<PAGE>
File Nos. 333-63091
811-7767
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 5
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17
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)
Mary Eldridge, Secretary
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:
__X__ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on (date) 1999 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"). The Rule 24f-2
Notice for the issuer's fiscal year ended December 31, 1998 was filed on or
before March 30, 1999.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1..............................Cover Page
2..............................Special Terms
3..............................Summary of Fees and Expenses; Summary of Contract
Features
4..............................Condensed Financial Information; Performance
Information
5..............................Description of the Companies, the Variable
Accounts, and the Underlying Portfolios
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
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
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY
KEMPER GATEWAY ADVISOR
A VARIABLE ANNUITY
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
JUNE 23, 1999 POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING
AS REVISED THE KEMPER GATEWAY ADVISOR VARIABLE ANNUITY CONTRACT. THE
NOVEMBER 15, CONTRACT IS MORE FULLY DESCRIBED LATER IN THIS PROSPECTUS.
1999 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 17 of the
available 24 investment portfolios of the Kemper Variable Series, the 4
investment portfolios of the Scudder Variable Life Investment Fund, the 2
investment portfolios of The Alger American Fund, the one investment portfolio
of the Dreyfus Investment Portfolios, the one investment portfolio of The
Dreyfus Socially Responsible Growth Fund, Inc. and the two investment portfolios
of the Janus Aspen Series in addition to 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 deferred annuities, the contract has an ACCUMULATION PHASE and, if you
annuitize, an ANNUITY PAYOUT PHASE. During the ACCUMULATION PHASE you can
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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 pre-tax payments to the contract when you withdraw
them. A federal tax penalty may apply if you withdraw money prior to age 59 1/2.
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) periodic payments guaranteed for the annuitant's lifetime;
(2) periodic payments guaranteed for the annuitant's lifetime, but for not less
than 10 years; (3) periodic payments for the annuitant's lifetime with the
guarantee that if payments are less than the accumulated value at annuitization,
a refund of the remaining value will be paid; (4) periodic payments guaranteed
for the annuitant's lifetime and one other individual's (i.e. the beneficiary or
a joint annuitant) lifetime; (5) periodic 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) periodic payments guaranteed for a
specified period of 1 to 30 years. Other annuity options may be offered by the
Company.
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. The initial payment
must be at least $25,000 and additional payments must be at least $100.
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4. INVESTMENT OPTIONS
You may allocate money among a total of 17 of the offered Sub-Accounts investing
in the following portfolios:
<TABLE>
<S> <C>
KVS PORTFOLIOS:
- --------------------------------------------------------------------
Kemper Aggressive Growth Kemper Index 500
Kemper Technology Growth Kemper Horizon 20+
Kemper-Dreman Financial Services Kemper Total Return
Kemper Small Cap Growth Kemper Horizon 10+
Kemper Small Cap Value Kemper High Yield
Kemper-Dreman High Return Equity Kemper Horizon 5
Kemper International Kemper Global Income
Kemper International Growth and Kemper Investment Grade Bond
Income Kemper Government Securities
Kemper Global Blue Chip Kemper Money Market
KVS Focused Large
Kemper Growth Cap Growth
Kemper Contrarian Value
Kemper Blue Chip
Kemper Value+Growth
SCUDDER VLIF PORTFOLIOS:
- --------------------------------------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
THE ALGER AMERICAN FUND PORTFOLIOS:
- --------------------------------------------------------------------
Alger American Leveraged AllCap
Alger American Balanced
DREYFUS INVESTMENT PORTFOLIOS:
- --------------------------------------------------------------------
Dreyfus MidCap Stock
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
- --------------------------------------------------------------------
Dreyfus Socially Responsible Growth
JANUS ASPEN SERIES:
- --------------------------------------------------------------------
Janus Aspen Growth
Janus Aspen 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).
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5. EXPENSES
Each year and upon surrender, a $35 contract fee is deducted from your contract.
(This fee may vary by state. See your contract for more information.) The
contract fee is waived if the value of the contract is $75,000 or more on the
date the fee is assessed. We also deduct insurance charges at a total annual
rate of 1.40% of the average 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 addition, if you elect any of the available optional
riders, additional expenses will apply.)
In states where premium taxes are imposed, a premium tax charge will be deducted
either when withdrawals are made or annuity payments commence. However, the
Company reserves the right to deduct the premium tax charge at the time payments
into the Contract are received.
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.
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 annual
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). Optional
rider charges are not included. 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: (1) at the end of year 1 (Column D), and (2) at the end of year 10
(Column E). In Column D, the Total Annual Expenses 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 following
chart does not reflect the optional Minimum Guaranteed Annuity Payout Rider or
the optional Enhanced Death Benefit Rider charges which, if elected, would
increase Total Annual Insurance expenses.
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<TABLE>
<CAPTION>
A B C D E
TOTAL
ANNUAL
EXPENSES
TOTAL TOTAL AT END OF
ANNUAL ANNUAL TOTAL -----------
INSURANCE PORTFOLIO ANNUAL 1 10
PORTFOLIO CHARGES CHARGES CHARGES YEAR YEARS
- -------------------------------------------------- --------- --------- ------- ---- -----
<S> <C> <C> <C> <C> <C>
Kemper Aggressive Growth* 1.44% 0.95% 2.39% $24 $269
Kemper Technology Growth* 1.44% 0.95% 2.39% $24 $269
Kemper-Dreman Financial Services** 1.44% 0.99% 2.43% $24 $273
Kemper Small Cap Growth 1.44% 0.70% 2.14% $21 $244
Kemper Small Cap Value 1.44% 0.80% 2.24% $22 $254
Kemper-Dreman High Return Equity** 1.44% 0.87% 2.31% $23 $261
Kemper International 1.44% 0.93% 2.37% $24 $267
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% 0.78% 2.22% $22 $252
Kemper Blue Chip 1.44% 0.76% 2.20% $22 $250
Kemper Value+Growth 1.44% 0.78% 2.22% $22 $252
Kemper Index 500*** 1.44% 0.55% 1.99% $20 $228
Kemper Horizon 20+ 1.44% 0.67% 2.11% $21 $241
Kemper Total Return 1.44% 0.60% 2.04% $20 $233
Kemper Horizon 10+ 1.44% 0.64% 2.08% $21 $238
Kemper High Yield 1.44% 0.65% 2.09% $21 $239
Kemper Horizon 5 1.44% 0.66% 2.10% $21 $240
Kemper Global Income 1.44% 1.05% 2.49% $25 $279
Kemper Investment Grade Bond 1.44% 0.67% 2.11% $21 $241
Kemper Government Securities 1.44% 0.66% 2.10% $21 $240
Kemper Money Market 1.44% 0.54% 1.98% $20 $227
KVS Focused Large Cap Growth**** 1.44% 1.55% 2.59% $26 $289
Scudder International 1.44% 1.05% 2.49% $25 $279
Scudder Global Discovery 1.44% 1.78% 3.22% $32 $349
Scudder Capital Growth 1.44% 0.51% 1.95% $20 $224
Scudder Growth and Income 1.44% 0.56% 2.00% $20 $229
Alger American Leveraged AllCap 1.44% 0.96% 2.40% $24 $270
Alger American Balanced 1.44% 0.92% 2.36% $24 $266
Dreyfus MidCap Stock** 1.44% 1.00% 2.44% $24 $274
Dreyfus Socially Responsible Growth 1.44% 0.80% 2.24% $22 $254
Janus Aspen Growth 1.44% 0.68% 2.12% $21 $242
Janus Aspen Growth and Income** 1.44% 1.25% 2.69% $27 $299
</TABLE>
* These portfolios commenced operations after May 1, 1999. Charges have been
estimated and annualized. The charges reflect any expense reimbursements and/or
fee waivers. For more detailed information, see the Fee Table in the Prospectus.
** These portfolios commenced operations on May 1, 1998. Charges have been
annualized. The charges reflect any expense reimbursements and/or fee waivers.
For more detailed information, see the Fee Table in the Prospectus.
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*** This portfolio commenced operations on September 1, 1999. Charges have been
estimated and annualized. The charges reflect any expense reimbursements
and/or fee waivers. For more detailed information, see the Fee Table in the
Prospectus.
**** This portfolio commenced operations on October 29, 1999. Charges have been
estimated and annualized. The charges reflect any expense reimbursements and/or
fee waivers. For more detailed information, see the Fee Table in the Prospectus.
6. TAXES
Under current tax rules you will not pay taxes until you withdraw money from
your contract. 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 original 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 may 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 up or down depending on the investment
performance of the Sub-Accounts investing in the underlying portfolios you
choose. The first chart below illustrates past returns on a calendar year basis
for each Sub-Account of Allmerica Financial Life Insurance and Annuity Company's
Separate Account KG based on the inception dates of each Sub-Account. The second
chart illustrates the same information for each Sub-Account of First Allmerica
Financial Life Insurance Company's Separate Account KG. Each Company offers the
same Sub-Accounts; however, Separate Account KG of Allmerica Financial Life
Insurance and Annuity Company and its Sub-Accounts have been in existence for a
longer period. The performance figures reflect the contract fee, the insurance
charges, and the investment charges and other expenses of the underlying
portfolios. They do not
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reflect the optional Minimum Guaranteed Annuity Payout Rider or the optional
Enhanced Death Benefit Rider charges which, if elected, would reduce
performance. Please note that past performance is not a guarantee of future
results.
SEPARATE ACCOUNT KG (KEMPER GATEWAY ADVISOR) OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED
DECEMBER 31
PORTFOLIO 1998 1997
- --------- --------------- --------
<S> <C> <C>
Kemper Aggressive Growth N/A N/A
Kemper Technology Growth N/A N/A
Kemper-Dreman Financial Services N/A N/A
Kemper Small Cap Growth 16.60% 32.32%
Kemper Small Cap Value -12.61% 20.03%
Kemper-Dreman High Return Equity N/A N/A
Kemper International 8.37% 7.92%
Kemper International Growth and Income N/A N/A
Kemper Global Blue Chip N/A N/A
Kemper Growth 13.38% 19.63%
Kemper Contrarian Value 17.48% 28.55%
Kemper Blue Chip 12.14% N/A
Kemper Value+Growth 18.38% 23.70%
Kemper Index 500 N/A N/A
Kemper Horizon 20+ 11.34% 18.78%
Kemper Total Return 13.42% 18.27%
Kemper Horizon 10+ 9.66% 15.13%
Kemper High Yield -0.08% 10.04%
Kemper Horizon 5 8.11% 11.11%
Kemper Global Income 9.32% N/A
Kemper Investment Grade Bond 6.31% 7.49%
Kemper Government Securities 5.42% 7.42%
Kemper Money Market 3.57% 3.72%
KVS Focused Large Cap Growth N/A N/A
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
Alger American Leveraged AllCap N/A N/A
Alger American Balanced N/A N/A
Dreyfus MidCap Stock N/A N/A
Dreyfus Socially Responsible Growth N/A N/A
Janus Aspen Growth N/A N/A
Janus Aspen Growth and Income N/A N/A
</TABLE>
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SEPARATE ACCOUNT KG (KEMPER GATEWAY ADVISOR) OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED
DECEMBER 31
PORTFOLIO 1998 1997
- --------- --------------- --------
<S> <C> <C>
Kemper Aggressive Growth N/A N/A
Kemper Technology Growth N/A N/A
Kemper-Dreman Financial Services N/A N/A
Kemper Small Cap Growth 16.61% N/A
Kemper Small Cap Value -12.60% N/A
Kemper-Dreman High Return Equity N/A N/A
Kemper International 8.38% N/A
Kemper International Growth and Income N/A N/A
Kemper Global Blue Chip N/A N/A
Kemper Growth 13.39% N/A
Kemper Contrarian Value 17.49% N/A
Kemper Blue Chip 12.15% N/A
Kemper Value+Growth 18.39% N/A
Kemer Index 500 N/A N/A
Kemper Horizon 20+ 11.35% N/A
Kemper Total Return 13.43% N/A
Kemper Horizon 10+ 9.67% N/A
Kemper High Yield -0.07% N/A
Kemper Horizon 5 8.12% N/A
Kemper Global Income 9.33% N/A
Kemper Investment Grade Bond 6.32% N/A
Kemper Government Securities 5.43% N/A
Kemper Money Market 3.55% N/A
KVS Focused Large Cap Growth N/A N/A
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
Alger American Leveraged AllCap N/A N/A
Alger American Balanced N/A N/A
Dreyfus MidCap Stock N/A N/A
Dreyfus Socially Responsible Growth N/A N/A
Janus Aspen Growth N/A N/A
Janus Aspen Growth and Income N/A N/A
</TABLE>
9. DEATH BENEFIT
If you or a joint owner (or an annuitant in the event that the owner is a
nonnatural person) dies during the accumulation phase, we will pay the
beneficiary a death
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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).
10. OTHER INFORMATION
OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER (not available in all
jurisdictions): This optional rider is available for a separate monthly charge.
This rider guarantees you a minimum amount of fixed lifetime income during the
annuity payout phase, subject to certain conditions. On each contract
anniversary a minimum guaranteed annuity payout benefit base is determined. This
minimum guaranteed annuity payout benefit base (less any applicable premium
taxes) is the value that will be annuitized should you exercise the rider. In
order to exercise the rider, a fixed annuitization option involving a life
contingency must be selected. Annuitization under this rider will occur at the
guaranteed annuity purchase rates listed under the Annuity Option Tables in your
Contract. The minimum guaranteed annuity payout benefit base is equal to the
greatest of:
(a) the accumulated value increased by any positive market value adjustment, if
applicable; or
(b) the accumulated value on the effective date of the rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest accumulated value on any contract anniversary since the rider
effective date, as determined after positive adjustments have been made for
subsequent payments and any positive market value adjustment, if applicable,
and negative adjustments have been made for subsequent withdrawals.
OPTIONAL ENHANCED DEATH BENEFIT RIDER: This optional rider is available at
issue if you are under age 89 for a separate monthly charge. Under this rider:
I. If an owner (or an annuitant if the owner is a nonnatural person) dies before
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; or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York, the 5% compounding is not available;
therefore, (b) equals gross payments decreased proportionately to reflect
withdrawals); or
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(c) the highest accumulated value on any prior contract anniversary, increased
for any positive market value adjustment and 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 nonnatural person) dies
before 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.
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" provision.
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. There is no charge for this service.
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.
There is no charge for this service.
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
This Prospectus provides important information about the Kemper Gateway Advisor
variable annuity contracts issued by Allmerica Financial Life Insurance and
Annuity Company (in all jurisdictions except Hawaii and New York) and First
Allmerica Financial Life Insurance Company in New York and Hawaii. The contract
is a flexible payment tax-deferred combination variable and fixed annuity
offered on both a group and individual basis. Please read this Prospectus
carefully before investing and keep it for future reference. Annuities involve
risks including possible loss of principle.
The Variable Account, known as Separate Account KG is subdivided into
Sub-Accounts, each investing exclusively in shares of one of the following
funds:
<TABLE>
<CAPTION>
KVS PORTFOLIOS:
- ---------------
<S> <C>
Kemper Aggressive Growth Kemper Blue Chip
Kemper Technology Growth Kemper Value+Growth
Kemper-Dreman Financial Services Kemper Index 500
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 Kemper Horizon 5
Growth and Income Kemper Global Income
Kemper Global Blue Chip Kemper Investment Grade Bond
Kemper Growth Kemper Government Securities
Kemper Contrarian Value Kemper Money Market
KVS Focused Large Cap Growth
SCUDDER VLIF PORTFOLIOS:
- ------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
THE ALGER AMERICAN FUND PORTFOLIO:
- ------------------------------------
Alger American Leveraged AllCap
Alger American Balanced
THE DREYFUS SOCIALLY RESPONSIBLE
DREYFUS INVESTMENT PORTFOLIOS: GROWTH FUND, INC.:
- ------------------------------------ ------------------------------------
Dreyfus MidCap Stock Dreyfus Socially Responsible Growth
JANUS ASPEN SERIES:
- ------------------------------------
Janus Aspen Growth Janus Aspen Growth and Income
</TABLE>
THIS ANNUITY IS NOT A BANK DEPOSIT; FEDERALLY INSURED OR ENDORSED BY ANY BANK OR
GOVERNMENTAL AGENCY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THAT THE INFORMATION IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED JUNE 23, 1999 AS REVISED NOVEMBER 15, 1999
<PAGE>
The Fixed Account is part of the Company's General Account and pays an interest
rate guaranteed for one year from the time a payment is received. The Guarantee
Period Accounts offer fixed rates of interest for specified periods ranging from
2 to 10 years. A Market Value Adjustment is applied to payments removed from a
Guarantee Period Account before the end of the specified period. The Market
Value Adjustment may be positive or negative. Payments allocated to a Guarantee
Period Account are held in the Company's Separate Account GPA (except in
California where they are allocated to the General Account.)
A Statement of Additional Information dated June 23, 1999 as revised
November 15, 1999 containing more information about this annuity is on file with
the Securities and Exchange Commission and is incorporated by reference into
this Prospectus. A copy may be obtained free of charge by calling Allmerica
Investments, Inc., at 1-800-782-8380. The Table of Contents of the Statement of
Additional Information is listed on page 5 of this Prospectus. This Prospectus
and the Statement of Additional Information can also be obtained from the
Securities and Exchange Commission's website (http://www.sec.gov).
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
SPECIAL TERMS 6
SUMMARY OF FEES AND EXPENSES 8
SUMMARY OF CONTRACT FEATURES 16
DESCRIPTION OF THE COMPANIES, THE VARIABLE
ACCOUNTS, AND THE UNDERLYING PORTFOLIOS 25
INVESTMENT OBJECTIVES AND POLICIES 27
INVESTMENT MANAGEMENT SERVICES 31
DESCRIPTION OF THE CONTRACT 35
A. Payments 35
B. Right to Cancel Individual Retirement Annuity 36
C. Right to Cancel All Other Contracts 37
D. Transfer Privilege 37
Automatic Transfers and Automatic Account Rebalancing
Options 38
E. Surrender 39
F. Withdrawals 40
Systematic Withdrawals 41
Life Expectancy Distributions 41
G. Death Benefit 42
Death of an Owner Prior to the Annuity Date 42
Optional Enhanced Death Benefit Rider 43
Payment of the Death Benefit 44
H. The Spouse of the Owner as Beneficiary 44
I. Assignment 45
J. Electing the Form of Annuity and Annuity Date 45
K. Description of Variable Annuity Payout Options 46
L. Annuity Benefit Payments 48
Determination of the First Variable Annuity Benefit
Payment 48
The Annuity Unit 49
Determination of the Number of Annuity Units 49
Dollar Amount of Subsequent Variable Annuity Benefit
Payments 49
M. Optional Minimum Guaranteed Annuity Payout Rider 50
N. NORRIS Decision 53
O. Computation of Values 53
The Accumulation Unit 53
Net Investment Factor 54
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C>
CHARGES AND DEDUCTIONS 54
A. Variable Account Deductions 55
Mortality and Expense Risk Charge 55
Administrative Expense Charge 55
Other Charges 56
B. Contract Fee 56
C. Optional Benefit Rider Charges 56
D. Premium Taxes 57
E. Transfer Charge 57
GUARANTEE PERIOD ACCOUNTS 58
FEDERAL TAX CONSIDERATIONS 61
A. Qualified and Non-Qualified Contracts 63
B. Taxation of the Contract in General 63
Withdrawals Prior to Annuitization 63
Annuity Payouts After Annuitization 63
Penalty on Distribution 64
Assignments or Transfers 64
Nonnatural Owners 65
Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations 65
C. Tax Withholding 65
D. Provisions Applicable to Qualified Employer Plans 65
Corporate and Self-Employed Pension and Profit Sharing
Plans 66
Individual Retirement Annuities 66
Tax-Sheltered Annuities 66
Texas Optional Retirement Program 67
STATEMENTS AND REPORTS 67
LOANS (QUALIFIED CONTRACTS ONLY) 67
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 68
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 69
VOTING RIGHTS 70
DISTRIBUTION 70
LEGAL MATTERS 71
YEAR 2000 COMPLIANCE 71
FURTHER INFORMATION 72
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C>
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED
ACCOUNT A-1
APPENDIX B -- PERFORMANCE INFORMATION
PERFORMANCE TABLES (ALLMERICA FINANCIAL LIFE
INSURANCE
AND ANNUITY COMPANY) B-1
APPENDIX C -- PERFORMANCE TABLES (FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY) C-1
APPENDIX D -- THE MARKET VALUE ADJUSTMENT D-1
APPENDIX E -- CONDENSED FINANCIAL INFORMATION E-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 total value of all Accumulation Units in the Sub-
Accounts plus 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 unit of measure used to calculate the value of 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. This date may
not be later than the first day of the month before the Owner's 99th birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity benefit payments under the Contract.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in all jurisdictions except Hawaii and New York and exclusively
to First Allmerica Financial Life Insurance Company for contracts issued in
Hawaii and New York.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option 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.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
6
<PAGE>
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.
OWNER (OR YOU): 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 investing exclusively in the
shares of a corresponding portfolio of Kemper Variable Series ("KVS"), Scudder
Variable Life Investment Fund (Class A) ("Scudder VLIF"), The Alger American
Fund ("Alger"), Dreyfus Investment Portfolios, The Dreyfus Socially Responsible
Growth Fund, Inc. (the "Dreyfus Socially Responsible Growth Fund") or Janus
Aspen Series ("Janus Aspen").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee and Market Value Adjustment.
UNDERLYING PORTFOLIO (OR PORTFOLIOS): currently, the twenty-four Portfolios of
KVS, the four Portfolios of Scudder VLIF, the two Portfolios of The Alger
American Fund, the one Portfolio of Dreyfus Investment Portfolios, the one
Portfolio of the Dreyfus Socially Responsible Growth Fund and the two Portfolios
of Janus Aspen 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 payout option in the payout phase providing
for payments varying in amount in accordance with the investment experience of
certain of the Portfolios.
7
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Kemper Gateway
Advisor Contract. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Contract, (2) annual expenses of the Sub-Accounts, and (3) annual 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>
<CAPTION>
(1) CONTRACT CHARGES: CHARGE
- --------------------- ----------
<S> <C>
SALES CHARGE IMPOSED ON PAYMENTS: NONE
SURRENDER CHARGE: NONE
TRANSFER CHARGE: None
The Company currently makes no charge for processing
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.
ANNUAL CONTRACT FEE: $35*
The fee is deducted annually and upon surrender prior to
the Annuity Date when Accumulated Value is less than
$75,000.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly basis at the
end of each month.)
On an annual basis as a percentage of Accumulated Value,
the charge is:
Optional Minimum Guaranteed Annuity Payout Rider with a 0.25%
ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout Rider with a 0.15%
fifteen year waiting period:
Optional Enhanced Death Benefit Rider: 0.25%
(2) ANNUAL SUB-ACCOUNT EXPENSES:
(on an annual basis as percentage of average daily net
assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.15%
------
Total Annual Expenses: 1.40%
</TABLE>
* This fee may vary by state. See your Contract for more information.
8
<PAGE>
(3) ANNUAL 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, 1998. For more information concerning fees and expenses, see the
prospectuses for the Underlying Portfolios.
<TABLE>
<CAPTION>
MANAGEMENT
FEE OTHER TOTAL PORTFOLIO
(AFTER ANY EXPENSES EXPENSES (AFTER
VOLUNTARY (AFTER ANY ANY WAIVERS/
PORTFOLIO WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- --------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth*(1).... 0.67% 0.28% 0.95%
Kemper Technology Growth*(1).... 0.66% 0.29% 0.95%
Kemper-Dreman Financial
Services**(1).................. 0.02% 0.97% 0.99%
Kemper Small Cap Growth......... 0.65% 0.05% 0.70%
Kemper Small Cap Value.......... 0.75% 0.05% 0.80%(2)
Kemper-Dreman High Return
Equity**(1).................... 0.42% 0.45% 0.87%
Kemper International............ 0.75% 0.18% 0.93%
Kemper International Growth and
Income**(1).................... 0.00% 1.12% 1.12%
Kemper Global Blue Chip**(1).... 0.00% 1.56% 1.56%
Kemper Growth................... 0.60% 0.05% 0.65%
Kemper Contrarian Value......... 0.75% 0.03% 0.78%(2)
Kemper Blue Chip................ 0.65% 0.11% 0.76%(2)
Kemper Value+Growth............. 0.75% 0.03% 0.78%(2)
Kemper Index 500***............. 0.26% 0.29% 0.55%(3)
Kemper Horizon 20+.............. 0.60% 0.07% 0.67%(2)
Kemper Total Return............. 0.55% 0.05% 0.60%
Kemper Horizon 10+.............. 0.60% 0.04% 0.64%(2)
Kemper High Yield............... 0.60% 0.05% 0.65%
Kemper Horizon 5................ 0.60% 0.06% 0.66%(2)
Kemper Global Income(1)......... 0.72% 0.33% 1.05%
Kemper Investment Grade Bond.... 0.60% 0.07% 0.67%(2)
Kemper Government Securities.... 0.55% 0.11% 0.66%
Kemper Money Market............. 0.50% 0.04% 0.54%
KVS Focused Large Cap
Growth****..................... 0.58% 0.57% 1.15%(4)
Scudder International........... 0.87% 0.18% 1.05%
Scudder Global Discovery........ 0.97% 0.81% 1.78%
Scudder Capital Growth.......... 0.47% 0.04% 0.51%
Scudder Growth and Income....... 0.47% 0.09% 0.56%
Dreyfus MidCap Stock**.......... 0.75% 0.25% 1.00%(5)
Dreyfus Socially Responsible
Growth......................... 0.75% 0.05% 0.80%
Janus Aspen Growth.............. 0.65% 0.03% 0.68%(6)
Janus Aspen Growth and
Income**....................... 0.00% 1.25% 1.25%(6)
</TABLE>
9
<PAGE>
* These portfolios commenced operations after May 1, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
** These portfolios commenced operations on May 1, 1998, therefore "other
expenses" are annualized. Actual expenses may be greater or less than shown.
*** This portfolio commenced operations on September 1, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
**** This portfolio commenced operations on October 29, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
(1) Pursuant to their respective agreements with Kemper Variable Series
("KVS"), the investment manager and the accounting agent have agreed, for
the one year period commencing on May 1, 1999, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the Kemper Aggressive Growth, Kemper Technology Growth,
Kemper-Dreman Financial Services, Kemper-Dreman High Return Equity, Kemper
International Growth and Income, Kemper Global Blue Chip and Kemper Global
Income Portfolios of KVS to the levels set forth in the table above. Without
taking into effect these expense caps, for the Kemper Aggressive Growth,
Kemper Technology Growth, Kemper-Dreman Financial Services, Kemper-Dreman
High Return Equity, Kemper International Growth and Income, Kemper Global
Blue Chip and Kemper Global Income Portfolios of KVS, management fees are
estimated to be 0.75%, 0.75%, 0.75%, 0.75%, 1.00%, 1.00% and 0.75%,
respectively. Other expenses are estimated to be 0.28%, 0.29%, 0.97%, 0.45%,
18.54%, 11.32% and 0.33%, respectively; and total operating expenses are
estimated to be 1.03%, 1.04%, 1.72%, 1.20%, 19.54%, 12.32%, and 1.08%,
respectively. In addition, for the Kemper International Growth and Income
and Kemper Global Blue Chip Portfolios, the investment manager has agreed to
limit its management fee to 0.70% and 0.85%, respectively, for such
portfolios for one year from May 1, 1999.
(2) Pursuant to their respective agreements with KVS, the investment manager
and the accounting agent have agreed, for the one year period commencing on
May 1, 1999, to limit their respective fees and to reimburse other operating
expenses, in a manner communicated to the Board of the Fund, to the extent
necessary to limit total operating expenses of the following described
portfolios to the amounts set forth after the portfolio names: Kemper
Value+Growth (0.84%), Kemper Contrarian Value (0.80%), Kemper Small Cap
Value (0.84%), Kemper Horizon 5 (0.97%), Kemper Horizon
10
<PAGE>
10+ (0.83%), Kemper Horizon 20+ (0.93%), Kemper Investment Grade Bond
(0.80%), and Kemper Blue Chip (0.95%). The amounts set forth in the table
above reflect actual expenses for the past fiscal year, which were lower
than these expense limits.
(3) The investment manager for the Kemper Index 500 Portfolio has agreed to
limit total operating expenses of the Portfolio to 0.55%. This limitation
will be effective from the portfolio's commencement of operations through
April 30, 2000. Without taking into effect this expense cap, for the Kemper
Index 500 Portfolio, management fees would be 0.45%; other expenses are
estimated to be 0.29%; and total operating expenses are estimated to be
0.74%.
(4) The investment manager for the KVS Focused Large Cap Growth Portfolio has
agreed, for the period from October 29, 1999 through April 30, 2000, to
limit its fees and to reimburse other operating expenses to the extent
necessary to limit total operating expenses of the portfolio to the levels
set forth in the table above. Without taking into effect these expense caps,
the management fees would be 0.95%, other expenses are estimated to be 0.57%
and total operating expenses are estimated to be 1.52%.
(5) From time to time, the MidCap Stock Portfolio's investment adviser, in its
sole discretion, may waive all or part of its fees and/or voluntarily assume
certain Portfolio expenses. The expenses set forth in the above table
reflect the adviser's waiver of fees or reimbursement of expenses for
calendar year 1998. Without such waivers or reimbursements, Total Portfolio
Expenses would have been 1.89% as a percentage of assets.
(6) The expense figures shown are net of certain contractual waivers or fee
reductions by Janus Capital. Without such waivers, Management Fees, Other
Expenses and Total Portfolio Expenses for the Portfolios for the fiscal year
ended December 31, 1998 would have been 0.72%, 0.03% and 0.75%,
respectively, for the Janus Aspen Growth Portfolio; and 0.75%, 2.31% and
3.06%, respectively, for the Janus Aspen Growth and Income Portfolio. See
the prospectus and Statement of Additional Information of Janus Aspen
Series for a description of these waivers.
The Underlying Portfolio information above was provided by the Underlying
Portfolios and was not independently verified by the Company.
EXPENSE EXAMPLES. The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. As required by rules of the Securities and
Exchange Commission ("SEC"), the Contract fee is reflected in the
11
<PAGE>
examples by a method designated 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 Contracts. 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 not deducted after annuitization. The Contract fee
is deducted only when the accumulated value is less than $75,000.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
12
<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 benefit riders:(1)
<TABLE>
<CAPTION>
1 3 5 10
UNDERLYING PORTFOLIO YEAR YEARS YEARS YEARS
- -------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $24 $74 $126 $269
Kemper Technology Growth................ $24 $74 $126 $269
Kemper-Dreman Financial Services........ $24 $75 $128 $273
Kemper Small Cap Growth................. $21 $66 $113 $244
Kemper Small Cap Value.................. $22 $69 $118 $254
Kemper-Dreman High Return............... $23 $71 $122 $261
Kemper International.................... $24 $73 $125 $267
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 $68 $117 $252
Kemper Blue Chip........................ $22 $68 $116 $250
Kemper Value+Growth..................... $22 $68 $117 $252
Kemper Index 500........................ $20 $62 $106 $228
Kemper Horizon 20+...................... $21 $65 $112 $241
Kemper Total Return..................... $20 $63 $108 $233
Kemper Horizon 10+...................... $21 $64 $110 $238
Kemper High Yield....................... $21 $65 $111 $239
Kemper Horizon 5........................ $21 $65 $111 $240
Kemper Global Income.................... $25 $77 $131 $279
Kemper Investment Grade Bond............ $21 $65 $112 $241
Kemper Government Securities............ $21 $65 $111 $240
Kemper Money Market..................... $20 $61 $105 $227
KVS Focused Large Cap Growth............ $26 $80 $136 $289
Scudder International................... $25 $77 $131 $279
Scudder Global Discovery................ $32 $98 $167 $349
Scudder Capital Growth.................. $20 $60 $104 $224
Scudder Growth and Income............... $20 $62 $106 $229
Alger American Leveraged AllCap......... $24 $74 $126 $270
Alger American Balanced................. $24 $73 $124 $266
Dreyfus MidCap Stock.................... $24 $75 $128 $274
Dreyfus Socially Responsible Growth..... $22 $69 $118 $254
Janus Aspen Growth...................... $21 $65 $112 $242
Janus Aspen Growth and Income........... $27 $83 $141 $299
</TABLE>
13
<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
election of either an optional Enhanced Death Benefit Rider or an optional
Minimum Guaranteed Annuity Payout Rider(1) with a ten-year waiting period:
<TABLE>
<CAPTION>
1 3 5 10
UNDERLYING PORTFOLIO YEAR YEARS YEARS YEARS
- -------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $26 $ 81 $138 $294
Kemper Technology Growth................ $26 $ 81 $138 $294
Kemper-Dreman Financial Services........ $27 $ 82 $140 $298
Kemper Small Cap Growth................. $24 $ 74 $126 $269
Kemper Small Cap Value.................. $25 $ 77 $131 $279
Kemper-Dreman High Return............... $26 $ 79 $134 $286
Kemper International.................... $26 $ 80 $137 $292
Kemper International Growth and
Income................................. $28 $ 86 $147 $310
Kemper Global Blue Chip................. $33 $ 99 $168 $352
Kemper Growth........................... $23 $ 72 $123 $264
Kemper Contrarian Value................. $25 $ 76 $130 $277
Kemper Blue Chip........................ $25 $ 75 $129 $275
Kemper Value+Growth..................... $25 $ 76 $130 $277
Kemper Index 500........................ $22 $ 69 $118 $254
Kemper Horizon 20+...................... $24 $ 73 $124 $266
Kemper Total Return..................... $23 $ 71 $121 $259
Kemper Horizon 10+...................... $23 $ 72 $123 $263
Kemper High Yield....................... $23 $ 72 $123 $264
Kemper Horizon 5........................ $24 $ 72 $124 $265
Kemper Global Income.................... $27 $ 84 $143 $304
Kemper Investment Grade Bond............ $24 $ 73 $124 $266
Kemper Government Securities............ $24 $ 72 $124 $265
Kemper Money Market..................... $22 $ 69 $118 $253
KVS Focused Large Cap Growth............ $28 $ 87 $148 $313
Scudder International................... $27 $ 84 $143 $304
Scudder Global Discovery................ $35 $106 $179 $372
Scudder Capital Growth.................. $22 $ 68 $116 $250
Scudder Growth and Income............... $23 $ 69 $119 $255
Alger American Leveraged AllCap......... $27 $ 81 $139 $295
Alger American Balanced................. $26 $ 80 $137 $291
Dreyfus MidCap Stock.................... $27 $ 83 $141 $299
Dreyfus Socially Responsible Growth..... $25 $ 77 $131 $279
Janus Aspen Growth...................... $24 $ 73 $125 $267
Janus Aspen Growth and Income........... $29 $ 90 $153 $323
</TABLE>
14
<PAGE>
(3) 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 the
election of both an optional Enhanced Death Benefit Rider and an optional
Minimum Guaranteed Annuity Payout Rider(1) with a ten-year waiting period:
<TABLE>
<CAPTION>
1 3 5 10
UNDERLYING PORTFOLIO YEAR YEARS YEARS YEARS
- -------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $29 $ 89 $151 $318
Kemper Technology Growth................ $29 $ 89 $151 $318
Kemper-Dreman Financial Services........ $29 $ 90 $153 $322
Kemper Small Cap Growth................. $26 $ 81 $138 $294
Kemper Small Cap Value.................. $27 $ 84 $143 $304
Kemper-Dreman High Return............... $28 $ 86 $147 $310
Kemper International.................... $29 $ 88 $150 $316
Kemper International Growth and
Income................................. $31 $ 94 $159 $334
Kemper Global Blue Chip................. $35 $107 $180 $375
Kemper Growth........................... $26 $ 80 $136 $289
Kemper Contrarian Value................. $27 $ 83 $142 $302
Kemper Blue Chip........................ $27 $ 83 $141 $300
Kemper Value+Growth..................... $27 $ 83 $142 $302
Kemper Index 500........................ $25 $ 77 $131 $279
Kemper Horizon 20+...................... $26 $ 80 $137 $291
Kemper Total Return..................... $25 $ 78 $133 $284
Kemper Horizon 10+...................... $26 $ 79 $135 $288
Kemper High Yield....................... $26 $ 80 $136 $289
Kemper Horizon 5........................ $26 $ 80 $136 $290
Kemper Global Income.................... $30 $ 92 $156 $328
Kemper Investment Grade Bond............ $26 $ 80 $137 $291
Kemper Government Securities............ $26 $ 80 $136 $290
Kemper Money Market..................... $25 $ 76 $130 $278
KVS Focused Large Cap Growth............ $31 $ 94 $161 $337
Scudder International................... $30 $ 92 $156 $328
Scudder Global Discovery................ $37 $113 $191 $394
Scudder Capital Growth.................. $25 $ 75 $129 $275
Scudder Growth and Income............... $25 $ 77 $131 $280
Alger American Leveraged AllCap......... $29 $ 89 $151 $319
Alger American Balanced................. $29 $ 88 $149 $315
Dreyfus MidCap Stock.................... $29 $ 90 $153 $323
Dreyfus Socially Responsible Growth..... $27 $ 84 $143 $304
Janus Aspen Growth...................... $26 $ 80 $137 $292
Janus Aspen Growth and Income........... $32 $ 97 $165 $346
</TABLE>
(1) If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Contract.
15
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE KEMPER GATEWAY ADVISOR VARIABLE ANNUITY?
The Kemper Gateway Advisor variable annuity contract ("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;
- 24 KVS Portfolios, 4 Scudder VLIF Portfolios, 2 Alger Portfolios, 1 Dreyfus
Investment Portfolios Portfolio, 1 Dreyfus Socially Responsible Growth Fund
and 2 Janus Aspen 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 payments that you can receive for life.
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, you may
allocate, your initial payment and any additional payments you choose to make
among seventeen of the thirty portfolios 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 you withdraw money. In addition, during the accumulation phase, your
beneficiaries receive certain protections in the event of your death. See
discussion below, "WHAT HAPPENS UPON MY 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-amount annuity benefit payments with
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payment amounts guaranteed by the Company, or a combination of fixed-amount and
variable annuity benefit payments. Among the payout options available during the
annuity payout phase are:
- periodic payments for the Annuitant's life; periodic payments for the
Annuitant's life and the life of another person selected by you;
- periodic payments for the Annuitant's life with any remaining 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.
An optional Minimum Guaranteed Annuity Payout Rider is available during the
accumulation phase in most jurisdictions for a separate monthly charge. See
"M. Optional Minimum Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE
CONTRACT." If elected, the Rider guarantees the Owner a minimum amount of fixed
lifetime income during the annuity payout phase, subject to certain conditions.
On each Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized should you
exercise the Rider. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rates listed under the Annuity
Option Tables in your Contract. The Minimum Guaranteed Annuity Payout Benefit
Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment, if
applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the Rider
effective date, as determined after positive adjustments have been made for
subsequent withdrawals and any positive Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal.
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WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner") and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
Hawaii and New York) or 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 nonnatural 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."
WHAT ARE MY INVESTMENT CHOICES?
You may allocate payments 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.
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VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the following
Portfolios:
<TABLE>
<S> <C>
KVS PORTFOLIOS:
- ---------------------------------------
Kemper Aggressive Growth Kemper Value+Growth
Kemper Technology Growth Kemper Index 500
Kemper-Dreman Financial Services Kemper Horizon 20+
Kemper Small Cap Growth Kemper Total Return
Kemper Small Cap Value Kemper Horizon 10+
Kemper-Dreman High Return Equity Kemper High Yield
Kemper International Kemper Horizon 5
Kemper International Growth and
Income Kemper Global Income
Kemper Global Blue Chip Kemper Investment Grade Bond
Kemper Growth Kemper Government Securities
Kemper Contrarian Value Kemper Money Market
Kemper Blue Chip KVS Focused Large Cap Growth
SCUDDER VLIF PORTFOLIOS:
- ---------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
THE ALGER AMERICAN FUND PORTFOLIOS:
- ---------------------------------------
Alger American Leveraged AllCap
Alger American Balanced
DREYFUS INVESTMENT PORTFOLIOS:
- ---------------------------------------
Dreyfus MidCap Stock
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
- ----------------------------------------------------------------------
Dreyfus Socially Responsible Growth
JANUS ASPEN SERIES:
- ---------------------------------------
Janus Aspen Growth
Janus Aspen 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, except in California where assets are held in the
Company's General 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
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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 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 is
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 KVS 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. Bankers
Trust Company is the sub-adviser for the Kemper Index 500 Portfolio. Eagle Asset
Management, Inc. ("EAM") is the sub-adviser for the KVS Focused Large Cap Growth
Portfolio. The investment manager for the Alger American Leveraged AllCap and
Alger American Balanced Portfolios is Fred Alger Management, Inc. The Dreyfus
Corporation serves as the investment
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adviser to the Dreyfus MidCap Stock Portfolio and the Dreyfus Socially
Responsible Growth Fund. NCM Capital Management Group, Inc. provides
sub-investment advisory services for the Dreyfus Socially Responsible Growth
Fund. Janus Capital is the investment adviser for the Janus Aspen Growth
Portfolio and Janus Aspen Growth and Income Portfolio.
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."
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% federal tax penalty may apply to 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 MY DEATH DURING THE
ACCUMULATION PHASE?
If you or a Joint Owner (or an Annuitant in the event that the Owner is a
nonnatural person) should die before 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).
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An optional Enhanced Death Benefit Rider is available if you are under age 89
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 nonnatural person) dies before
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; or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York the 5% compounding is not available;
therefore, (b) equals gross payments decreased proportionately to reflect
withdrawals); or
(c) the highest Accumulated Value on any prior Contract anniversary, increased
for any positive Market Value Adjustment and 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 nonnatural person) dies
before 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 or upon surrender is less
than $75,000, the Company will deduct a $35 Contract fee from your Contract.
(This fee may vary by state. See your Contract for more information.) There will
be no Contract fee if the Accumulated Value is $75,000 or more.
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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, per transfer, to
reimburse it for the expense of processing these additional transfers.
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 Underlying Portfolios
prospectuses which accompany this Prospectus.
Subject to state availability, optional benefit riders are available for an
additional charge equal to an annual rate of 0.25% for a Minimum Guaranteed
Annuity Payout Rider with a ten-year waiting period, 0.15% for a Minimum
Guaranteed Annuity Payout Rider with a fifteen-year waiting period and 0.25% for
an Enhanced Death Benefit Rider, which is deducted on the last day of each month
and on the date the rider is terminated. For more information, see "G. Death
Benefit" and "M. Optional Minimum Guaranteed Annuity Payout Rider" under
"DESCRIPTION OF THE CONTRACT" and see "C. Optional Benefit Rider Charges" under
"CHARGES AND DEDUCTIONS."
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?
You can make several changes after receiving your Contract:
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<PAGE>
- 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 nonnatural 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 state law).
24
<PAGE>
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS
AND THE UNDERLYING PORTFOLIOS
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, 1998, Allmerica Financial had over $14 billion in assets and over
$26 billion of life insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is a wholly owned subsidiary of First Allmerica Financial
Life Insurance Company 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 among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries had over $27 billion in combined assets and over $48 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.
THE VARIABLE ACCOUNTS. Each Company maintains a separate investment account
called Separate Account KG (the "Variable Account") with 36 Sub-
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<PAGE>
Accounts, of which 34 are available under this Contract. 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. Each Variable Account
meets the definition of a "separate account" under federal securities laws, and
is registered with the SEC as a unit investment trust under the 1940 Act. This
registration does not involve the supervision or management of investment
practices or policies of the Variable Accounts by the SEC.
Obligations under the contracts are obligations of the Company. 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 portfolio ("Portfolio") of Kemper Variable Series,
Scudder Variable Life Investment Fund, The Alger American Fund, Dreyfus
Investment Portfolios, The Dreyfus Socially Responsible Growth Fund, Inc. and
Janus Aspen Series. 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 Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. The Company also
offers other variable annuity contracts investing in the Variable Account which
are not discussed in this Prospectus. In addition, the Variable Account may
invest in other underlying portfolios which are not available to the contracts
described in this Prospectus.
KEMPER VARIABLE SERIES. Kemper Variable Series ("KVS"), is a series-type mutual
fund registered with the SEC as an open-end, management investment company.
Registration of KVS does not involve supervision of its management, investment
practices or policies by the SEC. KVS is designed to provide an investment
vehicle for certain variable annuity contracts and variable life insurance
policies. Shares of the Portfolios of KVS are sold only to insurance company
separate accounts. Scudder Kemper Investments, Inc. serves as the investment
adviser of KVS.
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.
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<PAGE>
THE ALGER AMERICAN FUND. The Alger American Fund ("Alger"), is an open-end,
diversified management investment company established as a Massachusetts
business trust on April 6, 1988 and registered with the SEC under the 1940 Act.
Fred Alger Management, Inc. is the investment manager of Alger.
DREYFUS INVESTMENT PORTFOLIOS. The Dreyfus Investment Portfolios was organized
as an investment business trust under Massachusetts law pursuant to an Agreement
and Declaration of Trust dated May 14, 1993, is registered with the SEC as an
open-end, management investment company and commenced operations May 1, 1998.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. The Dreyfus Socially
Responsible Growth Fund, Inc. (the "Dreyfus Socially Responsible Growth Fund")
was incorporated under Maryland law on July 20, 1992, commenced operations on
October 7, 1993 and is registered with the SEC as an open-end, diversified,
management investment company. The Dreyfus Corporation serves as the investment
adviser to the Dreyfus Socially Responsible Growth Fund and NCM Capital
Management Group, Inc. is the sub-advisor.
JANUS ASPEN SERIES. Janus Aspen Series ("Janus Aspen") is an open-end,
management investment company registered with the SEC. It was organized as a
Delaware business trust on May 20, 1993. Janus Capital is the investment adviser
of Janus Aspen.
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 the Underlying Portfolios 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.
KVS PORTFOLIOS:
KEMPER AGGRESSIVE GROWTH PORTFOLIO -- seeks capital appreciation through the use
of aggressive investment techniques.
KEMPER TECHNOLOGY GROWTH PORTFOLIO -- seeks growth of capital.
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.
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<PAGE>
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. A secondary objective is
the reduction of risk over a full market cycle compared to a portfolio of only
growth stocks or only value stocks.
KEMPER INDEX 500 PORTFOLIO* -- seeks to match, as closely as possible, before
expenses, the performance of the Standard & Poor's 500 Composite Stock Price
Index, (the "S& P 500 Index"), which emphasizes stocks of large U.S. companies.
* "Standard & Poor's-Registered Trademark-," "S&P-Registered Trademark-" "S&P
500-Registered Trademark-," "Standard & Poor's 500," and "500" are trademarks of
the McGraw-Hill Companies, Inc., and have been licensed for use by Scudder
Kemper Investments, Inc. The Kemper Index 500 Portfolio is not sponsored,
endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the fund. Additional
information may be found in the fund's Statement of Additional Information.
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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.
KVS FOCUSED LARGE CAP GROWTH PORTFOLIO -- seeks growth through long-term capital
appreciation.
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.
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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.
THE ALGER AMERICAN FUND PORTFOLIOS:
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO -- seeks long-term capital
appreciation.
ALGER AMERICAN BALANCED PORTFOLIO -- seeks current income and long-term capital
appreciation.
DREYFUS INVESTMENT PORTFOLIOS:
DREYFUS MIDCAP STOCK PORTFOLIO -- seeks investment results that are greater than
the total return performance of publicly traded common stocks of medium-size
domestic companies in the aggregate, as represented by the Standard & Poor's
MidCap 400 Index.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND -- seeks to achieve the primary goal of
providing capital growth by investing principally in common stocks, or
securities convertible into common stock, of companies which, in the opinion of
the Fund's management, not only meet traditional investment standards, but also
show evidence that they conduct their business in a manner that contributes to
the enhancement of the quality of life in America. Current income is a secondary
goal.
JANUS ASPEN SERIES PORTFOLIOS:
JANUS ASPEN GROWTH PORTFOLIO -- seeks long-term growth of capital in a manner
consistent with the preservation of capital.
JANUS ASPEN GROWTH AND INCOME PORTFOLIO -- seeks long-term capital growth and
current income.
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.
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<PAGE>
INVESTMENT MANAGEMENT SERVICES
KVS
Responsibility for overall management of KVS rests with the Board of Trustees
and officers of KVS. 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. Bankers Trust Company is the sub-adviser for the
Kemper Index 500 Portfolio. Eagle Asset Management, Inc. serves as sub-adviser
for the KVS Focused Large Cap Growth Portfolio.
For its services, Scudder Kemper receives a management fee, payable monthly at
the following annual rates based on the average daily net assets of each
Portfolio: Kemper Money Market (0.50%), Kemper Total Return (0.55%), Kemper High
Yield (0.60%), Kemper Growth (0.60%), Kemper Government Securities (0.55%),
Kemper International (0.75%), Kemper Small Cap Growth (0.65%), Kemper Investment
Grade Bond (0.60%), Kemper Contrarian Value (0.75%), Kemper Small Cap Value
(0.75%), Kemper Value+Growth (0.75%), Kemper Horizon 20+ (0.60%), Kemper Horizon
10+ (0.60%), Kemper Horizon 5 (0.60%), Kemper Blue Chip (0.65%), Kemper Global
Income (0.75%) and Kemper International Growth and Income (1.00%).
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<PAGE>
The following portfolios each pay Scudder Kemper an investment management fee,
payable monthly, at the following annual rates based on the average daily net
assets of each Portfolio.
<TABLE>
<S> <C>
Kemper Aggressive Growth Portfolio 0.75% for the first $250 million
Kemper Technology Growth Portfolio 0.72% for the next $750 million
Kemper-Dreman High Return Equity 0.70% for the next $1.5 billion
Portfolio
Kemper-Dreman Financial Services 0.68% for the next $2.5 billion,
Portfolio 0.65% for the next $2.5 billion,
0.64% for the next $2.5 billion,
0.63% for the next $2.5 billion,
0.62% for amounts over $12.5 billion.
Kemper Global Blue Chip Portfolio 1.00% for the first $250 million,
0.95% for the next $750 million,
0.90% for amounts over $1 billion.
Kemper Index 500 Portfolio 0.45% for the first $200 million,
0.42% for the next $550 million,
0.40% for the next $1.25 billion,
0.38% for the next $3 billion,
0.35% for amounts over $5 billion.
KVS Focused Large Cap Growth Portfolio 0.950% for the first $250 million,
0.925% for the next $250 million,
0.900% for the next $500 million,
0.875% for the next $1.5 billion,
0.850% for amounts over $2.5 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 the annual rate of 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 is payable monthly, at the annual rate of
0.24% of the first $250 million of each Portfolio's average daily net assets,
0.23% of average daily net assets between $250 million and $1 billion, 0.224% of
average daily net assets between $1 billion and $2.5 billion, 0.218% of average
daily net assets between $2.5 billion and $5 billion, 0.208% of average daily
net assets between $5 billion and $7.5 billion, 0.205% of average daily net
assets between $7.5 billion and $10 billion, 0.202% of average daily net assets
between $10 billion and $12.5 billion and 0.198% of each Portfolio's average
daily net assets over $12 billion.
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<PAGE>
Scudder Kemper also pays Bankers Trust Company a sub-advisory fee for its
services to the Kemper Index 500 Portfolio. A sub-advisory fee is payable
monthly at the following annual rates:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS OF THE PORTFOLIO ANNUAL SUB-ADVISER FEE RATE
- ----------------------------------------- ---------------------------
<S> <C>
$0-$200 million 0.08%
$200 million-$750 million 0.05%
On the balance over $750 million 0.025%
</TABLE>
Scudder Kemper also pays Eagle Asset Management, Inc. a sub-advisory fee for its
services based on the average daily net assets of the KVS Focused Large Cap
Growth Portfolio, payable monthly at the following annual rates:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS OF THE PORTFOLIO ANNUAL SUB-ADVISER FEE RATE
- ----------------------------------------- ---------------------------
<S> <C>
$0-$50 million 0.45%
$50 million-$300 million 0.40%
On the balance over $300 million 0.30%
</TABLE>
SCUDDER VLIF
For its investment management services to the Scudder Global Discovery, Scudder
Growth and Income, Scudder International and Scudder Capital Growth Portfolios,
Scudder Kemper receives compensation monthly at the following annual rates for
each Portfolio:
<TABLE>
<CAPTION>
PERCENT OF THE AVERAGE
DAILY NET ASSET VALUES
PORTFOLIO OF EACH PORTFOLIO
--------- ----------------------
<S> <C>
Scudder Global Discovery 0.975%
Scudder Growth and Income 0.475%
Scudder International 0.875% for the first
$500,000,000
0.725% over $500,000,000
Scudder Capital Growth 0.475% for the first
$500,000,000
0.450% for the next $500,000,000
0.425% over $1,000,000,000
</TABLE>
For more information, see the KVS and Scudder VLIF prospectuses and SAIs.
THE ALGER AMERICAN FUND
Under a management agreement, Fred Alger Management, Inc. receives an annual fee
of 0.85% and 0.75%, respectively, from the Alger American Leveraged AllCap and
Alger American Balanced Portfolios based on each Portfolio's average daily net
assets. This fee is computed daily and paid monthly.
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<PAGE>
DREYFUS INVESTMENT PORTFOLIOS
A management fee is payable monthly to The Dreyfus Corporation at the annual
rate of 0.75% of the Dreyfus MidCap Stock Portfolio's average daily net assets.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
A management fee is payable monthly to The Dreyfus Corporation and a sub-
investment advisory fee is payable monthly to NCM Capital Management
Group, Inc. at the aggregate annual rate of 0.75% of the value of the Dreyfus
Socially Responsible Growth Fund's average daily net assets.
JANUS ASPEN SERIES
Janus Capital receives a monthly advisory fee for the Janus Aspen Growth
Portfolio and Janus Aspen Growth and Income Portfolio based on the following
schedule (expressed as an annual rate):
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS OF PORTFOLIO ANNUAL RATE
- ------------------- -----------
<S> <C>
First $300 Million........... .75%
Next $200 Million............ .70%
Over $500 Million............ .65%
</TABLE>
However, Janus Capital has agreed to reduce each of the above Portfolios'
advisory fees to the extent that such fee exceeds the effective rate of a fund
managed by Janus Capital with similar investment objectives and policies.
Management fee waivers and/or reimbursements may be in effect for certain or all
of the Underlying Portfolios. Also see "Annual Underlying Portfolio Expenses"
under the SUMMARY OF FEES AND EXPENSES section.
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<PAGE>
DESCRIPTION OF THE CONTRACT
A. PAYMENTS
The Company issues a Contract when its underwriting requirements, which include
receipt of the initial payment and allocation instructions by the Company at its
Principal Office, are met. 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 requirements are not completed within five business days of the Company's
receipt of the initial payment, the payment will be returned immediately unless
the Owner specifically consents to the holding of it pending completion of the
outstanding issue requirements. Subsequent payments will be credited as of the
Valuation Date received at the Principal Office on the basis of the next
accumulation unit value determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date,
subject to certain minimums. 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
35
<PAGE>
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.
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 may 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 or PIN 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
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<PAGE>
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. In most
states, 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
purchased as an IRA or issued in a state that requires a full refund of the
initial payment(s), the IRA cancellation right described above will be used. At
the time the Contract is issued, the "Right to Examine" provision on the cover
of the Contract will specifically indicate what the refund will be and the time
period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. TRANSFER PRIVILEGE
At any time prior to the Annuity Date, an Owner may transfer amounts among
accounts subject to the seventeen variable Sub-Account restriction discussed in
"A. Payments." Transfer values will be based on the Accumulation Value next
computed after receipt of the transfer request. 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.
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.
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<PAGE>
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, if the execution of such transfers may disadvantage or
potentially impair the contract rights of other 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 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 use the
Fixed
38
<PAGE>
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 Sub-Accounts that may be
used for automatic transfers and rebalancing, and to discontinue either option
upon advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Contract year under a
request, count as one transfer for purposes of the 12 transfers 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 at no additional charge 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") less 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 Surrender Value will be calculated 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 Contracts annuitized under a commutable period
certain annuity option may be surrendered. The amount payable 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.
39
<PAGE>
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.
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 submit a signed, written request for withdrawal, satisfactory to
the Company, to 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.
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<PAGE>
Each withdrawal must be in a minimum amount of $100. Except in New York where no
specific balance is required, 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 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 may be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date, an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to the Company's life expectancy distribution ("LED") option
by returning a properly signed LED request form to the Principal Office.
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<PAGE>
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
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 selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn based on the Owner's then life expectancy (or
the joint life expectancy of the Owner and a beneficiary.) 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.
Under the Company's LED option, 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. Where the Owner is a trust or other nonnatural person, the Owner may
elect the LED option based on the Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Contract and may be subject to a 10% federal
tax penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contract 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 nonnatural person) an
Annuitant dies prior to the Annuity Date, the Company will pay the beneficiary a
death benefit, except when a spousal beneficiary chooses to continue the
Contract as provided below 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 nonnatural 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
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<PAGE>
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).
OPTIONAL ENHANCED DEATH BENEFIT RIDER. At the time of application for the
Contract, the Owner, if under age 89, 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 nonnatural person) dies before
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; or
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (in Hawaii and New York the 5% compounding is not available;
therefore, (b) equal gross payments decreased proportionately to reflect
withdrawals); or
(c) the highest Accumulated Value on any prior Contract anniversary, increased
for any positive Market Value Adjustment and 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 nonnatural person) dies
before 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.
A separate charge is deducted for the optional Enhanced Death Benefit Rider. On
the last day of each month and on the date the Rider is terminated, a charge
equal
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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. 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 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 transferred 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.
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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 Owner selects the Annuity Date. 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 (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. In no event will the maximum
annuitization age exceed 99. 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."
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Under a variable annuity payout option, 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 noncommutable "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 an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
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.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Contract.
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 payout options or the fixed-amount payout
options may be selected, or any of the variable annuity
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payout options may be selected in combination with any of the fixed-amount
annuity payout 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 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 at annuitization
divided by the dollar amount of the first payment, and
Where: (2) is the number of payments paid prior to the death of the Annuitant.
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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 and may be commutable or
noncommutable. 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 noncommutable. 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 computing payments under this option, the Company deducts a
charge for annuity rate guarantees, which includes a factor for mortality risks.
Although not contractually required to do so, the Company currently follows a
practice of permitting persons receiving payments under a period certain option
to elect to convert to a variable annuity involving a life contingency. The
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
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "N. NORRIS Decision" below) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Contract provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its 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.
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The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- - For life annuity options and noncommutable period certain options of ten years
or more (six or more years under New York Contracts), the dollar amount 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 dollar
amount is determined by multiplying (1) the Surrender Value less premium
taxes, if any, 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 a death benefit annuity, the annuity value will be the amount of the death
benefit.
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. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
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 initially 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 net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Contract.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) 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.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected Sub-Account(s). The
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dollar amount of each subsequent variable annuity benefit payment is determined
by multiplying the fixed number of Annuity Units (derived from the dollar amount
of the first payment, as described above) with respect to a Sub-Account by the
value of an Annuity Unit of that Sub-Account on the applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "M.
Optional Minimum Guaranteed Annuity Payout Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
Subject to state availability, an optional Minimum Guaranteed Annuity Payout
Rider is available for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed lifetime income during the
annuity payout phase, subject to the conditions described below. On each
Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized if the Rider is
exercised. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rate of 3 1/2%. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
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compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any prior Contract anniversary since
the Rider effective date, as determined after positive adjustments have
been made for subsequent payments and any positive Market Value
Adjustment, if applicable, and negative adjustments have been made for
subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Contract
issue or at any time thereafter, however, if the Rider is not elected within
thirty days after Contract issue or within thirty days after a Contract
anniversary date, the effective date of the Rider will be the following
Contract anniversary date.
- - The Owner may not elect a Rider with a ten-year waiting period if at the time
of election the Annuitant has reached his or her 87th birthday. The Owner may
not elect a Rider with a fifteen-year waiting period if at the time of
election the Annuitant has reached his or her 82nd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider within
thirty days after any Contract anniversary following the expiration of a ten
or fifteen-year waiting period from the effective date of the Rider.
- - The Owner may only annuitize under a fixed annuity payout option involving a
life contingency as provided under "K. Description of Variable Annuity Payout
Options."
- - The Owner may only annuitize at the guaranteed annuity purchase rates listed
under the Annuity Option Tables in the Contract.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider prior
to the seventh Contract anniversary after the effective date of the
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Rider, unless such termination occurs on or within thirty days after any
Contract anniversary and in conjunction with the repurchase of a Minimum
Guaranteed Annuity Payout Rider with a waiting period of equal or greater
length at its then current price, if available.
- - After the seventh Contract anniversary from the effective date of the Rider
the Owner may terminate the Rider at any time.
- - The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of a
Contract anniversary.
- - Other than in the event of a repurchase, once terminated the Rider may not be
purchased again.
- - The Rider will terminate upon surrender of the Contract or the date that a
death benefit is payable if the Contract is not continued under "H. The Spouse
of the Owner as Beneficiary" (see "DESCRIPTION OF THE CONTRACT").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider based on a variety of
assumptions, including varying rates of return on the value of the Contract
during the accumulation phase, annuity payout periods, annuity payout options
and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed rates
of return are for purposes of illustration only and are not intended as a
representation of past or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Owner age 60 (at issue) and exercise of a Minimum Guaranteed Annuity Payout
Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With Payments Guaranteed For 10 Years. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that wold be received under the Minimum Guaranteed Annuity Payout Rider. The
minimum guaranteed benefit base amounts are the values that will be annuitized.
Minimum guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
CONTRACT MINIMUM MINIMUM
ANNIVERSARY AT GUARANTEED GUARANTEED ANNUAL
EXERCISE BENEFIT BASE INCOME(1)
- -------------- ------------ -----------------
<S> <C> <C>
10 $162,889 $12,153
15 $207,892 $17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed for 10 Years are available. See "K. Description
of Variable Annuity Payout Options."
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The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
Note: Adding the Minimum Guaranteed Annuity Payout Rider after the issue date or
resetting or repurchasing the benefit will impact the Program to Protect
Principal and Provide Growth Potential offered under the GPA Accounts since the
Minimum Guaranteed Annuity Payout Rider charges are deducted on a pro-rata basis
from all accounts including the GPA Accounts. (See "Program to Protect Principal
and Provide Growth Potential" under "GUARANTEE PERIOD ACCOUNTS.")
N. 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
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.
O. 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,
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and will reflect the investment performance, expenses and charges of its
Underlying 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 the 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
(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 an 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 the
Underlying Portfolios.
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A. VARIABLE ACCOUNT DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The charge is imposed during both the accumulation phase and the
annuity payout phase. 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 payout 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 phase 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.
The Company intends to recoup commissions and other sales expenses through
profits from the Company's General Account, which may include amounts derived
from mortality and expense risk charges.
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.
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 (see "B. Contract Fee" below) 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
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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 currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$75,000. (This fee may vary by state. See your Contract for more information.)
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
class 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 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 CHARGES
Subject to state availability, the Company offers optional benefit riders that
may be elected by the Owner. A separate monthly charge is made for each rider
selected. On the last day of each month and on the date the rider is terminated,
a charge equal to 1/12th of the applicable annual rate (see table below) is made
against the Accumulated Value of the Contract at that time. The charge is made
through a pro-rata reduction of the Accumulated Value of the Sub-Accounts, the
Fixed Account and the Guarantee Period Accounts (based on the relative value
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that the Accumulation Units of the Sub-Accounts, the dollar amounts in the Fixed
Account and the dollar amounts in the Guarantee Period Accounts bear to the
total Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with ten-year
waiting period...................................... 0.25%
Minimum Guaranteed Annuity Payout Rider with fifteen-
year waiting period................................. 0.15%
Enhanced Death Benefit Rider......................... 0.25%
</TABLE>
For a description of the Enhanced Death Benefit Rider, see "G. Death Benefit"
and for a description of the Minimum Guaranteed Annuity Payout Rider, see "M.
Optional Minimum Guaranteed Annuity Payout Rider," 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 in total 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 charge, but reserves the right to assess a charge, guaranteed never to
exceed $25,
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for each subsequent transfer in a Contract year to reimburse it for the expense
of processing transfers. 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,
except in California where it is accounted for in the Company's General 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. 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 $1,000. If less than $1,000 is allocated, the Company reserves
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the right to apply that amount to the Sub-Account investing in 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 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 D, "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
(including withdrawals made as part of a pro rata deduction for charges on a
Minimum Guaranteed Annuity Payout Rider purchased or repurchased after issue),
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."
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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 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.
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.
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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 prescribed by the Treasury Department 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. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract
and therefore, the income on the Contract, for any taxable year of the Owner,
would be treated as ordinary income received or accrued by the Owner. It is
anticipated that the Underlying Portfolios in this Contract will comply with the
current diversification requirements. In the event that future IRS regulations
and/or rulings would require Contract modifications in order to remain in
compliance with the diversification standards, the Company will make reasonable
efforts to comply, and it reserves the right to make such changes as it deems
appropriate for that purpose.
In addition, traditionally 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 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 now 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.
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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 CONTRACT IN GENERAL
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owners" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the owner
chooses an Annuity Date beyond the Owner's 85th birthday, it is possible that
the Contract may not be considered an annuity for tax purposes, and therefore,
the Owner may be taxed on the annual increase in the Accumulated Value. The
Owner should consult tax and financial advisors for more information. 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
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
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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.
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 any LED-type 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
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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.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural 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.
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
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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
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 cancel the Contract as described
in this Prospectus. See "B. Right to Cancel 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
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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.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Portfolios. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting the Contract Value. (Certain transactions
made under recurring payment plans such as Dollar Cost Averaging may in the
future be confirmed quarterly rather than by immediate confirmations.) The Owner
should review the information in all statements carefully. All errors or
corrections must be reported to the Company immediately to assure proper
crediting to the Contract. The Company will assume that all transactions are
accurately reported on confirmation statements and quarterly/annual statements
unless the Owner notifies the Principal Office in writing within 30 days after
receipt of the statement.
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
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<PAGE>
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 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.
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<PAGE>
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 and the Underlying Portfolios do not currently
foresee any such disadvantages to either variable life insurance owners or
variable annuity owners, the Company and the trustees of the Underlying
Portfolios 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.
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
69
<PAGE>
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").
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 1.0% 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
70
<PAGE>
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.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
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.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
has completed the process of modifying or replacing existing software and
believes that this action will resolve the Year 2000 issue. However, should
there be serious unanticipated interruptions from unknown sources, the Year 2000
issue could have a material adverse impact on the operations of the Company.
Specifically, the Company could experience, among other things, an interruption
in its ability to collect and process premiums, process claim payments,
safeguard and manage its invested assets, accurately maintain policyholder
information, accurately maintain accounting records, and perform customer
service. Any of these specific events, depending on duration, could have a
material adverse impact on the results of operations and the financial position
of the Company.
The Company is engaged in formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issue. The Company's
total Year 2000 project cost and estimates to complete the project include the
estimated costs and time associated with the Company's involvement on a third
party's Year 2000 program, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on
71
<PAGE>
which the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company does not believe that it has material exposure to contingencies related
to the Year 2000 issue for the products it has sold. Although the Company does
not believe that there is a material contingency associated with the Year 2000
issue, there can be no assurance that exposure for material contingencies will
not arise.
The cost of the Year 2000 project is being expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $59
million related to the assessment, plan development and substantial completion
of the Year 2000 project through June 30, 1999. The total remaining cost of the
project is estimated between $10-$20 million
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.
72
<PAGE>
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.
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.
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. The Company reserves the right
to extend the period of time that the enhanced rate will apply. For more
information, contact your financial representative or call 1-800-782-8380
A-1
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
The Contract was first offered to the public in January 1999. The Company,
however, may advertise "total return" and "average annual total return"
performance information based on (1) the periods that the Sub-Accounts have been
in existence and (2) the periods that the Underlying Portfolios have been in
existence. Performance results in Tables 1A and 2A for all periods shown below
are calculated with all charges assumed to be those applicable to the Contract,
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 Table 1A of Appendix B and
C 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
B-1
<PAGE>
1.40%, the Underlying Portfolio charges and an annual Contract fee. The
calculation has not been adjusted to reflect the deduction of the optional
Minimum Guaranteed Annuity Payout Rider or the optional Enhanced Death Benefit
Rider charge which, if elected, would reduce performance.
The performance shown in Table 2A of Appendix B and C is calculated in exactly
the same manner as that in Table 1A; 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.
Allmerica Financial Life Insurance and Annuity Company performance tables can be
found in Appendix B. First Allmerica Financial Life Insurance Company
performance tables can be found in Appendix C.
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, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect
B-2
<PAGE>
deductions for administrative and management costs and expenses. In addition,
relevant broad-based indices and performance from independent sources may be
used to illustrate the performance of certain Contract features.
At times, 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
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.
B-3
<PAGE>
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/98 SUB-ACCOUNT
- -------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Kemper Aggressive Growth.......... N/A N/A N/A
Kemper Technology Growth.......... N/A N/A N/A
Kemper-Dreman Financial
Services......................... 5/4/98 N/A -3.24%
Kemper Small Cap Growth........... 12/4/96 16.60% 22.54%
Kemper Small Cap Value............ 11/13/96 -12.61% 3.28%
Kemper-Dreman High Return Equity.. 5/4/98 N/A 1.78%
Kemper International.............. 11/13/96 8.37% 8.54%
Kemper International Growth and
Income........................... 5/5/98 N/A -9.80%
Kemper Global Blue Chip........... 5/12/98 N/A -1.26%
Kemper Growth..................... 12/4/96 13.38% 15.53%
Kemper Contrarian Value........... 11/13/96 17.48% 23.31%
Kemper Blue Chip.................. 5/1/97 12.14% 13.68%
Kemper Value+Growth............... 11/29/96 18.38% 18.88%
Kemper Index 500.................. N/A N/A N/A
Kemper Horizon 20+................ 12/5/96 11.34% 14.14%
Kemper Total Return............... 11/29/96 13.42% 14.15%
Kemper Horizon 10+................ 12/23/96 9.66% 12.28%
Kemper High Yield................. 11/13/96 -0.08% 5.49%
Kemper Horizon 5.................. 12/23/96 8.11% 9.56%
Kemper Global Income.............. 5/1/97 9.32% 6.63%
Kemper Investment Grade Bond...... 12/12/96 6.31% 6.83%
Kemper Government Securities...... 12/4/96 5.42% 5.77%
Kemper Money Market............... 11/20/96 3.57% 3.58%
KVS Focused Large Cap Growth...... N/A N/A N/A
Scudder International............. 5/6/98 N/A -1.58%
Scudder Global Discovery.......... 5/6/98 N/A -4.60%
Scudder Capital Growth............ 5/11/98 N/A 5.72%
Scudder Growth and Income......... 5/1/98 N/A -6.30%
Alger American Leveraged AllCap... N/A N/A N/A
Alger American Balanced........... N/A N/A N/A
Dreyfus MidCap Stock.............. N/A N/A N/A
Dreyfus Socially Responsible
Growth........................... N/A N/A N/A
Janus Aspen Growth................ N/A N/A N/A
Janus Aspen Growth and Income..... N/A N/A N/A
</TABLE>
B-4
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
<TABLE>
<CAPTION>
UNDERLYING 10 YEARS
PORTFOLIO FOR YEAR (OR SINCE
SUB-ACCOUNT INVESTING IN INCEPTION ENDED 5 INCEPTION
UNDERLYING PORTFOLIO DATE 12/31/98 YEARS IF LESS)
- -------------------- ---------- --------------- ------ --------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth......... N/A N/A N/A N/A
Kemper Technology Growth......... N/A N/A N/A N/A
Kemper-Dreman Financial
Services........................ 5/4/98 N/A N/A -3.24%
Kemper Small Cap Growth.......... 5/2/94 16.60% N/A 22.37%
Kemper Small Cap Value........... 5/1/96 -12.61% N/A 2.11%
Kemper-Dreman High Return
Equity.......................... 5/4/98 N/A N/A 1.78%
Kemper International............. 1/6/92 8.37% 7.19% 8.87%
Kemper International Growth and
Income.......................... 5/5/98 N/A N/A -9.80%
Kemper Global Blue Chip.......... 5/5/98 N/A N/A -3.14%
Kemper Growth.................... 12/9/83 13.38% 15.00% 16.34%
Kemper Contrarian Value.......... 5/1/96 17.48% N/A 23.43%
Kemper Blue Chip................. 5/1/97 12.14% N/A 13.68%
Kemper Value+Growth.............. 5/1/96 18.38% N/A 20.92%
Kemper Index 500................. N/A N/A N/A N/A
Kemper Horizon 20+............... 5/1/96 11.34% N/A 16.68%
Kemper Total Return.............. 4/6/82 13.42% 11.26% 12.49%
Kemper Horizon 10+............... 5/1/96 9.66% N/A 13.16%
Kemper High Yield................ 4/6/82 -0.08% 6.56% 8.61%
Kemper Horizon 5................. 5/1/96 8.11% N/A 10.40%
Kemper Global Income............. 5/1/97 9.32% N/A 6.63%
Kemper Investment Grade Bond..... 5/1/96 6.31% N/A 6.08%
Kemper Government Securities..... 9/3/87 5.42% 5.11% 6.74%
Kemper Money Market.............. 4/6/82 3.57% 3.42% 3.83%
KVS Focused Large Cap Growth..... N/A N/A N/A N/A
Scudder International............ 5/1/87 16.55% 8.64% 10.27%
Scudder Global Discovery......... 5/1/96 14.65% N/A 11.14%
Scudder Capital Growth........... 7/16/85 21.35% 16.71% 15.14%
Scudder Growth and Income........ 5/2/94 5.24% N/A 18.35%
Alger American Leveraged
AllCap.......................... 1/25/95 55.62% N/A 37.39%
Alger American Balanced.......... 9/5/89 29.67% 14.78% 10.48%
Dreyfus MidCap Stock............. 5/1/98 N/A N/A -3.57%
Dreyfus Socially Responsible
Growth.......................... 10/7/93 27.46% 20.61% 21.15%
Janus Aspen Growth............... 9/13/93 33.72% 19.60% 19.06%
Janus Aspen Growth and Income.... 5/1/98 N/A N/A 18.56%
</TABLE>
B-5
<PAGE>
APPENDIX C
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/98 SUB-ACCOUNT
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth.......... N/A N/A N/A
Kemper Technology Growth.......... N/A N/A N/A
Kemper-Dreman Financial
Services......................... 10/27/98 N/A 12.58%
Kemper Small Cap Growth........... 10/16/97 16.61% 12.16%
Kemper Small Cap Value............ 11/18/97 -12.60% -11.14%
Kemper-Dreman High Return Equity.. 10/12/98 N/A 15.19%
Kemper International.............. 10/16/97 8.38% 0.83%
Kemper International Growth and
Income........................... 12/9/98 N/A 3.51%
Kemper Global Blue Chip........... 11/17/98 N/A 4.09%
Kemper Growth..................... 10/16/97 13.39% 8.49%
Kemper Contrarian Value........... 10/14/97 17.49% 15.53%
Kemper Blue Chip.................. 5/1/97 12.15% 13.69%
Kemper Value+Growth............... 10/14/97 18.39% 11.11%
Kemper Index 500.................. N/A N/A N/A
Kemper Horizon 20+................ 10/16/97 11.35% 7.47%
Kemper Total Return............... 11/17/97 13.43% 13.28%
Kemper Horizon 10+................ 11/25/97 9.67% 10.31%
Kemper High Yield................. 10/16/97 -0.07% 0.27%
Kemper Horizon 5.................. 11/10/97 8.12% 8.69%
Kemper Global Income.............. 5/1/97 9.33% 6.64%
Kemper Investment Grade Bond...... 12/11/97 6.32% 6.39%
Kemper Government Securities...... 12/11/97 5.43% 5.53%
Kemper Money Market............... 12/29/97 3.55% 3.56%
KVS Focused Large Cap Growth...... N/A N/A N/A
Scudder International............. 8/28/98 N/A 9.82%
Scudder Global Discovery.......... N/A N/A N/A
Scudder Capital Growth............ 10/28/98 N/A 17.05%
Scudder Growth and Income......... 8/28/98 N/A 10.14%
Alger American Leveraged AllCap... N/A N/A N/A
Alger American Balanced........... N/A N/A N/A
Dreyfus MidCap Stock.............. N/A N/A N/A
Dreyfus Socially Responsible
Growth........................... N/A N/A N/A
Janus Aspen Growth................ N/A N/A N/A
Janus Aspen Growth and Income..... N/A N/A N/A
</TABLE>
C-1
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
<TABLE>
<CAPTION>
UNDERLYING 10 YEARS
PORTFOLIO FOR YEAR (OR SINCE
SUB-ACCOUNT INVESTING IN INCEPTION ENDED 5 INCEPTION
UNDERLYING PORTFOLIO DATE 12/31/98 YEARS IF LESS)
- -------------------- ---------- --------------- ------ --------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth......... N/A N/A N/A N/A
Kemper Technology Growth......... N/A N/A N/A N/A
Kemper-Dreman Financial
Services........................ 5/4/98 N/A N/A -3.23%
Kemper Small Cap Growth.......... 5/2/94 16.61% N/A 22.38%
Kemper Small Cap Value........... 5/1/96 -12.60% N/A 2.10%
Kemper-Dreman High Return
Equity.......................... 5/4/98 N/A N/A 1.79%
Kemper International............. 1/6/92 8.38% 7.20% 8.88%
Kemper International Growth and
Income.......................... 5/5/98 N/A N/A -9.78%
Kemper Global Blue Chip.......... 5/5/98 N/A N/A -3.11%
Kemper Growth.................... 12/9/83 13.39% 15.01% 16.35%
Kemper Contrarian Value.......... 5/1/96 17.49% N/A 23.43%
Kemper Blue Chip................. 5/1/97 12.15% N/A 13.69%
Kemper Value+Growth.............. 5/1/96 18.39% N/A 20.93%
Kemper Index 500................. N/A N/A N/A N/A
Kemper Horizon 20+............... 5/1/96 11.35% N/A 16.69%
Kemper Total Return.............. 4/6/82 13.43% 11.27% 12.50%
Kemper Horizon 10+............... 5/1/96 9.67% N/A 13.17%
Kemper High Yield................ 4/6/82 -0.07% 6.57% 8.62%
Kemper Horizon 5................. 5/1/96 8.12% N/A 10.41%
Kemper Global Income............. 5/1/97 9.33% N/A 6.64%
Kemper Investment Grade Bond..... 5/1/96 6.32% N/A 6.09%
Kemper Government Securities..... 9/3/87 5.43% 5.12% 6.75%
Kemper Money Market.............. 4/6/82 3.55% 3.43% 3.84%
KVS Focused Large Cap Growth..... N/A N/A N/A N/A
Scudder International............ 5/1/87 16.56% 8.65% 10.28%
Scudder Global Discovery......... 5/1/96 N/A N/A N/A
Scudder Capital Growth........... 7/16/85 21.40% 16.73% 15.15%
Scudder Growth and Income........ 5/2/94 5.25% N/A 18.36%
Alger American Leveraged
AllCap.......................... 1/25/95 55.62% N/A 37.39%
Alger American Balanced.......... 9/5/89 29.67% 14.78% 10.48%
Dreyfus MidCap Stock............. 5/1/98 N/A N/A -3.55%
Dreyfus Socially Responsible
Growth.......................... 10/7/93 27.48% 20.63% 21.17%
Janus Aspen Growth............... 9/13/93 33.74% 19.62% 19.08%
Janus Aspen Growth and Income.... 5/1/98 N/A N/A 18.58%
</TABLE>
C-2
<PAGE>
APPENDIX D
THE MARKET VALUE ADJUSTMENT
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
D-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
D-2
<PAGE>
APPENDIX E
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ----------- ------- ------ -----
<S> <C> <C> <C>
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.969 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 12,487 N/A N/A
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.309 0.989 1.000
End of Period.................................. 1.528 1.309 0.989
Number of Units Outstanding at End of Period (in
thousands)........................................ 34,993 16,339 210
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.227 1.022 1.000
End of Period.................................. 1.074 1.227 1.022
Number of Units Outstanding at End of Period (in
thousands)........................................ 49,408 29,597 314
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 1.019 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 45,758 N/A N/A
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.100 1.019 1.000
End of Period.................................. 1.194 1.100 1.019
Number of Units Outstanding at End of Period (in
thousands)........................................ 46,830 30,789 360
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.903 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 2,218 N/A N/A
</TABLE>
E-1
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ----------- ------- ------ -----
<S> <C> <C> <C>
KEMPER GLOBAL BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.989 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 2,382 N/A N/A
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.191 0.995 1.000
End of Period.................................. 1.352 1.191 0.995
Number of Units Outstanding at End of Period (in
thousands)........................................ 56,608 24,186 370
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.332 1.036 1.000
End of Period.................................. 1.566 1.332 1.036
Number of Units Outstanding at End of Period (in
thousands)........................................ 90,048 53,634 317
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.105 0 N/A
End of Period.................................. 1.241 1.105 N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 49,320 13,179 N/A
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.213 0.981 1.000
End of Period.................................. 1.438 1.213 0.981
Number of Units Outstanding at End of Period (in
thousands)........................................ 64,931 30,946 197
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.183 0.995 1.000
End of Period.................................. 1.318 1.183 0.995
Number of Units Outstanding at End of Period (in
thousands)........................................ 19,538 7,768 226
</TABLE>
E-2
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ----------- ------- ------ -----
<S> <C> <C> <C>
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.164 0.984 1.000
End of Period.................................. 1.321 1.164 0.984
Number of Units Outstanding at End of Period (in
thousands)........................................ 85,265 31,284 353
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.154 1.002 1.000
End of Period.................................. 1.267 1.154 1.002
Number of Units Outstanding at End of Period (in
thousands)........................................ 28,551 10,199 39
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.123 1.020 1.000
End of Period.................................. 1.124 1.123 1.020
Number of Units Outstanding at End of Period (in
thousands)........................................ 132,619 64,934 941
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.114 1.002 1.000
End of Period.................................. 1.206 1.114 1.002
Number of Units Outstanding at End of Period (in
thousands)........................................ 19,335 7,888 53
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.019 0 N/A
End of Period.................................. 1.115 1.019 N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 2,760 1,317 N/A
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.079 1.003 1.000
End of Period.................................. 1.148 1.079 1.003
Number of Units Outstanding at End of Period (in
thousands)........................................ 29,010 8,255 22
</TABLE>
E-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997 1996
- ----------- ------- ------ -----
<S> <C> <C> <C>
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.067 0.993 1.000
End of Period.................................. 1.126 1.067 0.993
Number of Units Outstanding at End of Period (in
thousands)........................................ 28,997 7,815 498
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period............................ 1.042 1.004 1.000
End of Period.................................. 1.080 1.042 1.004
Number of Units Outstanding at End of Period (in
thousands)........................................ 28,692 15,760 1,904
SCUDDER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.986 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 4,592 N/A N/A
SCUDDER GLOBAL DISCOVERY PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.955 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 2,770 N/A N/A
SCUDDER CAPITAL GROWTH PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 1.059 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 4,396 N/A N/A
SCUDDER GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period............................ 0.000 N/A N/A
End of Period.................................. 0.938 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................ 11,424 N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
E-4
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997
- ----------- ----- -----
<S> <C> <C>
KEMPER-DREMAN FINANCIAL SERVICES PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.127 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 51 N/A
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.985 0
End of Period........................................... 1.150 0.985
Number of Units Outstanding at End of Period (in
thousands)................................................. 232 18
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.003 0
End of Period........................................... 0.878 1.003
Number of Units Outstanding at End of Period (in
thousands)................................................. 707 52
KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.153 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 450 N/A
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.932 0
End of Period........................................... 1.012 0.932
Number of Units Outstanding at End of Period (in
thousands)................................................. 377 48
KEMPER INTERNATIONAL GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.036 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 5 N/A
KEMPER GLOBAL BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.042 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 50 N/A
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.973 0
End of Period........................................... 1.105 0.973
Number of Units Outstanding at End of Period (in
thousands)................................................. 512 16
</TABLE>
E-5
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997
- ----------- ----- -----
<S> <C> <C>
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.014 0
End of Period........................................... 1.193 1.014
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,914 174
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.105 0
End of Period........................................... 1.241 1.105
Number of Units Outstanding at End of Period (in
thousands)................................................. 931 43
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.960 0
End of Period........................................... 1.138 0.960
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,081 125
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.980 0
End of Period........................................... 1.092 0.980
Number of Units Outstanding at End of Period (in
thousands)................................................. 35 5
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.014 0
End of Period........................................... 1.151 1.014
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,222 42
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.016 0
End of Period........................................... 1.115 1.016
Number of Units Outstanding at End of Period (in
thousands)................................................. 789 21
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.004 0
End of Period........................................... 1.005 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 2,121 75
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.017 0
End of Period........................................... 1.101 1.017
Number of Units Outstanding at End of Period (in
thousands)................................................. 643 81
</TABLE>
E-6
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
SUB-ACCOUNT 1998 1997
- ----------- ----- -----
<S> <C> <C>
KEMPER GLOBAL INCOME PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.019 0
End of Period........................................... 1.115 1.019
Number of Units Outstanding at End of Period (in
thousands)................................................. 26 11
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.004 0
End of Period........................................... 1.069 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 404 21
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.004 0
End of Period........................................... 1.060 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 971 21
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period..................................... 1.000 0
End of Period........................................... 1.037 1.000
Number of Units Outstanding at End of Period (in
thousands)................................................. 772 5
SCUDDER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.099 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 201 N/A
SCUDDER GLOBAL DISCOVERY PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 0 N/A
SCUDDER CAPITAL GROWTH PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.172 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 143 N/A
SCUDDER GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period..................................... 0.000 N/A
End of Period........................................... 1.103 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 411 N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
E-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT KG
INVESTING IN SHARES OF KEMPER VARIABLE SERIES,
SCUDDER VARIABLE LIFE INVESTMENT FUND, DREYFUS
INVESTMENT PORTFOLIOS, THE DREYFUS SOCIALLY RESPONSIBLE
GROWTH FUND, INC., JANUS ASPEN SERIES AND THE ALGER AMERICAN FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE KEMPER GATEWAY ADVISOR PROSPECTUS FOR SEPARATE
ACCOUNT KG DATED MAY 1, 1999 AS REVISED NOVEMBER 15, 1999 ("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 MAY 1 1999 AS REVISED NOVEMBER 15, 1999
AFLIAC KEMPER GATEWAY ADVISOR
<PAGE>
TABLE OF CONTENTS
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
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, 1998, the
Company had over $14 billion in assets and over $26 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 among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries (including the Company) had over $27 billion in combined assets and
over $48 billion in life insurance in force.
Currently, 34 Sub-Accounts of the Variable Account are available under
Contract Form 3027-98 (the "Contract"). Each Sub-Account invests in a
corresponding investment portfolio of Kemper Variable Series ("KVS"), Scudder
Variable Life Investment Fund ("Scudder VLIF"), Dreyfus Investment
Portfolios, The Dreyfus Socially Responsible Growth Fund, Inc., the Janus
Aspen Series ("Janus Aspen"), or The Alger American Fund ("Alger'), open-end,
registered management investment companies.
Twenty-four different portfolios of KVS are available under the Contract: the
Kemper Aggressive Growth Portfolio, Kemper Technology Growth Portfolio,
Kemper-Dreman Financial Services Portfolio, Kemper Small Cap Growth Portfolio,
Kemper Small Cap Value Portfolio, Kemper-Dreman High Return Equity Portfolio,
Kemper International Portfolio, Kemper International Growth and
2
<PAGE>
Income Portfolio, Kemper Global Blue Chip Portfolio, Kemper Growth Portfolio,
Kemper Contrarian Value Portfolio, Kemper Blue Chip Portfolio, Kemper
Value+Growth Portfolio, Kemper Index 500 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, Kemper Money Market Portfolio and KVS Focused Large Cap
Growth 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. One portfolio of Dreyfus Investment Portfolios is available under
the Contract: the Dreyfus MidCap Stock Portfolio. One portfolio of The
Dreyfus Socially Responsible Growth Fund, Inc. is available under the
Contract: the Dreyfus Socially Responsible Growth Fund. Two portfolios of
Janus Aspen are available under the Contract: the Janus Aspen Growth
Portfolio and the Janus Aspen Growth and Income Portfolio. Two portfolios of
Alger are available under the Contract: the Alger American Leveraged AllCap
Portfolio and the Alger American Balanced 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, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, and
the financial statements of Separate Account KG of the Company as of December
31, 1998 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
3
<PAGE>
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica Investments, the Company and the Variable Account. Allmerica
Investments distributes the Contract on a best-efforts basis. Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts 01653, was
organized in 1969 as a wholly owned subsidiary of 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.
There were no commissions paid to Allmerica Investments, Inc. during 1996, 1997
and 1998. 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:
(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
(5) Annual Charge (one-day equivalent of 1.40% per annum)..............0.000039
4
<PAGE>
(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
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 Accumulated
Value of the Contract is $44,800 (40,000 x $1.120000). Assume also that the
Owner elects an option for which the first monthly payment is $6.57 per $1,000
of Accumulated Value applied. Assuming no premium tax, the first monthly payment
would be 44.800 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.
PERFORMANCE INFORMATION
5
<PAGE>
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.
The calculations of Total Return reflect the deduction of the $35 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, 1998:
Yield 2.92%
Effective Yield 2.96%
6
<PAGE>
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $35 annual Contract
fee.
TAX-DEFERRED ACCUMULATION
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS AND
TAX-DEFERRED EARNINGS
---------------------------
---------------------------
<TABLE>
<CAPTION>
TAXABLE LUMP SUM AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- ---------------- -----------------------
<S> <C> <C> <C>
Years 10 $107,946 $86,448 $81,693
Years 20 233,048 165,137 133,476
Years 30 503,133 335,021 218,082
</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 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.)
7
<PAGE>
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
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 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/PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
<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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums................................................ $ 0.5 $ 22.8 $ 32.7
Universal life and investment product policy fees....... 267.4 212.2 176.2
Net investment income................................... 151.3 164.2 171.7
Net realized investment gains (losses).................. 20.0 2.9 (3.6)
Other income............................................ 0.6 1.4 0.9
------ ------ ------
Total revenues...................................... 439.8 403.5 377.9
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment
expenses.............................................. 153.9 187.8 192.6
Policy acquisition expenses............................. 64.6 2.8 49.9
Sales practice litigation............................... 21.0 -- --
Loss from cession of disability income business......... -- 53.9 --
Other operating expenses................................ 104.1 101.3 86.6
------ ------ ------
Total benefits, losses and expenses................. 343.6 345.8 329.1
------ ------ ------
Income before federal income taxes.......................... 96.2 57.7 48.8
------ ------ ------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current................................................. 22.1 13.9 26.9
Deferred................................................ 11.8 7.1 (9.8)
------ ------ ------
Total federal income tax expense.................... 33.9 21.0 17.1
------ ------ ------
Net income.................................................. $ 62.3 $ 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) 1998 1997
- ------------- --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)................................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)................................................ 31.8 54.0
Mortgage loans.......................................... 230.0 228.2
Real estate............................................. 14.5 12.0
Policy loans............................................ 151.5 140.1
Other long-term investments............................. 9.1 20.3
--------- ---------
Total investments................................... 1,767.3 1,857.1
--------- ---------
Cash and cash equivalents................................. 217.9 31.1
Accrued investment income................................. 33.5 34.2
Deferred policy acquisition costs......................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses, future
policy benefits and unearned premiums................... 308.0 251.1
Other assets.............................................. 46.9 10.7
Separate account assets................................... 11,020.4 7,567.3
--------- ---------
Total assets........................................ $14,344.5 $10,516.8
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.................................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.............................................. 17.9 18.5
Unearned premiums....................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities........................................... 38.1 32.5
--------- ---------
Total policy liabilities and accruals............... 2,343.5 2,150.1
--------- ---------
Expenses and taxes payable................................ 146.2 77.6
Reinsurance premiums payable.............................. 45.7 4.9
Deferred federal income taxes............................. 78.8 75.9
Separate account liabilities.............................. 11,020.4 7,567.3
--------- ---------
Total liabilities................................... 13,634.6 9,875.8
--------- ---------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares authorized,
2,524 and 2,521 shares issued and outstanding........... 2.5 2.5
Additional paid-in capital................................ 407.9 386.9
Accumulated other comprehensive income.................... 24.1 38.5
Retained earnings......................................... 275.4 213.1
--------- ---------
Total shareholder's equity.......................... 709.9 641.0
--------- ---------
Total liabilities and shareholder's equity.......... $14,344.5 $10,516.8
========= =========
</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) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................................ $ 2.5 $ 2.5 $ 2.5
------- ------- -------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period.......................... 386.9 346.3 324.3
Issuance of common stock................................ 21.0 40.6 22.0
------- ------- -------
Balance at end of period................................ 407.9 386.9 346.3
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period.......................... 38.5 20.5 23.8
Appreciation (depreciation) during the period:
Net (depreciation) appreciation on
available-for-sale securities..................... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal income
taxes............................................. 9.0 (9.0) 1.8
------- ------- -------
(14.4) 18.0 (3.3)
------- ------- -------
Balance at end of period................................ 24.1 38.5 20.5
------- ------- -------
RETAINED EARNINGS
Balance at beginning of period.......................... 213.1 176.4 144.7
Net income.............................................. 62.3 36.7 31.7
------- ------- -------
Balance at end of period................................ 275.4 213.1 176.4
------- ------- -------
Total shareholder's equity.......................... $ 709.9 $ 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 COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on available-for-sale
securities............................................ (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal income taxes... 9.0 (9.0) 1.8
------ ------ ------
Other comprehensive income.......................... (14.4) 18.0 (3.3)
------ ------ ------
Comprehensive income.................................... 47.9 $ 54.7 $ 28.4
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to net cash used in
operating activities:
Net realized gains.................................. (20.0) (2.9) 3.6
Net amortization and depreciation................... (7.1) -- 3.5
Sales practice litigation expense................... 21.0
Loss from cession of disability income business..... -- 53.9 --
Deferred federal income taxes....................... 11.8 7.1 (9.8)
Payment related to cession of disability income
business.......................................... -- (207.0) --
Change in deferred acquisition costs................ (177.8) (181.3) (66.8)
Change in reinsurance premiums payable.............. 40.8 3.9 (0.2)
Change in accrued investment income................. 0.7 3.5 1.2
Change in policy liabilities and accruals, net...... 193.1 (72.4) (39.9)
Change in reinsurance receivable.................... (56.9) 22.1 (1.5)
Change in expenses and taxes payable................ 55.4 0.2 32.3
Separate account activity, net...................... (0.5) 1.6 8.0
Other, net.......................................... (28.0) (8.7) 2.3
------- ------- -------
Net cash provided by (used in) operating
activities.................................... 94.8 (343.3) (35.6)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities................... 187.0 909.7 809.4
Proceeds from disposals of equity securities............ 53.3 2.4 1.5
Proceeds from disposals of other investments............ 22.7 23.7 17.4
Proceeds from mortgages matured or collected............ 60.1 62.9 34.0
Purchase of available-for-sale fixed maturities......... (136.0) (579.7) (795.8)
Purchase of equity securities........................... (30.6) (3.2) (13.2)
Purchase of other investments........................... (22.7) (9.0) (13.9)
Purchase of mortgages................................... (58.9) (70.4) (22.3)
Other investing activities, net......................... (3.9) -- (2.0)
------- ------- -------
Net cash provided by investing activities........... 71.0 336.4 15.1
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and capital paid in..... 21.0 19.2 22.0
------- ------- -------
Net cash provided by financing activities........... 21.0 19.2 22.0
------- ------- -------
Net change in cash and cash equivalents..................... 186.8 12.3 1.5
Cash and cash equivalents, beginning of period.............. 31.1 18.8 17.3
------- ------- -------
Cash and cash equivalents, end of period.................... $ 217.9 $ 31.1 $ 18.8
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................... $ 0.6 $ -- $ 3.4
Income taxes paid....................................... $ 36.2 $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of 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, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of 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, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual life and annuity policies, and are based upon estimates as to future
investment yield, mortality and withdrawals that include provisions for adverse
deviation. Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life 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 disability income 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 for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. Benefits, losses and related expenses are matched
with premiums, resulting in their recognition over the lives of the contracts.
This matching is accomplished through the provision for future benefits,
estimated and unpaid losses and amortization of deferred policy acquisition
costs. Revenues for investment-related products consist of net investment income
and contract charges assessed against the fund values. Related benefit expenses
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, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies. The Federal income tax for all subsidiaries in the consolidated
return of AFC is calculated on a separate return basis. Any current tax
liability is paid to AFC. Tax benefits resulting from taxable operating losses
or credits of AFC's subsidiaries are not reimbursed to the subsidiary until such
losses or credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), 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 adopted Statement No. 130 for the first quarter
of 1998, which resulted primarily in reporting unrealized gains and losses on
investments in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and
agency securities................................ $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions................. 2.7 0.2 -- 2.9
Foreign governments............................... 48.8 1.6 1.5 48.9
Corporate fixed maturities........................ 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities........................ 131.3 5.8 1.4 135.7
-------- ----- ----- --------
Total fixed maturities............................ $1,284.6 $66.4 $20.6 $1,330.4
======== ===== ===== ========
Equity securities................................. $ 27.4 $ 8.9 $ 4.5 $ 31.8
======== ===== ===== ========
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
U.S. Treasury securities and U.S. government and agency
<S> <C> <C> <C> <C>
securities......................................... $ 6.3 $ 0.5 $-- $ 6.8
States and political subdivisions................... 2.8 0.2 -- 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.............................. $1,340.5 $66.6 $ 4.6 $1,402.5
======== ===== ===== ========
Equity securities................................... $ 34.4 $19.9 $ 0.3 $ 54.0
======== ===== ===== ========
</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, 1998, the amortized
cost and market value of these assets on deposit in New York were
$268.5 million and $284.1 million, respectively. At December 31, 1997, the
amortized cost and market value of assets on deposit were $276.8 million and
$291.7 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, 1998
and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
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>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
-------- --------
Total....................................................... $1,284.6 $1,330.4
======== ========
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------- --------------- -------- --------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
1997
Fixed maturities............................................ $702.9 $11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
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 YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year........................ $ 22.1 $ 16.4 $ 38.5
------ ------ ------
Net depreciation on available-for-sale securities.......... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 7.1 -- 7.1
Benefit from deferred federal income taxes................. 3.2 5.8 9.0
------ ------ ------
(5.9) (8.5) (14.4)
------ ------ ------
Net appreciation, end of year.............................. $ 16.2 $ 7.9 $ 24.1
====== ====== ======
1997
Net appreciation, beginning of year........................ $ 12.7 $ 7.8 $ 20.5
------ ------ ------
Net appreciation on available-for-sale securities.......... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... (9.8) -- (9.8)
Provision for deferred federal income taxes................ (5.1) (3.9) (9.0)
------ ------ ------
9.4 8.6 18.0
------ ------ ------
Net appreciation, end of year.............................. $ 22.1 $ 16.4 $ 38.5
====== ====== ======
1996
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>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
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) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Mortgage loans.............................................. $230.0 $228.2
Real estate held for sale................................... 14.5 12.0
------ ------
Total mortgage loans and real estate........................ $244.5 $240.2
====== ======
</TABLE>
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, 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 was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 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.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
====== ======
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Geographic region:
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
====== ======
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows:
1999 -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 --
$11.5 million; 2003 -- $0.6 million; and $143.0 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 1998, 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 YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1998
Mortgage loans................................... $ 9.4 $(4.5) $1.6 $ 3.3
===== ===== ==== =====
1997
Mortgage loans................................... $ 9.5 $ 1.1 $1.2 $ 9.4
Real estate...................................... 1.7 3.7 5.4 --
----- ----- ---- -----
Total........................................ $11.2 $ 4.8 $6.6 $ 9.4
===== ===== ==== =====
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>
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
====== ====== ======
</TABLE>
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 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 $12.6 million, $21.1 million and $25.4 million at
December 31, 1998, 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 $1.4 million, $1.9 million and $3.6 million in
1998, 1997, and 1996, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $2.1 million and
$2.2 million in 1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
====== ====== ======
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $(5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------ ------ -----
Other comprehensive income.................................. $(14.4) $ 18.0 $(3.3)
====== ====== =====
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), 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 is
limited to the lesser of the present value of the cash flows or book value.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
1998 1997
------------------- -------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents....................... $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities................................ 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities............................... 31.8 31.8 54.0 54.0
Mortgage loans.................................. 230.0 241.9 228.2 239.8
Policy loans.................................... 151.5 151.5 140.1 140.1
-------- -------- -------- --------
$1,961.6 $1,973.5 $1,855.9 $1,867.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts.............. $1,069.4 $1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life
Contingencies................................. 16.6 16.6 15.3 15.3
-------- -------- -------- --------
$1,086.0 $1,051.2 $ 891.3 $ 865.9
======== ======== ======== ========
</TABLE>
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $(205.1) $(175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
------- -------
Deferred tax liability, net................................. $ 78.8 $ 75.9
======= =======
</TABLE>
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
====== ====== ======
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
====== ====== ======
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (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...................................... $950.5 $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.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME 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 recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company believes
that no material adverse development of losses will occur. However, the amount
of the liabilities could be revised in the near term if the estimates are
revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, 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.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes include the transfer of FAFLIC's ownership of Allmerica Property &
Casualty Companies, Inc., as well as several non-insurance subsidiaries, from
FAFLIC to AFC. In addition, certain changes affected AFLIAC. SMAFCO transferred
its ownership in AFLIAC to FAFLIC. Hence, AFLIAC became a wholly owned
subsidiary of FAFLIC. Further, four non-insurance subsidiaries previously held
by SMAFCO were contributed to AFLIAC. Under an agreement with the Commonwealth
of Massachusetts Insurance Commissioner ("the Commissioner"), AFC has
contributed to FAFLIC capital of $125.0 million and agreed to maintain FAFLIC's
statutory surplus at specified levels during the following six years. In
addition, any dividend from FAFLIC to AFC during 2000 and 2001 would require the
prior approval of the Commissioner. This transaction was approved by the
Commissioner on May 24, 1999.
In 1998, the net income of the subsidiaries, which was reported in SMAFCO's
results of operations, to be transferred to AFLIAC from SMAFCO pursuant to the
aforementioned change in corporate structure was $18.8 million. As of
December 31, 1998, the total assets and total shareholders' equity of these
subsidiaries were $16.8 million and $9.2 million, respectively.
On May 19, 1999, the Federal District Court in Worcester, Massachusetts issued
an order relating to the litigation mentioned in Note 12, above, certifying the
class for settlement purposes and granting final approval of the settlement
agreement.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Contractowners of Separate Account KG 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 changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account KG of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1998, the results of each of their operations
and the changes in each of their net assets for each of the periods indicated,
in conformity with 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 securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP CONTRARIAN*
VALUE GROWTH VALUE INTERNATIONAL
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Investors Fund Series........ $ 53,064,960 $ 53,460,040 $ 141,055,428 $55,906,982
Investments in shares of
Scudder Variable Life
Investment Fund (VLIF)....... -- -- -- --
Dividend receivable........... -- -- -- --
Receivable from Allmerica
Financial Life Insurance and
Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ------------- -------------
Total assets................ 53,064,960 53,460,040 141,055,428 55,906,982
LIABILITIES:
Payable to Allmerica Financial
Life Insurance and Annuity
Company (Sponsor)............ -- -- -- --
------------ ------------ ------------- -------------
Net assets.................. $ 53,064,960 $ 53,460,040 $ 141,055,428 $55,906,982
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 13,627,393 $ 12,563,154 $ 31,977,999 $14,212,237
Non-qualified variable
annuity contracts......... 39,437,567 40,896,886 109,077,429 41,694,745
------------ ------------ ------------- -------------
$ 53,064,960 $ 53,460,040 $ 141,055,428 $55,906,982
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Qualified units outstanding,
December 31, 1998............ 12,688,188 8,223,461 20,414,312 11,904,811
Net asset value per qualified
unit, December 31, 1998...... $ 1.074022 $ 1.527721 $ 1.566450 $ 1.193823
Non-qualified units
outstanding, December 31,
1998......................... 36,719,515 26,769,866 69,633,521 34,925,399
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.074022 $ 1.527721 $ 1.566450 $ 1.193823
<CAPTION>
TOTAL
GROWTH VALUE+GROWTH HORIZON 20+ RETURN
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Investors Fund Series........ $ 76,542,185 $93,372,379 $25,753,983 $ 112,673,905
Investments in shares of
Scudder Variable Life
Investment Fund (VLIF)....... -- -- -- --
Dividend receivable........... -- -- -- --
Receivable from Allmerica
Financial Life Insurance and
Annuity Company (Sponsor).... -- 6,081 -- --
------------ ------------ ------------ -------------
Total assets................ 76,542,185 93,378,460 25,753,983 112,673,905
LIABILITIES:
Payable to Allmerica Financial
Life Insurance and Annuity
Company (Sponsor)............ -- -- -- --
------------ ------------ ------------ -------------
Net assets.................. $ 76,542,185 $93,378,460 $25,753,983 $ 112,673,905
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 16,257,733 $22,374,616 $ 8,897,229 $ 22,280,492
Non-qualified variable
annuity contracts......... 60,284,452 71,003,844 16,856,754 90,393,413
------------ ------------ ------------ -------------
$ 76,542,185 $93,378,460 $25,753,983 $ 112,673,905
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Qualified units outstanding,
December 31, 1998............ 12,023,759 15,558,283 6,749,626 16,860,499
Net asset value per qualified
unit, December 31, 1998...... $ 1.352134 $ 1.438116 $ 1.318181 $ 1.321461
Non-qualified units
outstanding, December 31,
1998......................... 44,584,674 49,372,822 12,787,890 68,404,148
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.352134 $ 1.438116 $ 1.318181 $ 1.321461
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
HIGH INVESTMENT
HORIZON 10+ HORIZON 5 YIELD GRADE BOND
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $36,169,887 $ 23,310,445 $ 149,008,407 $33,284,565
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- 679 -- 21,813
------------ ------------ ------------- ------------
Total assets.............................. 36,169,887 23,311,124 149,008,407 33,306,378
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... 787 -- -- --
------------ ------------ ------------- ------------
Net assets................................ $36,169,100 $ 23,311,124 $ 149,008,407 $33,306,378
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 9,962,045 $ 3,924,320 $ 30,558,415 $ 6,908,540
Non-qualified variable annuity
contracts............................... 26,207,055 19,386,804 118,449,992 26,397,838
------------ ------------ ------------- ------------
$36,169,100 $ 23,311,124 $ 149,008,407 $33,306,378
------------ ------------ ------------- ------------
------------ ------------ ------------- ------------
Qualified units outstanding, December 31,
1998....................................... 7,863,740 3,255,036 27,197,365 6,017,321
Net asset value per qualified unit, December
31, 1998................................... $ 1.266833 $ 1.205615 $ 1.123580 $ 1.148109
Non-qualified units outstanding, December
31, 1998................................... 20,687,064 16,080,427 105,421,947 22,992,449
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.266833 $ 1.205615 $ 1.123580 $ 1.148109
<CAPTION>
GOVERNMENT GLOBAL BLUE
SECURITIES MONEY MARKET INCOME CHIP
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $32,656,623 $ 30,929,817 $ 3,078,846 $ 61,197,712
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- 59,904 -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ----------- ------------
Total assets.............................. 32,656,623 30,989,721 3,078,846 61,197,712
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ----------- ------------
Net assets................................ $32,656,623 $ 30,989,721 $ 3,078,846 $ 61,197,712
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 5,247,516 $ 6,293,691 $ 746,283 $ 14,457,112
Non-qualified variable annuity
contracts............................... 27,409,107 24,696,030 2,332,563 46,740,600
------------ ------------ ----------- ------------
$32,656,623 $ 30,989,721 $ 3,078,846 $ 61,197,712
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Qualified units outstanding, December 31,
1998....................................... 4,659,460 5,827,098 669,091 11,651,181
Net asset value per qualified unit, December
31, 1998................................... $ 1.126207 $ 1.080073 $ 1.115369 $ 1.240828
Non-qualified units outstanding, December
31, 1998................................... 24,337,539 22,865,149 2,091,292 37,668,880
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.126207 $ 1.080073 $ 1.115369 $ 1.240828
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DREMAN DREMAN INTERNATIONAL
FINANCIAL HIGH RETURN GROWTH AND GLOBAL
SERVICES EQUITY INCOME BLUE CHIP
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ 12,099,070 $46,632,882 $2,003,953 $ 2,355,309
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ------------- -----------
Total assets.............................. 12,099,070 46,632,882 2,003,953 2,355,309
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------ ------------ ------------- -----------
Net assets................................ $ 12,099,070 $46,632,882 $2,003,953 $ 2,355,309
------------ ------------ ------------- -----------
------------ ------------ ------------- -----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 2,921,696 $10,846,977 $ 643,777 $ 679,720
Non-qualified variable annuity
contracts............................... 9,177,374 35,785,905 1,360,176 1,675,589
------------ ------------ ------------- -----------
$ 12,099,070 $46,632,882 $2,003,953 $ 2,355,309
------------ ------------ ------------- -----------
------------ ------------ ------------- -----------
Qualified units outstanding, December 31,
1998....................................... 3,015,387 10,643,547 712,659 687,509
Net asset value per qualified unit, December
31, 1998................................... $ 0.968929 $ 1.019113 $ 0.903345 $ 0.988670
Non-qualified units outstanding, December
31, 1998................................... 9,471,668 35,114,757 1,505,710 1,694,791
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 0.968929 $ 1.019113 $ 0.903345 $ 0.988670
<CAPTION>
VLIF VLIF GLOBAL VLIF VLIF GROWTH
INTERNATIONAL DISCOVERY CAPITAL GROWTH AND INCOME
------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ -- $ -- $ -- $ --
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ 4,525,749 2,645,801 4,652,641 10,718,783
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------- ----------- -------------- ------------
Total assets.............................. 4,525,749 2,645,801 4,652,641 10,718,783
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------- ----------- -------------- ------------
Net assets................................ $4,525,749 $2,645,801 $4,652,641 $10,718,783
------------- ----------- -------------- ------------
------------- ----------- -------------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 723,046 $ 637,521 $1,322,096 $ 1,923,427
Non-qualified variable annuity
contracts............................... 3,802,703 2,008,280 3,330,545 8,795,356
------------- ----------- -------------- ------------
$4,525,749 $2,645,801 $4,652,641 $10,718,783
------------- ----------- -------------- ------------
------------- ----------- -------------- ------------
Qualified units outstanding, December 31,
1998....................................... 733,667 667,373 1,249,028 2,049,956
Net asset value per qualified unit, December
31, 1998................................... $ 0.985523 $ 0.955270 $ 1.058500 $ 0.938277
Non-qualified units outstanding, December
31, 1998................................... 3,858,564 2,102,316 3,146,476 9,373,944
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 0.985523 $ 0.955270 $ 1.058500 $ 0.938277
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP VALUE SMALL CAP GROWTH
--------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ 47,080 $ -- $ 16,845
Mortality and expense risk fees............ (584,005) (178,545) (436,697) (100,403)
Administrative expense fees................ (70,081) (21,426) (52,404) (12,048)
------------ ------------ ------------ ------------
Net investment income (loss)............. (654,086) (152,891) (489,101) (95,606)
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 1,115,662 -- 4,942,858 320,050
Net realized gain (loss) from sales of
investments.............................. (239,399) 18,177 (150,444) 15,233
------------ ------------ ------------ ------------
Net realized gain (loss)................... 876,263 18,177 4,792,414 335,283
Net unrealized gain (loss)................. (7,341,076) 1,759,941 2,357,658 2,010,568
------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. (6,464,813) 1,778,118 7,150,072 2,345,851
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... (7,118,899) 1,625,227 6,660,971 2,250,245
------------ ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 23,789,375 26,418,229 21,614,441 14,614,458
Withdrawals................................ (2,072,501) (581,435) (1,263,376) (229,859)
Contract benefits.......................... (671,460) (94,481) (628,139) (76,198)
Contract charges........................... (11,668) (269) (7,215) (114)
Transfers between sub-accounts (including
fixed account), net...................... (1,003,036) 8,009,844 2,245,841 4,234,262
Other transfers from (to) the General
Account.................................. 3,833,373 621,937 3,453,623 383,902
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 23,864,083 34,373,825 25,415,175 18,926,451
------------ ------------ ------------ ------------
Net increase (decrease) in net assets...... 16,745,184 35,999,052 32,076,146 21,176,696
NET ASSETS:
Beginning of year.......................... 36,319,776 320,724 21,383,894 207,198
------------ ------------ ------------ ------------
End of year................................ $ 53,064,960 $ 36,319,776 $ 53,460,040 $ 21,383,894
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
CONTRARIAN VALUE* INTERNATIONAL
---------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 633,471 $ 74,722 $ 489,867 $ 88,112
Mortality and expense risk fees............ (1,382,818) (351,384) (584,917) (200,312)
Administrative expense fees................ (165,938) (42,166) (70,191) (24,038)
------------- ------------ ------------ ------------
Net investment income (loss)............. (915,285) (318,828) (165,241) (136,238)
------------- ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 2,533,883 -- 1,469,600 308,389
Net realized gain (loss) from sales of
investments.............................. 525,805 12,074 (59,061) (283)
------------- ------------ ------------ ------------
Net realized gain (loss)................... 3,059,688 12,074 1,410,539 308,106
Net unrealized gain (loss)................. 14,662,017 6,408,577 1,259,087 (393,562)
------------- ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 17,721,705 6,420,651 2,669,626 (85,456)
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 16,806,420 6,101,823 2,504,385 (221,694)
------------- ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 55,490,687 51,755,894 19,119,834 27,242,757
Withdrawals................................ (4,934,497) (1,012,429) (1,671,001) (479,373)
Contract benefits.......................... (1,296,893) (267,497) (719,636) (173,076)
Contract charges........................... (27,258) (271) (10,634) (98)
Transfers between sub-accounts (including
fixed account), net...................... (3,451,681) 12,760,040 (606,885) 6,577,637
Other transfers from (to) the General
Account.................................. 7,034,801 1,768,326 3,412,651 565,568
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------- ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 52,815,159 65,004,063 19,524,329 33,733,415
------------- ------------ ------------ ------------
Net increase (decrease) in net assets...... 69,621,579 71,105,886 22,028,714 33,511,721
NET ASSETS:
Beginning of year.......................... 71,433,849 327,963 33,878,268 366,547
------------- ------------ ------------ ------------
End of year................................ $ 141,055,428 $ 71,433,849 $ 55,906,982 $ 33,878,268
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GROWTH VALUE+GROWTH
--------------------------- ---------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 127,622 $ 34,351 $ -- $ 40,431
Mortality and expense risk fees............ (636,986) (160,465) (816,513) (177,197)
Administrative expense fees................ (76,438) (19,256) (97,982) (21,263)
------------ ------------ ------------ ------------
Net investment income (loss)............. (585,802) (145,370) (914,495) (158,029)
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 6,381,102 1,391,185 1,465,937 --
Net realized gain (loss) from sales of
investments.............................. (353,788) 6,716 (86,036) 16,087
------------ ------------ ------------ ------------
Net realized gain (loss)................... 6,027,314 1,397,901 1,379,901 16,087
Net unrealized gain (loss)................. 419,230 734,032 10,264,094 1,966,784
------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 6,446,544 2,131,933 11,643,995 1,982,871
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 5,860,742 1,986,563 10,729,500 1,824,842
------------ ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 39,283,179 21,528,673 43,919,177 28,556,776
Withdrawals................................ (2,255,077) (466,604) (3,154,277) (566,546)
Contract benefits.......................... (996,123) (186,633) (1,199,454) (20,598)
Contract charges........................... (10,479) (137) (13,304) (120)
Transfers between sub-accounts (including
fixed account), net...................... 1,000,885 5,341,184 (738,468) 6,527,316
Other transfers from (to) the General
Account.................................. 4,848,132 239,467 6,283,341 1,037,491
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 41,870,517 26,455,950 45,097,015 35,534,319
------------ ------------ ------------ ------------
Net increase (decrease) in net assets...... 47,731,259 28,442,513 55,826,515 37,359,161
NET ASSETS:
Beginning of year.......................... 28,810,926 368,413 37,551,945 192,784
------------ ------------ ------------ ------------
End of year................................ $ 76,542,185 $ 28,810,926 $ 93,378,460 $ 37,551,945
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
<CAPTION>
HORIZON 20+ TOTAL RETURN
-------------------------- ----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 96,845 $ 16,264 $ 1,753,779 $ 155,748
Mortality and expense risk fees............ (215,242) (44,550) (893,166) (174,956)
Administrative expense fees................ (25,829) (5,346) (107,180) (20,994)
------------ ----------- ------------- ------------
Net investment income (loss)............. (144,226) (33,632) 753,433 (40,202)
------------ ----------- ------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 387,382 -- 7,794,571 640,299
Net realized gain (loss) from sales of
investments.............................. 922 19,104 (182,322) (1,220)
------------ ----------- ------------- ------------
Net realized gain (loss)................... 388,304 19,104 7,612,249 639,079
Net unrealized gain (loss)................. 1,280,559 534,900 1,095,523 1,196,085
------------ ----------- ------------- ------------
Net realized and unrealized gain
(loss)................................. 1,668,863 554,004 8,707,772 1,835,164
------------ ----------- ------------- ------------
Net increase (decrease) in net assets from
operations............................... 1,524,637 520,372 9,461,205 1,794,962
------------ ----------- ------------- ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 13,742,259 6,639,510 60,531,473 27,606,532
Withdrawals................................ (902,539) (104,209) (4,287,789) (499,571)
Contract benefits.......................... (93,965) -- (980,496) (160,213)
Contract charges........................... (3,959) (35) (12,887) (148)
Transfers between sub-accounts (including
fixed account), net...................... 536,069 1,684,354 439,225 6,332,604
Other transfers from (to) the General
Account.................................. 1,765,444 220,744 11,115,973 985,554
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ----------- ------------- ------------
Net increase (decrease) in net assets from
contract transactions.................... 15,043,309 8,440,364 66,805,499 34,264,758
------------ ----------- ------------- ------------
Net increase (decrease) in net assets...... 16,567,946 8,960,736 76,266,704 36,059,720
NET ASSETS:
Beginning of year.......................... 9,186,037 225,301 36,407,201 347,481
------------ ----------- ------------- ------------
End of year................................ $ 25,753,983 $ 9,186,037 $ 112,673,905 $ 36,407,201
------------ ----------- ------------- ------------
------------ ----------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
HORIZON 10+ HORIZON 5
--------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 127,937 $ 14,964 $ 101,425 $ 14,508
Mortality and expense risk fees............ (278,180) (58,622) (192,457) (42,009)
Administrative expense fees................ (33,382) (7,035) (23,095) (5,042)
------------ ------------ ------------ -----------
Net investment income (loss)............. (183,625) (50,693) (114,127) (32,543)
------------ ------------ ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 383,811 -- 304,275 --
Net realized gain (loss) from sales of
investments.............................. 48,043 12,017 26,745 6,148
------------ ------------ ------------ -----------
Net realized gain (loss)................... 431,854 12,017 331,020 6,148
Net unrealized gain (loss)................. 1,933,426 517,554 1,051,773 371,802
------------ ------------ ------------ -----------
Net realized and unrealized gain
(loss)................................. 2,365,280 529,571 1,382,793 377,950
------------ ------------ ------------ -----------
Net increase (decrease) in net assets from
operations............................... 2,181,655 478,878 1,268,666 345,407
------------ ------------ ------------ -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 17,322,094 8,487,755 10,016,522 6,722,321
Withdrawals................................ (1,228,986) (109,586) (710,798) (170,981)
Contract benefits.......................... (206,618) -- (349,599) (3,258)
Contract charges........................... (4,988) (19) (2,463) (11)
Transfers between sub-accounts (including
fixed account), net...................... 1,445,601 2,466,477 346,870 1,383,613
Other transfers from (to) the General
Account.................................. 4,892,426 405,527 3,956,115 455,930
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ------------ ------------ -----------
Net increase (decrease) in net assets from
contract transactions.................... 22,219,529 11,250,154 13,256,647 8,387,614
------------ ------------ ------------ -----------
Net increase (decrease) in net assets...... 24,401,184 11,729,032 14,525,313 8,733,021
NET ASSETS:
Beginning of year.......................... 11,767,916 38,884 8,785,811 52,790
------------ ------------ ------------ -----------
End of year................................ $ 36,169,100 $ 11,767,916 $ 23,311,124 $ 8,785,811
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
<CAPTION>
HIGH YIELD INVESTMENT GRADE BOND
---------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 7,281,617 $ 1,692,326 $ 386,125 $ 13,330
Mortality and expense risk fees............ (1,496,936) (418,706) (241,099) (43,570)
Administrative expense fees................ (179,632) (50,245) (28,932) (5,229)
------------- ------------ ------------ -----------
Net investment income (loss)............. 5,605,049 1,223,375 116,094 (35,469)
------------- ------------ ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- 128,708 --
Net realized gain (loss) from sales of
investments.............................. (551,935) (1,819) 41,448 1,923
------------- ------------ ------------ -----------
Net realized gain (loss)................... (551,935) (1,819) 170,156 1,923
Net unrealized gain (loss)................. (6,177,713) 2,081,418 923,527 359,468
------------- ------------ ------------ -----------
Net realized and unrealized gain
(loss)................................. (6,729,648) 2,079,599 1,093,683 361,391
------------- ------------ ------------ -----------
Net increase (decrease) in net assets from
operations............................... (1,124,599) 3,302,974 1,209,777 325,922
------------- ------------ ------------ -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 81,022,156 58,758,080 17,451,387 7,165,204
Withdrawals................................ (6,547,920) (1,747,189) (1,109,622) (122,182)
Contract benefits.......................... (2,658,763) (651,247) (529,109) (110,978)
Contract charges........................... (21,805) (158) (2,702) --
Transfers between sub-accounts (including
fixed account), net...................... (6,373,866) 11,240,404 2,164,116 1,451,096
Other transfers from (to) the General
Account.................................. 11,790,153 1,059,350 5,217,887 173,549
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------- ------------ ------------ -----------
Net increase (decrease) in net assets from
contract transactions.................... 77,209,955 68,659,240 23,191,957 8,556,689
------------- ------------ ------------ -----------
Net increase (decrease) in net assets...... 76,085,356 71,962,214 24,401,734 8,882,611
NET ASSETS:
Beginning of year.......................... 72,923,051 960,837 8,904,644 22,033
------------- ------------ ------------ -----------
End of year................................ $ 149,008,407 $ 72,923,051 $ 33,306,378 $ 8,904,644
------------- ------------ ------------ -----------
------------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES MONEY MARKET
-------------------------- -----------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 894,572 $ 130,640 $ 1,115,115 $ 650,734
Mortality and expense risk fees............ (247,378) (47,309) (278,097) (157,220)
Administrative expense fees................ (29,685) (5,677) (33,372) (18,866)
------------ ----------- ------------- -------------
Net investment income (loss)............. 617,509 77,654 803,646 474,648
------------ ----------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 89,758 6,594 -- --
------------ ----------- ------------- -------------
Net realized gain (loss)................... 89,758 6,594 -- --
Net unrealized gain (loss)................. 337,987 229,723 -- --
------------ ----------- ------------- -------------
Net realized and unrealized gain
(loss)................................. 427,745 236,317 -- --
------------ ----------- ------------- -------------
Net increase (decrease) in net assets from
operations............................... 1,045,254 313,971 803,646 474,648
------------ ----------- ------------- -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 22,349,806 8,695,248 31,596,153 90,905,689
Withdrawals................................ (1,638,958) (341,177) (3,292,780) (1,106,116)
Contract benefits.......................... (270,581) (71,442) (782,679) (16,619)
Contract charges........................... (1,883) (1) (1,815) --
Transfers between sub-accounts (including
fixed account), net...................... (1,003,639) (910,194) (12,411,316) (74,943,353)
Other transfers from (to) the General
Account.................................. 3,837,960 157,749 (1,336,066) (811,096)
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- --
------------ ----------- ------------- -------------
Net increase (decrease) in net assets from
contract transactions.................... 23,272,705 7,530,183 13,771,497 14,028,505
------------ ----------- ------------- -------------
Net increase (decrease) in net assets...... 24,317,959 7,844,154 14,575,143 14,503,153
NET ASSETS:
Beginning of year.......................... 8,338,664 494,510 16,414,578 1,911,425
------------ ----------- ------------- -------------
End of year................................ $ 32,656,623 $ 8,338,664 $ 30,989,721 $ 16,414,578
------------ ----------- ------------- -------------
------------ ----------- ------------- -------------
<CAPTION>
GLOBAL INCOME BLUE CHIP
--------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 5/1/97** TO YEAR ENDED 5/1/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 38,436 $ -- $ 231,176 $ --
Mortality and expense risk fees............ (28,575) (4,683) (449,022) (42,643)
Administrative expense fees................ (3,429) (562) (53,883) (5,117)
----------- ------------- ------------ -------------
Net investment income (loss)............. 6,432 (5,245) (271,729) (47,760)
----------- ------------- ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 19,218 -- -- --
Net realized gain (loss) from sales of
investments.............................. 17,493 1,016 (4,634) 10,843
----------- ------------- ------------ -------------
Net realized gain (loss)................... 36,711 1,016 (4,634) 10,843
Net unrealized gain (loss)................. 178,063 15,990 4,727,366 361,450
----------- ------------- ------------ -------------
Net realized and unrealized gain
(loss)................................. 214,774 17,006 4,722,732 372,293
----------- ------------- ------------ -------------
Net increase (decrease) in net assets from
operations............................... 221,206 11,761 4,451,003 324,533
----------- ------------- ------------ -------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 1,466,759 1,077,346 37,192,832 12,085,430
Withdrawals................................ (66,544) (39,522) (1,560,813) (250,802)
Contract benefits.......................... (60,759) -- (617,207) (10,417)
Contract charges........................... (350) -- (4,649) (4)
Transfers between sub-accounts (including
fixed account), net...................... (11,453) 226,043 1,491,067 2,169,909
Other transfers from (to) the General
Account.................................. 187,742 66,617 5,679,785 247,047
Net increase (decrease) in investment by
Sponsor.................................. -- -- -- (2)
----------- ------------- ------------ -------------
Net increase (decrease) in net assets from
contract transactions.................... 1,515,395 1,330,484 42,181,015 14,241,161
----------- ------------- ------------ -------------
Net increase (decrease) in net assets...... 1,736,601 1,342,245 46,632,018 14,565,694
NET ASSETS:
Beginning of year.......................... 1,342,245 -- 14,565,694 --
----------- ------------- ------------ -------------
End of year................................ $3,078,846 $1,342,245 $61,197,712 $14,565,694
----------- ------------- ------------ -------------
----------- ------------- ------------ -------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DREMAN INTERNATIONAL
FINANCIAL DREMAN HIGH GROWTH AND GLOBAL
SERVICES RETURN EQUITY INCOME BLUE CHIP
----------------- ------------- -------------- ------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
5/4/98** TO 5/5/98** TO 5/19/98** TO 5/12/98** TO
12/31/98 12/31/98 12/31/98 12/31/98
----------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends............................. $ -- $ -- $ -- $ --
Mortality and expense risk fees....... (53,996) (172,312) (6,802) (7,976)
Administrative expense fees........... (6,480) (20,677) (816) (958)
----------------- ------------- -------------- ------------
Net investment income (loss)........ (60,476) (192,989) (7,618) (8,934)
----------------- ------------- -------------- ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors.................. -- -- -- --
Net realized gain (loss) from sales of
investments......................... (86,875) 9,307 (2,943) (144)
----------------- ------------- -------------- ------------
Net realized gain (loss).............. (86,875) 9,307 (2,943) (144)
Net unrealized gain (loss)............ 367,539 2,651,775 (10,261) 85,043
----------------- ------------- -------------- ------------
Net realized and unrealized gain
(loss)............................ 280,664 2,661,082 (13,204) 84,899
----------------- ------------- -------------- ------------
Net increase (decrease) in net assets
from operations..................... 220,188 2,468,093 (20,822) 75,965
----------------- ------------- -------------- ------------
CONTRACT TRANSACTIONS:
Net purchase payments................. 7,215,268 27,871,658 1,154,289 1,572,737
Withdrawals........................... (93,345) (477,636) (15,699) (21,153)
Contract benefits..................... (8,312) (41,586) -- (1,031)
Contract charges...................... (206) (571) (39) (14)
Transfers between sub-accounts
(including fixed account), net...... 2,845,468 8,922,472 407,263 246,914
Other transfers from (to) the General
Account............................. 1,920,009 7,890,452 478,961 481,891
Net increase (decrease) in investment
by Sponsor.......................... -- -- -- --
----------------- ------------- -------------- ------------
Net increase (decrease) in net assets
from contract transactions.......... 11,878,882 44,164,789 2,024,775 2,279,344
----------------- ------------- -------------- ------------
Net increase (decrease) in net
assets.............................. 12,099,070 46,632,882 2,003,953 2,355,309
NET ASSETS:
Beginning of year..................... -- -- -- --
----------------- ------------- -------------- ------------
End of year........................... $12,099,070 $46,632,882 $2,003,953 $2,355,309
----------------- ------------- -------------- ------------
----------------- ------------- -------------- ------------
<CAPTION>
VLIF
VLIF VLIF VLIF GROWTH AND
INTERNATIONAL GLOBAL DISCOVERY CAPITAL GROWTH INCOME
------------- ---------------- -------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
5/6/98** TO 5/6/98** TO 5/11/98** TO 5/1/98** TO
12/31/98 12/31/98 12/31/98 12/31/98
------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends............................. $ -- $ -- $ 8,092 $ 66,360
Mortality and expense risk fees....... (18,790) (8,664) (14,841) (40,433)
Administrative expense fees........... (2,255) (1,040) (1,781) (4,851)
------------- ---------------- -------------- ----------------
Net investment income (loss)........ (21,045) (9,704) (8,530) 21,076
------------- ---------------- -------------- ----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from
portfolio sponsors.................. -- -- -- --
Net realized gain (loss) from sales of
investments......................... (72,137) (329) 426 (152)
------------- ---------------- -------------- ----------------
Net realized gain (loss).............. (72,137) (329) 426 (152)
Net unrealized gain (loss)............ 65,557 200,714 480,191 272,443
------------- ---------------- -------------- ----------------
Net realized and unrealized gain
(loss)............................ (6,580) 200,385 480,617 272,291
------------- ---------------- -------------- ----------------
Net increase (decrease) in net assets
from operations..................... (27,625) 190,681 472,087 293,367
------------- ---------------- -------------- ----------------
CONTRACT TRANSACTIONS:
Net purchase payments................. 2,357,151 1,276,882 1,885,314 7,243,015
Withdrawals........................... (244,548) (14,325) (24,556) (123,326)
Contract benefits..................... -- -- -- (4,763)
Contract charges...................... (136) (62) (59) (240)
Transfers between sub-accounts
(including fixed account), net...... 1,581,433 532,771 1,265,981 665,676
Other transfers from (to) the General
Account............................. 859,474 659,854 1,053,874 2,645,054
Net increase (decrease) in investment
by Sponsor.......................... -- -- -- --
------------- ---------------- -------------- ----------------
Net increase (decrease) in net assets
from contract transactions.......... 4,553,374 2,455,120 4,180,554 10,425,416
------------- ---------------- -------------- ----------------
Net increase (decrease) in net
assets.............................. 4,525,749 2,645,801 4,652,641 10,718,783
NET ASSETS:
Beginning of year..................... -- -- -- --
------------- ---------------- -------------- ----------------
End of year........................... $4,525,749 $2,645,801 $4,652,641 $10,718,783
------------- ---------------- -------------- ----------------
------------- ---------------- -------------- ----------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
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 twenty-four Sub-Accounts under the variable annuity contracts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
Investors Fund Series (Kemper INFS) or Scudder Variable Life Investment Fund
(Scudder VLIF) managed by Scudder Kemper Investments, Inc. (Scudder Kemper).
Kemper INFS and Scudder VLIF (the Funds) are open-end, management investment
companies 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 (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.
Effective May 1, 1998, Kemper Value Portfolio was renamed Kemper Contrarian
Value Portfolio.
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 the Funds. 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 the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of 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
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 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......................... 49,805,676 $ 58,640,343 $ 1.065
Small Cap Growth........................ 27,105,842 49,089,360 1.972
Contrarian Value*....................... 80,276,491 119,986,134 1.757
International........................... 32,886,267 55,034,184 1.700
Growth.................................. 25,887,620 75,383,136 2.957
Value+Growth............................ 55,880,820 81,143,063 1.671
Horizon 20+............................. 17,091,272 23,937,607 1.507
Total Return............................ 41,203,066 110,381,032 2.735
Horizon 10+............................. 25,946,834 33,718,981 1.394
Horizon 5............................... 17,906,456 21,886,918 1.302
High Yield.............................. 121,403,646 153,097,448 1.227
Investment Grade Bond................... 28,578,292 32,001,508 1.165
Government Securities................... 27,030,272 32,089,787 1.208
Money Market............................ 30,929,817 30,929,817 1.000
Global Income........................... 2,775,936 2,884,793 1.109
Blue Chip............................... 48,582,723 56,108,896 1.260
Dreman Financial Services............... 12,372,502 11,731,531 0.978
Dreman High Return Equity............... 45,338,469 43,981,107 1.029
International Growth and Income......... 2,198,136 2,014,214 0.912
Global Blue Chip........................ 2,405,929 2,270,266 0.979
VLIF International...................... 310,834 4,460,192 14.560
VLIF Global Discovery................... 329,080 2,445,087 8.040
VLIF Capital Growth..................... 194,265 4,172,450 23.950
VLIF Growth and Income.................. 955,328 10,446,340 11.220
</TABLE>
* Name changed. See Note 1.
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 0.15% 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 is currently deducted on the contract anniversary and upon
full surrender of the contract when the accumulated value is less than $50,000
on contracts issued on Form A3025-96 (Kemper Gateway Elite) and when the
accumulated value is less than $75,000 for contracts issued on Form A3027-98
(Kemper
SA-10
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Gateway Advisor). The fee is currently waived for contracts issued to and
maintained by the trustee of a 401(k) plan.
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 by the Company to registered representatives of
Allmerica Investments and to certain independent broker-dealers. The current
series of contracts have a contingent deferred sales charge and no deduction is
made for sales charges at the time of the sale. For the years ended December 31,
1998 and 1997, the Company received $388,553 and $34,464, respectively, for
contingent deferred sales charges applicable to Separate Account KG.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Small Cap Value
Issuance of Units.......................... 30,508,718 $ 36,271,264 31,975,472 $ 36,833,168
Redemption of Units........................ (10,697,842) (12,407,181) (2,692,444) (2,459,343)
------------ ------------- ------------ -------------
Net increase (decrease).................. 19,810,876 $ 23,864,083 29,283,028 $ 34,373,825
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Small Cap Growth
Issuance of Units.......................... 25,270,847 $ 34,309,129 17,793,898 $ 20,525,939
Redemption of Units........................ (6,616,756) (8,893,954) (1,664,217) (1,599,488)
------------ ------------- ------------ -------------
Net increase (decrease).................. 18,654,091 $ 25,415,175 16,129,681 $ 18,926,451
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Contrarian Value*
Issuance of Units.......................... 53,828,717 $ 78,198,319 57,737,606 $ 68,909,586
Redemption of Units........................ (17,414,571) (25,383,160) (4,420,566) (3,905,523)
------------ ------------- ------------ -------------
Net increase (decrease).................. 36,414,146 $ 52,815,159 53,317,040 $ 65,004,063
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
International
Issuance of Units.......................... 25,663,270 $ 30,713,284 34,446,548 $ 37,444,700
Redemption of Units........................ (9,622,473) (11,188,955) (4,016,781) (3,711,285)
------------ ------------- ------------ -------------
Net increase (decrease).................. 16,040,797 $ 19,524,329 30,429,767 $ 33,733,415
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Growth
Issuance of Units.......................... 40,910,361 $ 52,587,397 26,615,425 $ 29,159,670
Redemption of Units........................ (8,488,197) (10,716,880) (2,799,269) (2,703,720)
------------ ------------- ------------ -------------
Net increase (decrease).................. 32,422,164 $ 41,870,517 23,816,156 $ 26,455,950
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Value+Growth
Issuance of Units.......................... 45,219,480 $ 59,935,502 33,482,451 $ 38,000,583
Redemption of Units........................ (11,234,167) (14,838,487) (2,733,249) (2,466,264)
------------ ------------- ------------ -------------
Net increase (decrease).................. 33,985,313 $ 45,097,015 30,749,202 $ 35,534,319
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
* Name changed. See Note 1.
SA-11
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Horizon 20+
Issuance of Units.......................... 13,603,712 $ 17,394,100 7,925,733 $ 8,720,181
Redemption of Units........................ (1,834,502) (2,350,791) (383,808) (279,817)
------------ ------------- ------------ -------------
Net increase (decrease).................. 11,769,210 $ 15,043,309 7,541,925 $ 8,440,364
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Total Return
Issuance of Units.......................... 66,620,582 $ 82,298,961 33,289,148 $ 36,351,700
Redemption of Units........................ (12,639,486) (15,493,462) (2,358,846) (2,086,942)
------------ ------------- ------------ -------------
Net increase (decrease).................. 53,981,096 $ 66,805,499 30,930,302 $ 34,264,758
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Horizon 10+
Issuance of Units.......................... 20,573,123 $ 25,005,402 10,824,499 $ 11,378,438
Redemption of Units........................ (2,221,057) (2,785,873) (664,570) (128,284)
------------ ------------- ------------ -------------
Net increase (decrease).................. 18,352,066 $ 22,219,529 10,159,929 $ 11,250,154
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Horizon 5
Issuance of Units.......................... 13,744,682 $ 15,912,248 8,218,267 $ 8,735,360
Redemption of Units........................ (2,296,765) (2,655,601) (383,398) (347,746)
------------ ------------- ------------ -------------
Net increase (decrease).................. 11,447,917 $ 13,256,647 7,834,869 $ 8,387,614
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
High Yield
Issuance of Units.......................... 108,622,190 $ 123,713,400 76,297,806 $ 81,860,370
Redemption of Units........................ (40,936,497) (46,503,445) (12,305,958) (13,201,130)
------------ ------------- ------------ -------------
Net increase (decrease).................. 67,685,693 $ 77,209,955 63,991,848 $ 68,659,240
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Investment Grade Bond
Issuance of Units.......................... 25,923,174 $ 28,946,187 8,795,744 $ 8,964,639
Redemption of Units........................ (5,168,841) (5,754,230) (562,272) (407,950)
------------ ------------- ------------ -------------
Net increase (decrease).................. 20,754,333 $ 23,191,957 8,233,472 $ 8,556,689
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Government Securities
Issuance of Units.......................... 36,939,375 $ 40,481,355 10,864,889 $ 10,997,891
Redemption of Units........................ (15,757,395) (17,208,650) (3,547,883) (3,467,708)
------------ ------------- ------------ -------------
Net increase (decrease).................. 21,181,980 $ 23,272,705 7,317,006 $ 7,530,183
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Money Market
Issuance of Units.......................... 72,056,560 $ 76,090,252 103,574,850 $ 99,792,728
Redemption of Units........................ (59,123,922) (62,318,755) (89,719,351) (85,764,223)
------------ ------------- ------------ -------------
Net increase (decrease).................. 12,932,638 $ 13,771,497 13,855,499 $ 14,028,505
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Global Income
Issuance of Units.......................... 2,184,199 $ 2,290,081 1,502,424 $ 1,418,266
Redemption of Units........................ (740,944) (774,686) (185,296) (87,782)
------------ ------------- ------------ -------------
Net increase (decrease).................. 1,443,255 $ 1,515,395 1,317,128 $ 1,330,484
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Blue Chip
Issuance of Units.......................... 41,977,198 $ 48,966,392 14,107,528 $ 14,719,710
Redemption of Units........................ (5,836,077) (6,785,377) (928,588) (478,549)
------------ ------------- ------------ -------------
Net increase (decrease).................. 36,141,121 $ 42,181,015 13,178,940 $ 14,241,161
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Dreman Financial Services
Issuance of Units.......................... 14,384,298 $ 13,534,406 -- $ --
Redemption of Units........................ (1,897,243) (1,655,524) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 12,487,055 $ 11,878,882 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Dreman High Return Equity
Issuance of Units.......................... 50,434,830 $ 48,454,494 -- $ --
Redemption of Units........................ (4,676,526) (4,289,705) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 45,758,304 $ 44,164,789 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
International Growth and Income
Issuance of Units.......................... 2,372,606 $ 2,157,411 -- $ --
Redemption of Units........................ (154,237) (132,636) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 2,218,369 $ 2,024,775 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Global Blue Chip
Issuance of Units.......................... 2,508,836 $ 2,383,694 -- $ --
Redemption of Units........................ (126,536) (104,350) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 2,382,300 $ 2,279,344 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF International
Issuance of Units.......................... 6,075,894 $ 5,956,552 -- $ --
Redemption of Units........................ (1,483,663) (1,403,178) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,592,231 $ 4,553,374 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Global Discovery
Issuance of Units.......................... 2,893,238 $ 2,546,075 -- $ --
Redemption of Units........................ (123,549) (90,955) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 2,769,689 $ 2,455,120 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Capital Growth
Issuance of Units.......................... 4,473,686 $ 4,253,512 -- $ --
Redemption of Units........................ (78,182) (72,958) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,395,504 $ 4,180,554 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Growth and Income
Issuance of Units.......................... 13,104,373 $ 11,926,667 -- $ --
Redemption of Units........................ (1,680,473) (1,501,251) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 11,423,900 $ 10,425,416 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
SA-13
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
the Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account 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 shares of the Funds by Separate
Account KG during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ -----------
<S> <C> <C>
Small Cap Value........................................ $ 27,977,260 $ 3,651,601
Small Cap Growth....................................... 32,353,425 2,484,493
Contrarian Value*...................................... 60,420,808 5,987,051
International.......................................... 24,230,838 3,402,150
Growth................................................. 49,880,761 2,214,944
Value+Growth........................................... 48,311,485 2,669,109
Horizon 20+............................................ 16,231,167 944,702
Total Return........................................... 78,545,770 3,192,267
Horizon 10+............................................ 23,121,759 701,257
Horizon 5.............................................. 14,371,454 925,338
High Yield............................................. 102,644,951 19,829,947
Investment Grade Bond.................................. 24,882,542 1,467,596
Government Securities.................................. 31,376,639 7,486,425
Money Market........................................... 49,184,818 34,631,835
Global Income.......................................... 2,107,370 566,325
Blue Chip.............................................. 42,553,190 643,904
Dreman Financial Services.............................. 12,529,576 711,170
Dreman High Return Equity.............................. 44,354,526 382,726
International Growth and Income........................ 2,042,671 25,514
Global Blue Chip....................................... 2,335,322 64,912
VLIF International..................................... 5,807,390 1,275,061
VLIF Global Discovery.................................. 2,448,168 2,752
VLIF Capital Growth.................................... 4,178,521 6,497
VLIF Growth and Income................................. 10,885,814 439,322
------------ -----------
Totals............................................... $712,776,225 $93,706,898
------------ -----------
------------ -----------
</TABLE>
* Name changed. See Note 1.
SA-14
<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 (Registration Statement No. 811-7767)
in Post-Effective Amendment No. 3, and is
incorporated by reference herein.
(c) Revised commission schedule was previously
filed on December 8, 1998 in Pre-Effective
Amendment No. 1, and is incorporated by
reference herein. Sales Agreements with
Commission Schedule were previously filed on
April 30, 1998 (Registration Statement No.
811-7767) in Post-Effective Amendment No. 3,
and are incorporated by reference herein.
(d) Sales Agreement with Chase was previously
filed on April 30, 1998 (Registration
Statement No. 811-7767) in Post-Effective
Amendment No. 3, and is incorporated by
reference herein.
(e) General Agent's Agreement was previously
filed on April 30, 1998 (Registration
Statement No. 811-7767) in Post-Effective
Amendment No. 3, and is incorporated by
reference herein.
(f) Career Agent Agreement was previously filed
on April 30, 1998 (Registration Statement
No. 811-7767) in Post-Effective Amendment
No. 3, and is incorporated by reference
herein.
(g) Registered Representative's Agreement was
previously filed on April 30, 1998
(Registration Statement No. 811-7767) in
Post-Effective Amendment No. 3, and is
incorporated by reference herein.
<PAGE>
(h) Form of Indemnification Agreement with
Scudder Kemper was previously filed on
April 30, 1998 (Registration Statement No.
811-7767) in Post-Effective Amendment No. 3,
and is incorporated by reference herein.
EXHIBIT 4 Minimum Guaranteed Annuity Payout Rider was
previously filed on December 29, 1998 in
Post-Effective Amendment No. 1, and is incorporated
by reference herein. Contract Form 3027-98 was
previously filed on December 8, 1998 in Registrant's
Pre-Effective Amendment No. 1, and is incorporated by
reference herein.
EXHIBIT 5 Application Form SML1446K was previously filed on
December 8, 1998 in Pre-Effective Amendment No. 1,
and is incorporated by reference herein.
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 (Registration Statement No. 811-7767) in
Post-Effective Amendment No. 3, and are
incorporated by reference herein.
(b) Form of Scudder Services Agreement was
previously filed on April 30, 1998
(Registration Statement No. 811-7767) in
Post-Effective Amendment No. 3, and is
incorporated by reference herein.
(c) Director's Power of Attorney is filed
herewith.
(d) Service Fee Agreement with Dreyfus was
previously filed on June 23, 1999 in
Post-Effective Amendment No. 3 and is
incorporated by reference herein.
(e) Service Fee Agreement with Janus was
previously filed on June 23, 1999 in
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
(Registration Statement No. 811-7767) in
Post-Effective Amendment No. 3, and is
incorporated by reference herein.
<PAGE>
(c) Participation Agreement with Dreyfus was
previously filed on June 23, 1999 in
Post-Effective Amendment No. 3 and is
incorporated by reference herein.
(d) Participation Agreement with Janus was
previously filed on June 23, 1999 in
Post-Effective Amendment No. 3 and is
incorporated by reference herein.
(e) Draft Participation Agreement with Alger
is filed herewith.
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 WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant
Director Secretary (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998)
Vice President and of First Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since 1997) and Vice
Director and Chief Information President (since 1995) of First Allmerica; and Corporate Manager
Officer (1979 to 1995) of Digital Equipment Corporation
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary (since 1999)
Secretary of Allmerica Investments, Inc.; and Secretary (since 1999) of
Allmerica Financial Investment Management Services, Inc.
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice
Director, Vice President and President (since 1991) of First Allmerica; and Vice President
Chief Investment Officer (since 1998) of Allmerica Financial Investment Management Services,
Inc.
John F. Kelly Director (since 1996), Senior Vice President (since 1986), General
Director, Vice President and Counsel (since 1981) and Assistant Secretary (since 1991) of First
General Counsel Allmerica; Director (since 1985) of Allmerica Investments, Inc.; and
Director (since 1990) of Allmerica Financial Investment Management
Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and President
Director (since 1996) of The Hanover Insurance Company; and Vice President
(1993 to 1996) of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director (since 1992),
Director President (since 1994) and Chief Executive Officer (since 1996)
of Citizens Insurance Company of America
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of
Director and Chairman First Allmerica; Director (since 1989) of Allmerica Investments,
of the Board Inc.; and Director and Chairman of the Board (since 1990) of
Allmerica Financial Investment Management Services, Inc.
<PAGE>
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and Vice
Director, Vice President President and Treasurer (since 1993) of First Allmerica; Treasurer
Chief Financial Officer (since 1993) of Allmerica Investments, Inc.; and Treasurer (since
and Treasurer 1993) of Allmerica Financial Investment Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director, President and Allmerica; Director (since 1990) of Allmerica Investments, Inc.;
Chief Executive Officer and Director and President (since 1998) of Allmerica Financial
Investment Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica; Chief
Director Executive Officer (1996 to 1998) of Travelers Property & Casualty;
Senior Vice President (1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; Director (since 1991) of Allmerica Investments, Inc.;
and Director (since 1991) of Allmerica Financial Investment
Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since 1987) of First
Director Allmerica
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | | |
________________________________________________________________________________________________________________________________
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Financial Allmerica, Allmerica First Allmerica AFC Capital Allmerica First Sterling
Asset Profiles, Inc. Inc. Funding Financial Life Trust I Services Limited
Management, Inc. Corp. Insurance Corporation
Company
Massachusetts California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| | |
| ___________________________________________________________ ________________
| | | | |
| 100% 99.2% 100% 100%
| Advantage Allmerica Allmerica First Sterling
| Insurance Trust Financial Life Reinsurance
| Network, Inc. Company, N.A. Insurance and Company
| Annuity Company Limited
|
| Delaware Federally Chartered Delaware Bermuda
| |
| ________________________________________________________________
| | | | |
| 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial
| Inc. Management Investment Services
| Company, Inc. Management Insurance
| Services, Inc. Agency, Inc.
|
| Massachusetts Massachusetts Massachusetts Massachusetts
|
________________________________________________________________
| | | |
100% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica
Property Management Benefits, Inc. Asset
& Casualty Services, Inc. Management,
Companies, Inc. Limited
Delaware Delaware Florida Bermuda
|
________________________________________________
| | |
100% 100% 100%
The Hanover Allmerica Citizens
Insurance Financial Insurance
Company Insurance Company
Brokers, Inc. of Illinois
New Hampshire Massachusetts Illinois
|
________________________________________________________________________________________________________________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts Allmerica AMGRO
Financial Plus American Insurance Corporation Bay Insurance Financial Inc.
Benefit Insurance Insurance Management Company Alliance
Insurance Agency, Inc. Company Company, Inc. Insurance
Company Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire New Hampshire Massachusetts
| |
________________________________________________ ________________
| | | |
100% 100% 100% 100%
Citizens Citizens Citizens Lloyds Credit
Insurance Insurance Insurance Corporation
Company Company Company
of Ohio of America of the
Midwest
Ohio Michigan Indiana Massachusetts
|
_________________
|
100%
Citizens
Management
Inc.
Michigan
_______________ ---------------- ----------------
Allmerica Greendale AAM
Equity Special Equity Fund
Index Pool Placements
Fund
Massachusetts Massachusetts Massachusetts
- -------- Grantor Trusts established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
--------------- ----------------
Allmerica Allmerica
Investment Trust Securities
Trust
Massachusetts Massachusetts
- -------- Affiliated Management Investment Companies
...............
Hanover Lloyd's
Insurance
Company
Texas
- -------- Affiliated Lloyd's plan company, controlled by Underwriters
for the benefit of The Hanover Insurance Company
_______________ ________________
AAM Growth AAM High Yield
& Income Fund, L.L.C.
Fund L.P.
Delaware Massachusetts
________ L.P. or L.L.C. established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
</TABLE>
<PAGE>
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
Advantage Insurance Network Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
<PAGE>
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident and health
and Annuity Company (formerly known Worcester MA 01653 insurance, annuities, variable
as SMA Life Assurance Company annuities and variable life insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle for
Worcester MA 01653 commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. (formerly Worcester MA 01653
known as Allmerica Institutional Services,
Inc. and 440 Financial Group of
Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica 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
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
<PAGE>
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the 3950 Priority Way Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity, accident
Company (formerly State Mutual Life Worcester MA 01653 and health insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover Lloyd's
Company, Inc. Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance Company Hanover Lloyd's Insurance Multi-line property and casualty
Company insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
<PAGE>
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of September 30, 1999, the Variable Account had 5,914 Qualified
Contract holders and 16,758 Non-Qualified Contract holders.
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:
- VEL Account, VEL II Account, VEL Account III, Select Account
III, Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C,
VA-G, VA-H, VA-K, VA-P, Allmerica Select Separate Account II,
Group VEL Account, Separate Account KG, Separate Account KGC,
Fulcrum Separate Account, Fulcrum Variable Life Separate
Account, and Allmerica Select Separate Account of Allmerica
Financial Life Insurance and Annuity Company
- Inheiritage Account, VEL II Account, Separate Account I,
Separate Account VA-K, Separate Account VA-P, Allmerica
Select Separate Account II, Group VEL Account, Separate
Account KG, Separate Account KGC, Fulcrum Separate Account,
and Allmerica Select Separate Account of First Allmerica
Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors
and Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
<TABLE>
<CAPTION>
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
<S> <C>
Emil J. Aberizk, Jr Vice President and Chief Compliance Officer
Edward T. Berger Vice President and Chief Compliance Officer
Mary Eldridge Secretary
<PAGE>
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
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>
(c) As indicated in Part B (Statement of Additional Information) in
response to Item 20(c), there were no commissions retained by Allmerica
Investments, Inc., the principal underwriter of the Contracts, for
sales of variable contracts funded by the Registrant in 1998. No
commissions or other compensation was received by the principal
underwriter, directly or indirectly, from the Registrant during the
Registrant's last fiscal year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section 31(a)
of the 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 and any financial statements promptly upon written or oral
request, according to the requirements of Form N-4.
<PAGE>
(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 ("Company"), states that it is (a) relying on Rule 6c-7 under the
1940Act 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 certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 1st day of
November, 1999.
SEPARATE ACCOUNT KG OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Mary Eldridge
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Warren E. Barnes Vice President and Corporate November 1, 1999
- ------------------------- Controller
Warren E. Barnes
Edward J. Parry III* Director, Vice President, Chief
- ------------------------- Financial Officer and Treasurer
Richard M. Reilly* Director, President and
- ------------------------- Chief Executive Officer
John F. O'Brien* Director and Chairman of the
- ------------------------- Board
Bruce C. Anderson* Director
- -------------------------
Robert E. Bruce* Director and Chief Information
- ------------------------- Officer
John P. Kavanaugh* Director, Vice President and
- ------------------------- Chief Investment Officer
John F. Kelly* Director, Vice President and
- ------------------------- General Counsel
J. Barry May* Director
- -------------------------
James R. McAuliffe* Director
- -------------------------
Robert P. Restrepo, Jr.* Director
- -------------------------
Eric A. Simonsen* Director and Vice President
- -------------------------
Director
- -------------------------
Phillip E. Soule
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated July 1, 1999 duly executed by
such persons.
/s/ Sheila B. St. Hilaire
- --------------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-63091)
<PAGE>
EXHIBIT TABLE
Exhibit 8(c) Director's Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(e) Draft Participation Agreement with Alger
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by Allmerica Financial Life Insurance and
Annuity Company, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and with any other regulatory agency or state authority that may so require,
granting unto said attorneys and each of them, acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys or any of them may lawfully do or cause to be done by virtue hereof.
Witness our hands on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director and Chairman of the Board 7/1/99
- -------------------------- ------
John F. O'Brien
/s/ Bruce C. Anderson Director 7/1/99
- -------------------------- ------
Bruce C. Anderson
/s/ Robert E. Bruce Director and Chief Information Officer 7/1/99
- -------------------------- ------
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 7/1/99
- -------------------------- Chief Investment Officer ------
John P. Kavanaugh
/s/ John F. Kelly Director, Vice President and 7/1/99
- -------------------------- General Counsel ------
John F. Kelly
/s/ J. Barry May Director 7/1/99
- -------------------------- ------
J. Barry May
/s/ James R. McAuliffe Director 7/1/99
- -------------------------- ------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief Financial 7/1/99
- -------------------------- Officer and Treasurer ------
Edward J. Parry, III
/s/ Richard M. Reilly Director, President and 7/1/99
- -------------------------- Chief Executive Officer ------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director 7/1/99
- -------------------------- ------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 7/1/99
- -------------------------- ------
Eric A. Simonsen
/s/ Phillip E. Soule Director 7/1/99
- -------------------------- ------
Phillip E. Soule
</TABLE>
<PAGE>
November 1, 1999
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
FILE NO.'S: 333-63091 AND 811-7767
Gentlemen:
In my capacity as Assistant Vice President and Counsel of Allmerica Financial
Life Insurance and Annuity Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
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 variable annuity contracts, when issued in accordance with the
Prospectus contained in the Post-Effective Amendment to the Registration
Statement and upon compliance with applicable local law, will be legal
and binding obligations of the Company in accordance with their terms and
when sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment to the Registration Statement for Separate Account KG
on Form N-4 filed under the Securities Act of 1933.
Very truly yours,
/s/ John C. Donlon, Jr.
John C. Donlon, Jr.
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 5 to the Registration
Statement of Separate Account KG of Allmerica Financial Life Insurance and
Annuity Company on Form N-4 of our report dated February 2, 1999, except for
paragraph 2 of Note 12, which is as of March 19, 1999, relating to the financial
statements of Allmerica Financial Life Insurance and Annuity Company, and our
report dated March 26, 1999, relating to the financial statements of Separate
Account KG 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
Boston, Massachusetts
November 15, 1999
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this _____ day of ______________ , 1999, by and
among The Alger American Fund (the "Trust"), an open-end management investment
company organized as a Massachusetts business trust, Allmerica Financial Life
Insurance and Annuity Company, a life insurance company organized as a
corporation under the laws of the State of Delaware, (the "Company"), on its own
behalf and on behalf of each segregated asset account of the Company set forth
in Schedule A, as may be amended from time to time (the "Accounts"), and Fred
Alger & Company, Incorporated, a Delaware corporation, the Trust's distributor
(the "Distributor").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Distributor desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, shares of beneficial interest in the Trust are divided into the
following series which are available for purchase by the Company for the
Accounts: Alger American Small Capitalization Portfolio, Alger American Growth
Portfolio, Alger American Income and Growth Portfolio, Alger American Balanced
Portfolio, Alger American MidCap Growth Portfolio, and Alger American Leveraged
AllCap Portfolio;
WHEREAS, the Trust has received an order from the Commission, dated
February 17, 1989 (File No. 812-7076), granting Participating Insurance
Companies and their separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the Trust to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated life
insurance companies (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and variable annuity contracts to be
issued by the Company under which the Portfolios are to be made available as
investment vehicles (the "Contracts");
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WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised;
WHEREAS, the Company desires to use shares of the Portfolios indicated on
Schedule A as investment vehicles for the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1. For purposes of this Article I, the Company shall be the Trust's agent
for the receipt from each account of purchase orders and requests for
redemption pursuant to the Contracts relating to each Portfolio, provided
that the Company notifies the Trust of such purchase orders and requests
for redemption by 9:30 a.m. Eastern time on the next following Business
Day, as defined in Section 1.3.
1.2. The Trust shall make shares of the Portfolios available to the Accounts
at the net asset value next computed after receipt of a purchase order by
the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust describing
Portfolio purchase procedures. The Company will transmit orders from time
to time to the Trust for the purchase and redemption of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the
offering of shares of any Portfolio if such action is required by law or
by regulatory authorities having jurisdiction or if, in the sole
discretion of the Trustees acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, such action
is deemed in the best interests of the shareholders of such Portfolio.
1.3. The Company shall pay for the purchase of shares of a Portfolio on behalf
of an Account with federal funds to be transmitted by wire to the Trust,
with the reasonable expectation of receipt by the Trust by 2:00 p.m.
Eastern time on the next Business Day after the Trust (or its agent)
receives the purchase order. Upon receipt by the Trust of the federal
funds so wired, such funds shall cease to be the responsibility of the
Company and shall become the responsibility of the Trust for this
purpose. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the Commission.
1.4. The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the
net asset value next computed
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after receipt by the Trust (or its agent) of the request for redemption,
as established in accordance with the provisions of the then current
prospectus of the Trust describing Portfolio redemption procedures. The
Trust shall make payment for such shares in the manner established from
time to time by the Trust. Proceeds of redemption with respect to a
Portfolio will normally be paid to the Company for an Account in federal
funds transmitted by wire to the Company by order of the Trust with the
reasonable expectation of receipt by the Company by 2:00 p.m. Eastern
time on the next Business Day after the receipt by the Trust (or its
agent) of the request for redemption. Such payment may be delayed if, for
example, the Portfolio's cash position so requires or if extraordinary
market conditions exist, but in no event shall payment be delayed for a
greater period than is permitted by the 1940 Act. The Trust reserves the
right to suspend the right of redemption, consistent with Section 22(e)
of the 1940 Act and any rules thereunder.
1.5. Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of
the Trust's Portfolios under Section 1.4 on any Business Day may be
netted against one another for the purpose of determining the amount of
any wire transfer.
1.6. Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Accounts. Portfolio Shares purchased from the Trust will be recorded in
the appropriate title for each Account or the appropriate subaccount of
each Account.
1.7. The Trust shall furnish, on or before the ex-dividend date, notice to the
Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to
receive all such income dividends and capital gain distributions as are
payable on a Portfolio's shares in additional shares of that Portfolio.
The Trust shall notify the Company of the number of shares so issued as
payment of such dividends and distributions.
1.8. The Trust shall calculate the net asset value of each Portfolio on each
Business Day, as defined in Section 1.3. The Trust shall make the net
asset value per share for each Portfolio available to the Company or its
designated agent on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best
efforts to make such net asset value per share available to the Company
by 6:30 p.m. Eastern time each Business Day.
1.9. The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their segregated asset accounts, to
the Fund Sponsor or its affiliates and to such other entities as may be
permitted by Section 817(h) of the Code, the regulations hereunder, or
judicial or administrative interpretations thereof. No shares of any
Portfolio will be sold directly to the general public. The Company agrees
that it will use Trust shares only for the purposes of funding the
Contracts through the Accounts listed in
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Schedule A, as amended from time to time.
1.10. The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding materially to those contained in
Section 2.9 and Article IV of this Agreement.
ARTICLE II.
OBLIGATIONS OF THE PARTIES
2.1. The Trust shall prepare and be responsible for filing with the Commission
and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional
information of the Trust. The Trust shall bear the costs of registration
and qualification of shares of the Portfolios, preparation and filing of
the documents listed in this Section 2.1 and all taxes to which an issuer
is subject on the issuance and transfer of its shares.
2.2. The Company shall distribute such prospectuses, proxy statements and
periodic reports of the Trust to the Contract owners as required to be
distributed to such Contract owners under applicable federal or state
law.
2.3. The Trust shall provide such documentation (including a final copy of the
Trust's prospectus as set in type or in camera-ready copy) and other
assistance as is reasonably necessary in order for the Company to print
together in one document the current prospectus for the Contracts issued
by the Company and the current prospectus for the Trust. The Trust shall
bear the expense of printing copies of its current prospectus that will
be distributed to existing Contract owners, and the Company shall bear
the expense of printing copies of the Trust's prospectus that are used in
connection with offering the Contracts issued by the Company.
2.4. The Trust and the Distributor shall provide (1) at the Trust's expense,
one copy of the Trust's current Statement of Additional Information
("SAI") to the Company and to any Contract owner who requests such SAI,
(2) at the Company's expense, such additional copies of the Trust's
current SAI as the Company shall reasonably request and that the Company
shall require in accordance with applicable law in connection with
offering the Contracts issued by the Company.
2.5. The Trust, at its expense, shall provide the Company with copies of its
proxy material, periodic reports to shareholders and other communications
to shareholders in such quantity as the Company shall reasonably require
for purposes of distributing to Contract owners.The Trust shall bear any
costs associated with the distribution of its proxy materials to existing
shareholders. The Trust, at the Company's expense, shall provide the
Company with copies of its periodic reports to shareholders and other
communications to
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shareholders in such quantity as the Company shall reasonably request for
use in connection with offering the Contracts issued by the Company. If
requested by the Company in lieu thereof, the Trust shall provide such
documentation (including a final copy of the Trust's proxy materials,
periodic reports to shareholders and other communications to
shareholders, as set in type or in camera-ready copy) and other
assistance as reasonably necessary in order for the Company to print such
shareholder communications for distribution to Contract owners.
2.6. The Company agrees and acknowledges that the Distributor is the sole
owner of the name and mark "Alger" and that all use of any designation
comprised in whole or part of such name or mark under this Agreement
shall inure to the benefit of the Distributor. Except as provided in
Section 2.5, the Company shall not use any such name or mark on its own
behalf or on behalf of the Accounts or Contracts in any registration
statement, advertisement, sales literature or other materials relating to
the Accounts or Contracts without the prior written consent of the
Distributor. Upon termination of this Agreement for any reason, the
Company shall cease all use of any such name or mark as soon as
reasonably practicable.
2.7. The Company shall furnish, or cause to be furnished, to the Trust or its
designee a copy of each Contract prospectus and/or statement of
additional information describing the Contracts, each report to Contract
owners, proxy statement, application for exemption or request for
no-action letter in which the Trust or the Distributor is named
contemporaneously with the filing of such document with the Commission.
The Company shall furnish, or shall cause to be furnished, to the Trust
or its designee each piece of sales literature or other promotional
material in which the Trust or the Distributor is named, at least five
Business Days prior to its use. No such material shall be used if the
Trust or its designee reasonably objects to such use within three
Business Days after receipt of such material.
2.8. The Company shall not give any information or make any representations or
statements on behalf of the Trust or concerning the Trust or the
Distributor in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from
the registration statement or prospectus for the Trust shares (as such
registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust,
Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the prior
written permission of the Trust, the Distributor or their respective
designees. The Trust and the Distributor agree to respond to any request
for approval on a prompt and timely basis. The Company shall adopt and
implement procedures reasonably designed to ensure that "broker only"
materials including information therein about the Trust or the
Distributor are not distributed to existing or prospective Contract
owners.
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2.9. The Trust shall use its best efforts to provide the Company, on a timely
basis, with such information about the Trust, the Portfolios and the
Distributor, in such form as the Company may reasonably require, as the
Company shall reasonably request in connection with the preparation of
registration statements, prospectuses and annual and semi-annual reports
pertaining to the Contracts.
2.10. The Trust and the Distributor shall not give, and agree that no affiliate
of either of them shall give, any information or make any representations
or statements on behalf of the Company or concerning the Company, the
Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Contracts (as such registration statement and
prospectus may be amended or supplemented from time to time), or in
materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal
process or regulatory authorities or with the prior written permission of
the Company. The Company agrees to respond to any request for approval on
a prompt and timely basis.
2.11. So long as, and to the extent that, the Commission interprets the 1940
Act to require pass-through voting privileges for Contract owners, the
Company will provide pass-through voting privileges to Contract owners
whose cash values are invested, through the registered Accounts, in
shares of one or more Portfolios of the Trust. The Trust shall require
all Participating Insurance Companies to calculate voting privileges in
the same manner and the Company shall be responsible for assuring that
the Accounts calculate voting privileges in the manner established by the
Trust. With respect to each registered Account, the Company will vote
shares of each Portfolio of the Trust held by a registered Account and
for which no timely voting instructions from Contract owners are received
in the same proportion as those shares for which voting instructions are
received. The Company and its agents will in no way recommend or oppose
or interfere with the solicitation of proxies for Portfolio shares held
to fund the Contacts without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion. The Company
reserves the right, to the extent permitted by law, to vote shares held
in any Account in its sole discretion.
2.12. The Company and the Trust will each provide to the other information
about the results of any regulatory examination relating to the Contracts
or the Trust, including relevant portions of any "deficiency letter" and
any response thereto.
2.13. No compensation shall be paid by the Trust to the Company, or by the
Company to the Trust, under this Agreement (except for specified expense
reimbursements). However, nothing herein shall prevent the parties hereto
from otherwise agreeing to perform, and arranging for appropriate
compensation for, other services relating to the Trust, the
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Accounts or both.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1. The Company represents and warrants that it is an insurance company duly
organized and in good standing under the laws of the State of Delaware
and that it has legally and validly established each Account as a
segregated asset account under such law as of the date set forth in
Schedule A, and that _________________________________, the principal
underwriter for the Contracts, is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member in good standing of the
National Association of Securities Dealers, Inc.
3.2. The Company represents and warrants that it has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act
and cause each Account to remain so registered to serve as a segregated
asset account for the Contracts, unless an exemption from registration is
available.
3.3. The Company represents and warrants that the Contracts will be registered
under the 1933 Act unless an exemption from registration is available
prior to any issuance or sale of the Contracts; the Contracts will be
issued and sold in compliance in all material respects with all
applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance law suitability
requirements.
3.4. The Trust represents and warrants that it is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and the
rules and regulations thereunder.
3.5. The Trust and the Distributor represent and warrant that the Portfolio
shares offered and sold pursuant to this Agreement will be registered
under the 1933 Act and sold in accordance with all applicable federal and
state laws, and the Trust shall be registered under the 1940 Act prior to
and at the time of any issuance or sale of such shares. The Trust shall
amend its registration statement under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of
its shares. The Trust shall register and qualify its shares for sale in
accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6. The Trust represents and warrants that the investments of each Portfolio
will comply with the diversification requirements for variable annuity,
endowment or life insurance
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contracts set forth in Section 817(h) of the Internal Revenue Code of
1986, as amended (the "Code"), and the rules and regulations thereunder,
including without limitation Treasury Regulation 1.817-5, and will notify
the Company immediately upon having a reasonable basis for believing any
Portfolio has ceased to comply or might not so comply
and will immediately take all reasonable steps to adequately diversify
the Portfolio to achieve compliance within the grace period afforded by
Regulation 1.817-5.
3.7. The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it
will make every effort to maintain such qualification and will notify the
Company immediately upon having a reasonable basis for believing it has
ceased to so qualify or might not so qualify in the future.
3.8. The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less than
the minimum coverage required by Rule 17g-1 or other applicable
regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3.9. The Distributor represents that it is duly organized and validly existing
under the laws of the State of Delaware and that it is registered, and
will remain registered, during the term of this Agreement, as a
broker-dealer under the Securities Exchange Act of 1934 and is a member
in good standing of the National Association of Securities Dealers, Inc.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1. The parties acknowledge that a Portfolio's shares may be made available
for investment to other Participating Insurance Companies. In such event,
the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of
all Participating Insurance Companies. A material irreconcilable conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or any
similar action by insurance, tax, or securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Portfolio are being
managed; (e) a difference in voting instructions given by variable
annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination
by the Trustees that a material irreconcilable conflict exists and of the
implications thereof.
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4.2. The Company agrees to report promptly any potential or existing conflicts
of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for and requested by the Trustees to consider any issues raised
including, but not limited to, information as to a decision by the
Company to disregard Contract owner voting instructions. All
communications from the Company to the Trustees may be made in care of
the Trust.
4.3. If it is determined by a majority of the Trustees, or a majority of the
disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of contract owners, the Company shall, in
cooperation with other Participating Insurance Companies whose contract
owners are also affected, at its own expense and to the extent reasonably
practicable (as determined by the Trustees) take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict,
which steps could include: (a) withdrawing the assets allocable to some
or all of the Accounts from the Trust or any Portfolio and reinvesting
such assets in a different investment medium, including (but not limited
to) another Portfolio of the Trust, or submitting the question of whether
or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering
to the affected Contract owners the option of making such a change; and
(b) establishing a new registered management investment company or
managed separate account.
4.4. If a material irreconcilable conflict arises because of a decision by the
Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the
Company may be required, at the Trust's election, to withdraw the
affected Account's investment in the Trust and terminate this Agreement
with respect to such Account; provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Any such withdrawal and termination must take
place within six (6) months after the Trust gives written notice that
this provision is being implemented. Until the end of such six (6) month
period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw
the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the
Trustees inform the Company in writing that the Trust has determined that
such decision has created a material irreconcilable conflict; provided,
however, that such withdrawal
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and termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Until the end of such six (6) month period, the
Trust shall continue to accept and implement orders by the Company for
the purchase and redemption of shares of the Trust.
4.6. For purposes of Section 4.3 through 4.6 of this Agreement, a majority of
the disinterested Trustees shall determine whether any proposed action
adequately remedies any material irreconcilable conflict, but in no event
will the Trust be required to establish a new funding medium for any
Contract. The Company shall not be required to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
material irreconcilable conflict. In the event that the Trustees
determine that any proposed action does not adequately remedy any
material irreconcilable conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six
(6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.
4.7. The Company shall at least annually submit to the Trustees such reports,
materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared
Funding Exemptive Order, and said reports, materials and data shall be
submitted more frequently if reasonably deemed appropriate by the
Trustees.
4.8. If and to the extent that Rule 6e-3(T) is amended, or Rule 6e-3 is
adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared
Funding Exemptive Order, then the Trust and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with Rule 6e-3(T), as amended, or Rule 6e-3, as
adopted, to the extent such rules are applicable.
ARTICLE V.
INDEMNIFICATION
5.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold
harmless the Distributor, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the Trust
within the meaning of Section 15 of the 1933
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Act (collectively, the "Indemnified Parties" for purposes of this Section
5.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company, which
consent shall not be unreasonably withheld) or expenses (including the
reasonable costs of investigating or defending any alleged loss, claim,
damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation,
or at common law or otherwise, insofar as such Losses are related to the
sale or acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the
Company on behalf of the Contracts or Accounts (or any amendment
or supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of or
are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Company by or on behalf of the Trust
for use in Company Documents or otherwise for use in connection
with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived from Trust Documents as defined in Section 5.2(a)) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as
defined in Section 5.2(a) or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately
derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Company; or
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(f) arise out of or result from the provision by the Company to the
Trust of insufficient or incorrect information regarding the
purchase or sale of shares of any Portfolio, or the failure of the
Company to provide such information on a timely basis.
5.2. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor agrees to indemnify
and hold harmless the Company and each of its directors, officers,
employees, and agents and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for the purposes of this Section 5.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Distributor, which consent
shall not be unreasonably withheld) or expenses (including the reasonable
costs of investigating or defending any alleged loss, claim, damage,
liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common
law or otherwise, insofar as such Losses are related to the sale or
acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement or prospectus for the Trust (or any
amendment or supplement thereto) (collectively, "Trust Documents"
for the purposes of this Article V), or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Distributor or the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for
use in connection with the sale of the Contracts or Trust shares;
or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived form Company Documents) or wrongful conduct of the
Distributor or persons under its control, with respect to the sale
or acquisition of the Contracts or Portfolio shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Trust; or
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(d) arise out of or result from any failure by the Distributor or the
Trust to provide the services or furnish the materials required
under the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor or the
Trust in this Agreement or arise out of or result from any other
material breach of this Agreement by the Distributor or the Trust.
5.3. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any Losses incurred or assessed against an Indemnified
Party that arise from such Indemnified Party's willful misfeasance, bad
faith or negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement.
5.4. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any claim made against an Indemnified party unless such
Indemnified Party shall have notified the other party in writing within a
reasonable time after the summons, or other first written notification,
giving information of the nature of the claim shall have been served upon
or otherwise received by such Indemnified Party (or after such
Indemnified Party shall have received notice of service upon or other
notification to any designated agent), but failure to notify the party
against whom indemnification is sought of any such claim shall not
relieve that party from any liability which it may have to the
Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5. In case any such action is brought against an Indemnified Party, the
indemnifying party shall be entitled to participate, at its own expense,
in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably
satisfactory to the party named in the action. After notice from the
indemnifying party to the Indemnified Party of an election to assume such
defense, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the indemnifying party will not be
liable to the Indemnified Party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
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ARTICLE VI.
TERMINATION
6.1. This Agreement shall terminate:
(a) at the option of any party upon 60 days advance written notice to
the other parties, unless a shorter time is agreed to by the
parties;
(b) at the option of the Trust or the Distributor if the Contracts
issued by the Company cease to qualify as annuity contracts or
life insurance contracts, as applicable, under the Code or if the
Contracts are not registered, issued or sold in accordance with
applicable state and/or federal law; or
(c) at the option of any party upon a determination by a majority of
the Trustees of the Trust, or a majority of its disinterested
Trustees, that a material irreconcilable conflict exists; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust or the Distributor by the NASD, the
SEC, or any state securities or insurance department or any other
regulatory body regarding the Trust's or the Distributor's duties
under this Agreement or related to the sale of Trust shares or the
operation of the Trust; or
(e) at the option of the Company if the Trust or a Portfolio fails to
meet the diversification requirements specified in Section 3.6
hereof; or
(f) at the option of the Company if shares of the Series are not
reasonably available to meet the requirements of the Variable
Contracts issued by the Company, as determined by the Company, and
upon prompt notice by the Company to the other parties; or
(g) at the option of the Company in the event any of the shares of the
Portfolio are not registered, issued or sold in accordance with
applicable state and/or federal law, or such law precludes the use
of such shares as the underlying investment media of the Variable
Contracts issued or to be issued by the Company; or
(h) at the option of the Company, if the Portfolio fails to qualify as
a Regulated Investment Company under Subchapter M of the Code; or
(i) at the option of the Distributor if it shall determine in its sole
judgment exercised in good faith, that the Company and/or its
affiliated companies has suffered a
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material adverse change in its business, operations, financial
condition or prospects since the date of this Agreement or is the
subject of material adverse publicity.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares
of any Portfolio and redeem shares of any Portfolio pursuant to the terms
and conditions of this Agreement for all Contracts in effect on the
effective date of termination of this Agreement.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.9 shall survive
the termination of this Agreement as long as shares of the Trust are held
on behalf of Contract owners in accordance with Section 6.2.
ARTICLE VII.
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or its Distributor:
Fred Alger Management, Inc.
30 Montgomery Street
Jersey City, NJ 07302
Attn: Gregory S. Duch
If to the Company:
ARTICLE VIII.
MISCELLANEOUS
8.1. The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
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8.2. This Agreement may be executed in two or more counterparts, each of which
taken together shall constitute one and the same instrument.
8.3. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
8.4. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York. It shall
also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the Commission
granting exemptive relief therefrom and the conditions of such orders.
Copies of any such orders shall be promptly forwarded by the Trust to the
Company.
8.5. All liabilities of the Trust arising, directly or indirectly, under this
Agreement, of any and every nature whatsoever, shall be satisfied solely
out of the assets of the Trust and no Trustee, officer, agent or holder
of shares of beneficial interest of the Trust shall be personally liable
for any such liabilities.
8.6. Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Commission,
the National Association of Securities Dealers, Inc. and state insurance
regulators) and shall permit such authorities reasonable access to its
books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and federal laws.
8.8. This Agreement shall not be exclusive in any respect.
8.9. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other
party.
8.10. No provisions of this Agreement may be amended or modified in any manner
except by a written agreement properly authorized and executed by both
parties.
8.11. Each party hereto shall, except as required by law or otherwise permitted
by this greement, treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto, and shall not disclose
such confidential information without the written consent of the affected
party unless such information has become publicly available.
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IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.
Fred Alger & Company, Incorporated
By:________________________________
Name:
Title:
The Alger American Fund
By:_________________________________
Name:
Title:
Allmerica Financial Life Insurance and
Annuity Company
By:___________________________________
Name:
Title:
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SCHEDULE A
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The Alger American Fund:
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American Income and Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Balanced Portfolio
Alger American MidCap Growth Portfolio
The Accounts:
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