
amount to the Money Market Sub-Account.
Any transfer from a Guarantee Period Account prior to the
end of its Guarantee Period will be subject to a Market
Value Adjustment. In the case of a partial transfer from a
Guarantee Period Account the Market Value Adjustment will be
applied to the value remaining in the account.
There is no charge for the first twelve transfers per
contract year. A transfer charge of up to $25 may be
imposed on each additional transfer.
The Company reserves the right to establish and impose
reasonable rules restricting transfers. All transfers are
subject to the Company's consent.
WITHDRAWAL AND SURRENDER
Prior to the Annuity Date, the Owner may, by Written
Request, withdraw a part of the Accumulated Value or
surrender the contract for its Surrender Value.
Any withdrawal must be at least the Minimum Withdrawal
Amount (see Specifications page). A withdrawal will not be
permitted if the Accumulated Value remaining in the contract
would be less than the Minimum Accumulated Value After
Withdrawal (see Specifications page). The Written Request
must indicate the dollar amount to be paid and the accounts
from which it is to be withdrawn. A withdrawal from a
Guarantee Period Account will be subject to a Market Value
Adjustment. The Market Value Adjustment will be applied to
the value remaining in the Guarantee Period Account.
When surrendered, this contract terminates and the Company
has no further liability under it. The Surrender Value will
be based on the Accumulated Value on the Valuation Date.
10
<PAGE>
Amounts taken from the Variable Account will be paid within
7 days of the date a Written Request is received. The
Company reserves the right to delay payments subject to the
requirements of applicable laws, rules and regulations
governing variable annuities.
Amounts taken from the Fixed Account or the Guarantee Period
Accounts will normally be paid within 7 days of receipt of a
Written Request. The Company may defer payment for up to
six months from the receipt date. If deferred for 30 days
or more, the amount payable will be credited interest at a
rate of at least 3%.
MARKET VALUE ADJUSTMENT A transfer, withdrawal or surrender from a Guarantee Period
Account after the expiration of its Guarantee Period will not
be subject to a Market Value Adjustment. A Market Value Adjustment
will apply to all other transfers or withdrawals, or to a surrender.
Amounts applied under an annuity option are treated as withdrawals
when calculating the Market Value Adjustment. The Market
Value Adjustment will be determined by multiplying the
amount taken from each Guarantee Period Account by the
market value factor. The market value factor for each
Guarantee Period Account is equal to:
n/365
(1+i)/(1+j) -1
where:
i - is the Guaranteed Interest Rate expressed as a
decimal (for example: 3% = 0.03) being credited to the
current Guarantee Period;
j - is the new Guaranteed Interest Rate, expressed as a
decimal, for a Guarantee Period with a duration equal
to the number of years remaining in the current
Guarantee Period, rounded to the next higher number of
whole years. If that rate is not available, the Company
will use a suitable rate or index allowed by the
Department of Insurance; and
n - is the number of days remaining from the Effective
Valuation Date to the end of the current Guarantee Period.
If the Guaranteed Interest Rate being credited is lower than
the new Guaranteed Interest Rate, the Market Value
Adjustment will decrease the Guarantee Period Account value.
Similarly, if the Guaranteed Interest Rate being credited
is higher than the new Guaranteed Interest Rate, the Market
Value Adjustment will increase the Guarantee Period Account
value. The Market Value Adjustment will never result in a
change to the value more than the interest earned in excess
of the Minimum Guarantee Period Account Interest Rate (see
Specifications page) compounded annually from the beginning
of the current Guarantee Period.
DEATH BENEFIT
At the death of an Owner prior to the Annuity Date, the
Company will pay to the Beneficiary a death benefit
determined as of the Valuation Date upon receipt at the
Principal Office of proof of death. If the owner is a non-
natural person, then a death benefit is paid on the death of
an Annuitant prior to the Annuity Date.
11
<PAGE>
OWNER'S DEATH BENEFIT If an Owner dies before the Annuity Date, the death benefit will be the
BEFORE THE ANNUITY DATE greater of:
(a) the Accumulated Value increased by any
positive Market Value Adjustment; or
(b) the sum of the gross payments made under
this contract reduced proportionately to reflect all
partial withdrawals. For each withdrawal, the
proportionate reduction is calculated as the death
benefit under this option immediately prior to the
withdrawal multiplied by the withdrawal amount and
divided by the Accumulated Value immediately prior
to the withdrawal.
PAYMENT OF THE DEATH The death benefit will be paid to the Beneficiary
BENEFIT BEFORE THE within 7 days of the Effective Valuation Date unless the Owner
ANNUITY DATE has specified a death benefit annuity option.
Instead, the Beneficiary may, by Written Request, elect to:
(a) defer distribution of the death benefit
for a period no more than 5 years from the date
of death; or
(b) receive a life annuity or an annuity for a period
certain not extending beyond the Beneficiary's life
expectancy. Annuity benefit payments must begin
within one year from the date of death.
If distribution of the death benefit is deferred under (a)
or (b), any value in Guarantee Period Accounts will be
transferred to the Money Market Sub-Account. The excess, if
any, of the death benefit over the Accumulated Value will
also be transferred to the Money Market Sub-Account. The
Beneficiary may, by Written Request, effect transfers and
withdrawals, but may not make additional payments. If there
are multiple Beneficiaries, the consent of all is required.
If the sole Beneficiary is the deceased Owner's spouse, the
Beneficiary may, by Written Request, continue the contract
and become the new Owner and Annuitant subject to the
following:
(a) any value in the Guarantee Period Accounts will be
transferred to the Money Market Sub-Account;
(b) the excess, if any, of the death benefit over the
contract's Accumulated Value will also be added to
the Money Market Sub-Account;
(c) additional payments may be made; and
(d) any subsequent spouse of the new Owner, if named as the
Beneficiary, may not continue the contract.
ANNUITY BENEFIT
ANNUITY OPTIONS Annuity options are available on a fixed, variable or
combination fixed and variable basis. The annuity options
described below or any alternative option offered by the
Company may be chosen. If no option is chosen, monthly
benefit payments under a variable life annuity with payments
guaranteed for 10 years will be made.
The Owner may also elect to have the death benefit applied
under a life annuity or a period certain annuity not
extending beyond the Beneficiary's life expectancy. Such an
election may not be altered by the Beneficiary.
12
<PAGE>
Fixed annuity options are funded through the Fixed Account.
Variable annuity options may be funded through one or more
of the Sub-Accounts. Not all Sub-Accounts may be made available.
ANNUITY BENEFIT Annuity benefit payments may be received on a monthly,
PAYMENTS quarterly, semiannual or annual basis. If the first
payment would be less than the Minimum Annuity Benefit
Payment (see Specifications page), a single payment will
be made instead. Satisfactory proof of the date of birth
of the Annuitant or Beneficiary, whichever is applicable,
must be received at the Principal Office before life annuity
benefit payments begin. Where a life annuity option has been
elected, the Company may require satisfactory proof that
the Annuitant or Beneficiary, whichever is applicable,
is alive before any payment is made.
PAYMENT OF ANNUITY If an Owner who is not also an Annuitant dies on or after
BENEFIT PAYMENTS UPON the Annuity Date the annuity benefit payments continue in
OWNER DEATH accordance with the terms of the annuity option selected.
Upon the death of the Owner, the Beneficiary becomes the
Owner of the contract.
ANNUITY VALUE The amount of the first annuity benefit payment under all
available options except period certain options will depend
on the age of the Annuitant and/or Beneficiary on the
Annuity Date and the annuity value applied. Period certain
options are based on the duration of payments and the
annuity value.
For life annuity options and non-commutable period certain
options with a duration of 10 years or more, the annuity
value will be the Accumulated Value, including any
applicable Market Value Adjustment less any applicable
premium tax. For commutable period certain options or any
period certain option less than 10 years, the annuity value
will be the Surrender Value less any applicable premium tax.
For a death benefit annuity, the annuity value will be the
amount of the death benefit. The annuity value applied
under a variable annuity option is based on the Accumulation
Unit Value on a Valuation Date not more than four weeks,
uniformly applied, before the Annuity Date.
ANNUITY UNIT VALUES A Sub-Account Annuity Unit value on any Valuation Date is
equal to its value on the preceding Valuation Date
multiplied by the product of:
(a) a discount factor equivalent to the assumed interest rate; and
(b) the net investment factor of the Sub-Account funding
the annuity benefit payments for the applicable
Valuation Period.
The value of an Annuity Unit as of any date other than a
Valuation Date is equal to its value as of the preceding
Valuation Date.
Each variable annuity benefit payment is equal to the number
of Annuity Units multiplied by the applicable value of an
Annuity Unit, except that under a Joint and Two-Thirds
Option, payments after the first death are based on
two-thirds the number of Annuity Units that applied when
both individuals on whose lives the payments were based were
living. Variable annuity benefit payments will increase or
decrease with the value of annuity units. The Company
guarantees that the amount of each variable annuity benefit
payment will not be affected by changes in mortality and
expense experience.
NUMBER OF ANNUITY UNITS The number of Annuity Units determining the benefit payable is
equal to the amount of the first annuity benefit payment divided
by the value of the Annuity Unit as of the Valuation Date used to
calculate the amount of the first payment. Once annuity benefit
payments begin, the number of Annuity Units will not change unless
a split is made.
13
<PAGE>
ANNUITY BENEFIT PAYMENT VARIABLE OR FIXED LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR
OPTIONS 10 YEARS: Periodic annuity benefit payments during the
Annuitant's life. If the Annuitant dies before all
guaranteed payments have been made, the remaining guaranteed
payments will continue to the Owner.
VARIABLE OR FIXED LIFE ANNUITY: Periodic annuity benefit
payments during the Annuitant's life.
UNIT REFUND VARIABLE OR FIXED LIFE ANNUITY: Periodic
annuity benefit payments during the Annuitant's life. If
the Annuitant dies and the annuity value initially applied
to purchase the option, divided by the first payment,
exceeds the number of payments made before the Annuitant's
death, payments will continue to the Owner until the number
of payments equals the Annuity Value divided by the first
payment.
JOINT AND SURVIVOR VARIABLE OR FIXED LIFE ANNUITY: Periodic
annuity benefit payments during the joint lifetime of the
Annuitant and another individual (i.e. the Beneficiary or a
Joint Annuitant) with payments continuing during the
lifetime of the survivor.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE OR FIXED LIFE
ANNUITY: Periodic annuity benefit payments during the
joint lifetime of the Annuitant and one other individual
(i.e. the Beneficiary or a joint Annuitant) with payments
continuing during the lifetime of the survivor at two-thirds
the amount payable when both individuals were living.
VARIABLE OR FIXED ANNUITY FOR A PERIOD CERTAIN: Periodic
annuity benefit payments for a chosen number of years. The
number of years selected may be from 1 to 30. If the payee
dies before the end of the period, remaining payments will
continue to the Owner.
ANNUITY TABLES The first annuity benefit payment will be based on the
greater of the guaranteed annuity rates shown in the
following tables or the Company's non-guaranteed current
annuity option rates applicable to this class of contracts.
Second and subsequent annuity benefit payments, when based
on the investment experience of the Variable Account, may
increase or decrease.
</TABLE>
14
<PAGE>
ANNUITY OPTION TABLES
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
<TABLE>
<CAPTION>
Age Life Annuity with
Nearest Payments Guaranteed Life Unit Refund
Birthday for 10 Years Annuity Life Annuity
<S> <C> <C> <C>
50 4.20 4.22 4.12
51 4.26 4.28 4.17
52 4.32 4.35 4.23
53 4.38 4.42 4.29
54 4.45 4.49 4.35
55 4.53 4.57 4.41
56 4.60 4.65 4.48
57 4.68 4.73 4.55
58 4.77 4.83 4.63
59 4.86 4.92 4.71
60 4.95 5.03 4.79
61 5.05 5.14 4.88
62 5.16 5.26 4.97
63 5.27 5.38 5.07
64 5.39 5.52 5.17
65 5.51 5.66 5.28
66 5.64 5.82 5.39
67 5.78 5.98 5.51
68 5.92 6.16 5.64
69 6.07 6.35 5.78
70 6.23 6.56 5.92
71 6.39 6.77 6.07
72 6.56 7.01 6.23
73 6.73 7.26 6.40
74 6.91 7.54 6.57
75 7.09 7.83 6.76
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the Annuity 2000 Mortality Table.
15
<PAGE>
ANNUITY OPTION TABLES (CONTINUED)
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
Joint and Survivor Life Annuity
Older Age
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 55 60 65 70 75 80
Y 50 3.82 3.90 3.96 4.01 4.05 4.08 4.09
O
U 55 4.06 4.16 4.25 4.32 4.36 4.39
N
G 60 4.38 4.52 4.64 4.72 4.78
E
R 65 4.82 5.01 5.17 5.28
70 5.42 5.69 5.91
A
G 75 6.28 6.67
E
80 7.52
</TABLE>
Joint and Two-Thirds Survivor Life Annuity
Older Age
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
50 55 60 65 70 75 80
Y 50 4.09 4.23 4.38 4.55 4.74 4.93 5.13
O
U 55 4.40 4.58 4.78 5.00 5.22 5.45
N
G 60 4.81 5.05 5.31 5.58 5.86
E
R 65 5.37 5.70 6.04 6.38
70 6.16 6.59 7.04
A
G 75 7.27 7.87
E
80 8.86
</TABLE>
These tables are based on an annual interest rate of 3 1/2%
and the Annuity 2000 Mortality Table.
16
<PAGE>
FIRST MONTHLY ANNUITY BENEFIT PAYMENT
FOR EACH $1,000 OF ANNUITY VALUE APPLIED
<TABLE>
<CAPTION>
Number of Variable or Fixed Annuity for a Number of Variable or Fixed Annuity for a
Years Period Certain Years Period Certain
<S> <C> <C> <C>
1 84.65 16 6.76
2 43.05 17 6.47
3 29.19 18 6.20
4 22.27 19 5.97
5 18.12 20 5.75
6 15.35 21 5.56
7 13.38 22 5.39
8 11.90 23 5.24
9 10.75 24 5.09
10 9.83 25 4.96
11 9.09 26 4.84
12 8.46 27 4.73
13 7.94 28 4.63
14 7.49 29 4.53
15 7.10 30 4.45
</TABLE>
These tables are based on an annual interest rate of 3 1/2%.
17
<PAGE>
GENERAL PROVISIONS
ENTIRE CONTRACT The entire contract consists of this contract, any
application attached at issue and any endorsements.
MISSTATEMENT OF AGE If the age of an individual is misstated, the Company
will adjust all benefit payable to that which would be
available at the correct age. Any underpayments already
made by the Company will be paid immediately. Any
overpayments will be deducted from future annuity
benefits.
MODIFICATIONS Only the President, a Vice President or Secretary of the
Company may modify or waive any provisions of this
contract. Agents or Brokers are not authorized to do so.
INCONTESTABILITY The Company cannot contest this contract after it has
been in force for more than two years from the date of
issue.
CHANGE OF ANNUITY The Owner may change the Annuity Date by Written Request
DATE at any time after the contract has been issued. The
request must be received at the Principal Office at least
one month before the new Annuity Date. The new Annuity
Date must be the first of any month prior to the
Maximum Alternative Annuity Date shown on the
Specifications page.
MINIMUMS All values, benefits or settlement options available
under this contract equal or exceed those required by the
state in which the contract is delivered.
ANNUAL REPORT The Company will furnish an annual report to the Owner
containing a statement of the number and value of
Accumulation Units credited to the Sub-Accounts, the
value of the Fixed Account and the Guarantee Period
Accounts and any other information required by applicable
law, rules and regulations.
ADDITION, DELETION, The Company reserves the right, subject to compliance
OR SUBSTITUTION OF with applicable law, to add to, delete from, or
INVESTMENTS substitute for the shares of a Fund that are held by
the Sub-Accounts or that the Sub-Accounts may purchase.
The Company also reserves the right to eliminate the
shares of any Fund no longer available for investment
or if the Company believes further investment in the
Fund is no longer appropriate for the purposes of the
Sub-Accounts.
The Company will not substitute shares attributable to
any interest in a Sub-Account without notice to the
Owner and prior approval of the Securities and Exchange
Commission as required by the Investment Company Act of
1940. This will not prevent the Variable Account from
purchasing other securities for other series or classes
of contracts, or from permitting a conversion between
series or classes of contracts on the basis of requests
made by Owners.
The Company reserves the right, subject to compliance
with applicable laws, to establish additional Separate
Accounts, Guarantee Period Accounts and Sub-Accounts
and to make them available to any class or series of
contracts as the Company considers appropriate.
Each new Separate Account or Sub-Account will invest
in a new investment company, or in shares of another
open-end investment company, or such other investments
as may be permitted under applicable law. The Company
also reserves the right to eliminate or combine existing
Sub-Accounts and to transfer the assets of any
Sub-Accounts to any other Sub-Accounts. In the event of
any substitution or change, the Company may, by
appropriate notice, make such changes in this and
other contracts as may be necessary or appropriate
to reflect the substitution or change. If the Company
considers it to be in the
18
<PAGE>
best interests of contract Owners, the Variable Account
or any Sub-Account may be operated as a management
company under the Investment Company Act of 1940 or in
any other form permitted by law, or may be deregistered
under that Act in the event registration is no longer
required, or may be combined with other accounts of the
Company.
CHANGES IN LAW The Company reserves the right to make any changes to
provisions of the contract to comply with, or give
Owners the benefit of, any federal or state statute,
rule, or regulation.
CHANGE OF NAME Subject to compliance with applicable law, the Company
reserves the right to change the names of the Variable
Account or the Sub-Accounts.
FEDERAL TAX The Variable Account is not currently subject to tax,
CONSIDERATIONS but the Company reserves the right to assess a charge
for taxes if the Variable Account becomes subject to tax.
SPLITTING OF UNITS The Company reserves the right to split the value of a
unit, either to increase or decrease the number of
units. Any splitting of units will have no material
effect on the benefits, provisions or investment return
of this contract or upon the Owner, the Annuitant,
any Beneficiary, or the Company.
INSULATION OF The investment performance of Separate Account assets
SEPARATE ACCOUNT is determined separately from the other assets of the
Company. The assets of a Separate Account equal to
the reserves and liabilities of the contracts supported
by the account will not be charged with liabilities from
any other business that the Company may conduct.
19
<PAGE>
Flexible Payment Deferred Variable and Fixed Annuity
Annuity Benefits Payable on the Annuity Date
Death Benefit Payable to Beneficiary if Owner Dies prior to Annuity Date
Non-Participating
7-98-30
20
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
ENHANCED DEATH BENEFIT RIDER
This Rider is part of the policy to which it is attached and is effective on
the Date of Issue of the contract.
BENEFIT - The "Owner's Death Benefit Before the Annuity Date" provision on
page 12 of the contract is replaced by the following:
If an Owner dies before the Annuity Date and before the oldest Owner's [90th]
birthday, the death benefit will be the greater of:
(a) the Accumulated Value increased by any positive Market Value
Adjustment;
(b) gross payments accumulated daily at the Death Benefit Effective
Annual Yield shown on the Specifications page, starting on the
Effective Valuation Date of each gross payment, reduced
proportionately to reflect withdrawals. For each withdrawal,
the proportionate reduction is calculated as the death benefit
immediately prior to the withdrawal multiplied by the withdrawal
amount and divided by the Accumulated Value immediately prior to
the withdrawal; or
(c) The highest Accumulated Value increased by any positive Market Value
Adjustment on any contract anniversary, increased for subsequent
payments and reduced proportionately for subsequent withdrawals.
If an Owner dies before the Annuity Date but after the oldest Owner's
[90th] birthday, the death benefit will be the greater of:
(a) the Accumulated Value increased by any positive Market Value
Adjustment or
(b) the death benefit that would have been payable on the contract
anniversary following the oldest Owner's [90th] birthday,
increased for subsequent payments and reduced proportionately
for subsequent withdrawals.
CHARGE - The Company will assess a monthly rider charge which will be
deducted Pro Rata on the last day of each month and on the date the Rider
terminates. The charge will be equal to the Accumulated Value on that date
multiplied by 1/12th of the Enhanced Death Benefit Annual Percentage Rate
shown on the Specifications Page.
TERMINATION - This Rider will terminate on the earliest of the following:
-the Annuity Date;
-payment of the death benefit;
-surrender of the contract; or
-receipt of the Owner's Written Request to terminate the Rider.
Signed for the Company at Dover, Delaware
7-98-31
<PAGE>
KEMPER GATEWAY ADVISOR
KEMPER ANNUITIES ALLMERICA FINANCIAL LIFE INSURANCE
Long-term investing in a short-term world-SM- AND ANNUITY COMPANY
440 LINCOLN STREET, WORCESTER, MA 01653
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1. ANNUITANT
- -------------------------------------------------------------------------------
Please Print Clearly
First MI Last
------------------------------------------------------------------------------
Street Address Age
------------------------------------------------------------------------------
City State Zip
------------------------------------------------------------------------------
Daytime Telephone | / / Male | Date of Birth
| |
( ) | / / Female | / /
------------------------------------------------------------------------------
Social Security Number
--------------------------------------------------------
- -------------------------------------------------------------------------------
2. OWNER Complete this section only if (check one):
- -------------------------------------------------------------------------------
Please Print Clearly
/ / THIS IS A JOINT OWNER WITH THE ANNUITANT, OR
/ / The owner is other than the annuitant
First MI Last
------------------------------------------------------------------------------
Street Address Age
------------------------------------------------------------------------------
City State Zip
------------------------------------------------------------------------------
Daytime Telephone | Date of Birth | Date of Trust
| |
( ) | / / | / /
------------------------------------------------------------------------------
Social Security/Tax I.D. Number
----------------------------------------------
- -------------------------------------------------------------------------------
3. JOINT ANNUITANT
- -------------------------------------------------------------------------------
Please Print Clearly
First MI Last
------------------------------------------------------------------------------
Street Address Age
------------------------------------------------------------------------------
City State Zip
------------------------------------------------------------------------------
Daytime Telephone | / / Male | Date of Birth
| |
( ) | / / Female | / /
------------------------------------------------------------------------------
Social Security Number
--------------------------------------------------------
- -------------------------------------------------------------------------------
4. BENEFICIARY
- -------------------------------------------------------------------------------
Note: If joint owners, the survivor is primary beneficiary unless otherwise
indicated below.
Primary Relationship to Owner
-----------------------------------------------------------------------------
Contingent Relationship to Owner
-----------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5. OPTIONAL RIDER
- -------------------------------------------------------------------------------
I elect: / / Enhanced Death Benefit Rider
/ /
-----------------------------
- -------------------------------------------------------------------------------
6. TYPE OF PLAN TO BE ISSUED:
- -------------------------------------------------------------------------------
/ / Nonqualified / / IRA
/ / Nonqualified Def. Comp. / / SEP-IRA*
/ / 401(a) Pension/Profit Sharing* / / Roth IRA
/ / 401(k) Profit Sharing / / 457 Def. Comp.
/ / 403(b) TSA
*Attach required additional forms.
- -------------------------------------------------------------------------------
7. INITIAL PAYMENT
- -------------------------------------------------------------------------------
Initial Payment $
------------------------------------------------
($25,000 minimum-Make check payable to Allmerica Financial.)
If IRA, Roth IRA or SEP-IRA application, the applicant has received a
Disclosure Buyer's Guide and this payment is a
(check one):
/ / Rollover/Conversion / / Trustee to Trustee Transfer
/ / Regular, Roth or SEP-IRA Payment for Tax Year
--------------------
- -------------------------------------------------------------------------------
8. ALLOCATION OF PAYMENTS
- -------------------------------------------------------------------------------
KEMPER SUBACCOUNTS
_____ % Dreman Financial _____ % Blue Chip
Services _____ % Value+Growth
_____ % Small Cap Growth _____ % Horizon 20+
_____ % Small Cap Value _____ % Total Return
_____ % Dreman High Return _____ % Horizon 10+
Equity _____ % High Yield
_____ % International _____ % Horizon 5
_____ % International Growth _____ % Global Income
and Income _____ % Investment Grade
_____ % Global Blue Chip Bond
_____ % Growth _____ % Government Securities
_____ % Contrarian Value _____ % Money Market
SCUDDER VLIF (VARIABLE LIFE INVESTMENT FUND) (CLASS A)
_____ % International _____ % Capital Growth
_____ % Global Discovery _____ % Growth and Income
You have 24 variable investment options. You may invest in up to 17 over the
life of the contract.
_____ % Fixed Account
Guarantee Period Accounts (GPA) ($1,000 minimum per Account)
____% ____Year, ____% ____Year, ____% ____Year (2-10 Years)
(ALL ALLOCATIONS ABOVE MUST TOTAL 100%)
-------------------------------------------------------------------------------
SECURE YOUR FUTURE PROGRAM
/ / Allocate a portion of my initial payment to the _______ year GPA such
that, at the end of the guarantee period, the GPA will have grown to an
amount equal to the total initial payment assuming no withdrawals or
transfers of any kind. The remaining balance will be applied as indicated
above in Section 8.
-------------------------------------------------------------------------------
/ / I elect Automatic Account Rebalancing (AAR) among the above accounts
(excluding Fixed Accounts) starting on the 16th day after issue date
and continuing every:
/ / 1 / / 2 / / 3 / / 6 / / 12 Months
- -------------------------------------------------------------------------------
9. REPLACEMENT
- -------------------------------------------------------------------------------
Will the proposed contract replace or change any existing annuity or insurance
policy?
/ / No / / Yes (If yes, list company name and policy number)
SML1446K
<PAGE>
- -------------------------------------------------------------------------------
10. TELEPHONE TRANSFER
- -------------------------------------------------------------------------------
I/We authorize and direct Allmerica Financial Life Insurance and Annuity
Company to accept telephone instructions from any person who can furnish
proper identification to effect transfers and future payment allocation
changes. I/We agree to hold harmless and indemnify Allmerica Financial Life
Insurance and Annuity Company and its affiliates and their collective
directors, employees and agents against any claim arising from such action.
/ / I/We DO NOT accept this telephone transfer privilege.
- -------------------------------------------------------------------------------
11. DOLLAR COST AVERAGING
- -------------------------------------------------------------------------------
Dollar Cost Averaging (DCA) and Automatic Account Rebalancing (AAR) cannot
be in effect simultaneously.
Please transfer $ from (check one source account):
--------------------
($100 minimum)
/ / Fixed Account / / Government Securities / / Money Market
Every: / / 1 / / 2 / / 3 / / 6 / / 12 Months
To:
KEMPER SUBACCOUNTS
_____ % Dreman Financial _____ % Value+Growth
Services _____ % Horizon 20+
_____ % Small Cap Growth _____ % Total Return
_____ % Small Cap Value _____ % Horizon 10+
_____ % Dreman High _____ % High Yield
Return Equity _____ % Horizon 5
_____ % International _____ % Global Income
_____ % International _____ % Investment Grade
Growth and Income Bond
_____ % Global Blue Chip _____ % Government
_____ % Growth Securities
_____ % Contrarian Value _____ % Money Market
_____ % Blue Chip
SCUDDER VLIF (VARIABLE LIFE INVESTMENT FUND) (CLASS A)
_____ % International _____ % Capital Growth
_____ % Global Discovery _____ % Growth and Income
Dollar Cost Averaging (DCA) begins on the 16th day after the issue date and
ends when the source account value is exhausted. DCA INTO THE FIXED OR
GUARANTEE PERIOD ACCOUNTS IS NOT AVAILABLE.
- -------------------------------------------------------------------------------
12. MONTHLY AUTOMATIC PAYMENTS (MAP)
- -------------------------------------------------------------------------------
/ / I wish to authorize monthly automatic deductions from my
checking account for application to this contract. ATTACH
COMPLETED MAP APPLICATION (FORM 1968) AND VOIDED CHECK.
- -------------------------------------------------------------------------------
13. SYSTEMATIC WITHDRAWALS
- -------------------------------------------------------------------------------
Please withdraw $ starting 16 days after issue or
--------------------
($100 minimum)
/ / , whichever is later, and then every:
------------------------
/ / 1 / / 2 / / 3 / / 6 / / 12 Months
% From
-------- ---------------------------------------------------
% From
-------- ---------------------------------------------------
% From
-------- ---------------------------------------------------
% From
-------- ---------------------------------------------------
% From
-------- ---------------------------------------------------
PLEASE / / Do not withhold federal income taxes
/ / Do withhold at 10% or (% or $)
-----------
/ / I wish to use Electronic Funds Transfer (Direct Deposit).
I authorize the Company to correct electronically any
overpayments or erroneous credits made to my account.
ATTACH A VOIDED CHECK.
- -------------------------------------------------------------------------------
14. REMARKS
- -------------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
- -------------------------------------------------------------------------------
15. SIGNATURES
- -------------------------------------------------------------------------------
I/We represent to the best of my/our knowledge and belief that the
statements made in this application are true and complete. I/We agree to all
terms and conditions as shown on the front and back. It is indicated and
agreed that the only statements which are to be construed as the basis of
the contract are those contained in this application. I/We acknowledge
receipt of a current prospectus describing the contract applied for. I/WE
UNDERSTAND THAT ALL PAYMENTS AND VALUES BASED ON THE VARIABLE ACCOUNTS MAY
FLUCTUATE AND ARE NOT GUARANTEED AS TO DOLLAR AMOUNTS AND ALL PAYMENTS AND
VALUES BASED ON THE GUARANTEE PERIOD ACCOUNTS ARE SUBJECT TO A MARKET
VALUE-ADJUSTMENT FORMULA, THE OPERATION OF WHICH MAY RESULT IN EITHER UPWARD
OR DOWNWARD ADJUSTMENT.
-----------------------------------------------------------------------------
Signature of Owner Signed at (City and State) Date
-----------------------------------------------------------------------------
Signature of Joint Owner
- -------------------------------------------------------------------------------
16. REGISTERED REPRESENTATIVE / DEALER INFORMATION
- -------------------------------------------------------------------------------
Does the contract applied for replace an existing annuity or life insurance
policy? / / Yes (attach replacement forms as required) / / No
I certify that the information provided by the owner has been accurately
recorded; a current prospectus was delivered; no written sales materials
other than those approved by the Principal Office were used; and I have
reasonable grounds to believe the purchase of the contract applied for is
suitable for the owner.
<TABLE>
<S><C>
|Comm. Code: |
-----------------------------------------| | Tel. # ( )
Signature of Registered Representative | | ------------------
----------------
| |
-----------------------------------------|________________|---------------------------------
Printed Name of Registered Representative|B/D Client Acct.| Printed Name of Broker/Dealer
--------------------------------------------------------------------------------------------
Branch Office Street Address for Contract Delivery Telephone of Broker/Dealer
</TABLE>
<PAGE>
August 31, 1998
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: SEPARATE ACCOUNT KG OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY
Gentlemen:
In my capacity as Attorney of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of the
initial Registration Statement for Separate Account KG on Form N-4 under the
Securities Act of 1933 and amendment under the Investment Company Act of
1940, with respect to the Company's qualified and non-qualified variable
annuity contracts.
I am of the following opinion:
1. Separate Account KG is a separate account of the Company validly existing
pursuant to the Delaware Insurance Code and the regulations issued
thereunder.
2. The assets held in Separate Account KG are not chargeable with liabilities
arising out of any other business the Company may conduct.
3. The individual variable annuity contracts, when issued in accordance with
the Prospectus contained in the Registration Statement and upon compliance
with applicable local law, will be legal and binding obligations of the
Company in accordance with their terms and when sold will be legally
issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this initial
Registration Statement for Separate Account KG on Form N-4 under the
Securities Act of 1933 and amendment under the Investment Company Act of 1940.
Very truly yours,
/s/ Lynn Gelinas
Lynn Gelinas
Attorney
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this initial Registration Statement of Separate Account
KG of Allmerica Financial Life Insurance and Annuity Company on Form N-4 of
our report dated February 3, 1998, relating to the financial statements of
Allmerica Financial Life Insurance and Annuity Company, and our report dated
March 25, 1998, relating to the financial statements of Separate Account KG -
Kemper Gateway Elite of Allmerica Financial Life Insurance and Annuity
Company, both of which appear in such Statement of Additional Information.
We also consent to the reference to us under the heading "Experts" in such
Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
September 8, 1998
