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File Nos. 333-10285
811-7769
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 6
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 14
SEPARATE ACCOUNT KG OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(Exact Name of Registrant)
FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
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X on May 1, 2000 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, 1999 was filed on or
before March 30, 2000.
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CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
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FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
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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 Investment Companies
6........................Charges and Deductions
7........................Description of the Contract
8........................Electing the Form of Annuity and the Annuity Date;
Description of Variable Annuity Option;
Annuity Benefit Payments
9........................Death Benefit
10.......................Payments; Computation of Values; Distribution
11.......................Surrender; Withdrawals; Charge for Surrender and
Withdrawal; Withdrawal Without Surrender Charge;
Texas Optional Retirement Program
12.......................Federal Tax Considerations
13.......................Legal Matters
14.......................Statement of Additional Information - Table of Contents
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FORM N-4 ITEM NO. CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
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15.......................Cover Page
16.......................Table of Contents
17.......................General Information and History
18.......................Services
19.......................Underwriters
20.......................Underwriters
21.......................Performance Information
22.......................Annuity Benefit Payments
23.......................Financial Statements
</TABLE>
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SEPARATE ACCOUNT KG
(KEMPER GATEWAY ELITE)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 2000
* * *
An Application for an Order of Exemption has been filed with the Securities and
Exchange Commission on behalf of Allmerica Financial Life Insurance and Annuity
Company, First Allmerica Financial Life Insurance Company, Separate Account KG,
and Allmerica Investments, Inc. (collectively referred to herein as the
"Applicants"), to permit the Applicants to deduct a charge for an optional
benefit rider in the manner set out in "WHAT CHARGES WILL I INCUR UNDER MY
CONTRACT?," under the SUMMARY OF CONTRACT FEATURES, and "C. Optional Minimum
Guaranteed Annuity Payout Rider Charge" under the CHARGES AND DEDUCTIONS
sections of the prospectus.
While the Application for an Order of Exemption is pending, the sixth paragraph
of "WHAT CHARGES WILL I INCUR UNDER MY CONTRACT" and the first two paragraphs of
"C. Optional Minimum Guaranteed Annuity Payout Rider Charge" are hereby replaced
by the following:
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider that may be elected by the Owner. A separate monthly charge
is made for the Rider. On the last day of each month 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 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, multiplied by 1/12th of the following annual percentage rates:
* * *
SUPPLEMENT DATED MAY 1, 2000
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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 Elite
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 PRINCIPAL.
A Statement of Additional Information dated May 1, 2000 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 Annuity Client Services at 1-800-782-8380.
The Table of Contents of the Statement of Additional Information is listed on
page 4 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).
The Variable Account, known as Separate Account KG is subdivided into
Sub-Accounts. Each Sub-Account offered as an investment option under this
contract invests exclusively in shares of one of the following portfolios:
<TABLE>
<S> <C>
KEMPER VARIABLE SERIES SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A)
Kemper Aggressive Growth Portfolio Scudder 21st Century Growth Portfolio
Kemper Technology Growth Portfolio Scudder International Portfolio
KVS Dreman Financial Services Portfolio Scudder Global Discovery Portfolio
Kemper Small Cap Growth Portfolio Scudder Capital Growth Portfolio
Kemper Small Cap Value Portfolio Scudder Growth and Income Portfolio
KVS Dreman High Return Equity Portfolio
Kemper International Portfolio THE ALGER AMERICAN FUND
Kemper New Europe Portfolio Alger American Leveraged AllCap Portfolio
Kemper Global Blue Chip Portfolio Alger American Balanced Portfolio
Kemper Growth Portfolio
Kemper Contrarian Value Portfolio DREYFUS INVESTMENT PORTFOLIOS
Kemper Blue Chip Portfolio Dreyfus MidCap Stock Portfolio
Kemper Value+Growth Portfolio
KVS Index 500 Portfolio THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
Kemper Horizon 20+ Portfolio FUND, INC.
Kemper Total Return Portfolio Dreyfus Socially Responsible Growth Fund
Kemper Horizon 10+ Portfolio
Kemper High Yield Portfolio WARBURG PINCUS TRUST
Kemper Horizon 5 Portfolio Warburg Pincus Emerging Markets Portfolio
Kemper Strategic Income Portfolio Warburg Pincus Global Post-Venture Capital
Kemper Investment Grade Bond Portfolio Portfolio
Kemper Government Securities Portfolio
Kemper Money Market Portfolio
KVS Focused Large Cap Growth Portfolio
KVS Growth Opportunities Portfolio
KVS Growth And Income Portfolio
</TABLE>
THIS ANNUITY IS NOT: A BANK DEPOSIT OR OBLIGATION; 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 IN THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DATED MAY 1, 2000
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The Fixed Account, which is part of the Company's General Account, is an
investment option that pays an interest rate guaranteed for one year from the
time a payment is received. Another investment option, the Guarantee Period
Accounts, offers 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.)
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS............................................... 5
SUMMARY OF FEES AND EXPENSES................................ 7
SUMMARY OF CONTRACT FEATURES................................ 15
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS AND
THE UNDERLYING INVESTMENT COMPANIES........................ 21
INVESTMENT OBJECTIVES AND POLICIES.......................... 22
PERFORMANCE INFORMATION..................................... 25
DESCRIPTION OF THE CONTRACT................................. 28
A. Payments............................................. 28
B. Right to Cancel Individual Retirement Annuity........ 29
C. Right to Cancel All Other Contracts.................. 29
D. Transfer Privilege................................... 29
Automatic Transfers and Automatic Account
Rebalancing Options................................. 30
E. Surrender............................................ 30
F. Withdrawals.......................................... 31
Systematic Withdrawals.............................. 32
Life Expectancy Distributions....................... 32
G. Death Benefit........................................ 32
Death of the Annuitant Prior to the Annuity Date.... 33
Death of an Owner Who is Not Also the Annuitant
Prior to the Annuity Date........................... 33
Payment of the Death Benefit Prior to the Annuity
Date................................................ 33
Death of the Annuitant On or After the Annuity
Date................................................ 33
H. The Spouse of the Owner as Beneficiary............... 34
I. Assignment........................................... 34
J. Electing the Form of Annuity and Annuity Date........ 34
K. Description of Variable Annuity Payout Options....... 35
L. Annuity Benefit Payments............................. 36
Determination of the First Variable Annuity Benefit
Payment............................................. 36
The Annuity Unit.................................... 37
Determination of the Number of Annuity Units........ 37
Dollar Amount of Subsequent Variable Annuity Benefit
Payments............................................ 37
M. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider................................................... 37
N. NORRIS Decision...................................... 39
O. Computation of Values................................ 40
The Accumulation Unit............................... 40
Net Investment Factor............................... 40
CHARGES AND DEDUCTIONS...................................... 41
A. Variable Account Deductions.......................... 41
Mortality and Expense Risk Charge................... 41
Administrative Expense Charge....................... 41
Other Charges....................................... 41
B. Contract Fee......................................... 42
C. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider Charge............................................ 42
D. Premium Taxes........................................ 42
E. Surrender Charge..................................... 43
Charges for Surrender and Withdrawal................ 43
Reduction or Elimination of Surrender Charge and
Additional Amounts Credited......................... 44
Withdrawal Without Surrender Charge................. 45
Surrenders.......................................... 45
Charge at the Time Annuity Benefit Payments Begin... 46
F. Transfer Charge...................................... 46
</TABLE>
3
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<TABLE>
<S> <C>
GUARANTEE PERIOD ACCOUNTS................................... 47
FEDERAL TAX CONSIDERATIONS.................................. 49
A. General.............................................. 49
The Company......................................... 49
Diversification Requirements........................ 49
Investor Control.................................... 49
B. Qualified and Non-Qualified Contracts................ 50
C. Taxation of the Contracts in General................. 50
Withdrawals Prior to Annuitization.................. 50
Annuity Payouts After Annuitization................. 50
Penalty on Distribution............................. 50
Assignments or Transfers............................ 51
Nonnatural Owners................................... 51
Deferred Compensation Plans of State and Local
Government and Tax-Exempt Organizations............. 51
D. Tax Withholding...................................... 51
E. Provisions Applicable to Qualified Employer Plans.... 52
Corporate and Self-Employed Pension and Profit
Sharing Plans....................................... 52
Individual Retirement Annuities..................... 52
Tax-Sheltered Annuities............................. 52
Texas Optional Retirement Program................... 53
STATEMENTS AND REPORTS...................................... 53
LOANS (QUALIFIED CONTRACTS ONLY)............................ 53
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 53
CHANGES TO COMPLY WITH LAW AND AMENDMENTS................... 54
VOTING RIGHTS............................................... 55
DISTRIBUTION................................................ 55
LEGAL MATTERS............................................... 55
FURTHER INFORMATION......................................... 56
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT...... A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE
ADJUSTMENT................................................. B-1
APPENDIX C -- THE DEATH BENEFIT............................. C-1
APPENDIX D -- CONDENSED FINANCIAL INFORMATION............... D-1
STATEMENT OF ADDITIONAL INFORMATION
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
EXCHANGE OFFER.............................................. 6
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING)
PROGRAM..................................................... 8
PERFORMANCE INFORMATION..................................... 9
TAX-DEFERRED ACCUMULATION................................... 10
FINANCIAL STATEMENTS........................................ F-1
</TABLE>
4
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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 life annuity benefit
payments are to be made.
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 Annuitant's 90th
birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of 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.
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.
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 (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
the Annuitant.
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 Warburg
Pincus Trust.
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any applicable Contract fee, surrender charge, rider charge and
Market Value Adjustment.
5
<PAGE>
UNDERLYING PORTFOLIOS (PORTFOLIOS): currently, the twenty-six Portfolios of KVS,
the five Portfolios of Scudder VLIF, the two Portfolios of The Alger American
Fund, the one Portfolio of the Dreyfus Investment Portfolios, the one Portfolio
of The Dreyfus Socially Responsible Growth Fund, Inc. and the two Portfolios of
Warburg Pincus Trust 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 providing for payments varying
in amount in accordance with the investment experience of certain of the
Portfolios.
6
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SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Kemper Gateway
Elite 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" under CHARGES AND DEDUCTIONS.
<TABLE>
<CAPTION>
YEARS FROM
DATE OF PAYMENT CHARGE
(1) CONTRACT CHARGES: --------------- ------
<S> <C> <C>
0-1 7.0%
2 6.0%
3 5.0%
4 4.0%
5 3.0%
6 2.0%
More than 6 0.0%
SURRENDER CHARGE:*
This charge may be assessed upon surrender, withdrawal or
annuitization under any commutable period certain option
or a noncommutable period certain option of less than ten
years. The charge is a percentage of payments applied to
the amount surrendered (in excess of any amount that is
without a surrender charge) within the indicated time
periods.
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 the Accumulated Value is less than
$50,000. The fee is waived for Contracts issued to and
maintained by the trustee of a 401(k) plan.
OPTIONAL RIDER CHARGES:
Under the following riders, 1/12th of the annual charge is
deducted pro-rata on a monthly basis at the end of each
month and, if applicable, at termination of the rider. The
charge on an annual basis as a percentage of the
Accumulated Value is:
Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider 0.25%
with a ten-year waiting period:
Optional Minimum Guaranteed Annuity Payout (M-GAP) Rider 0.15%
with a fifteen-year waiting period:
(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>
*From time to time the Company may allow a reduction of the surrender charge,
the period during which the charges apply, or both, and/or credit additional
amounts on Contracts when (1) Contracts are sold to individuals or groups of
individuals in a manner which reduces sales expenses, or (2) where the Owner or
the Annuitant on the date of issue is within certain classes of eligible
persons. For more information, see "E. Surrender Charge" "Reduction or
Elimination of Surrender Charge and Additional Amounts Credited" under CHARGES
AND DEDUCTIONS.
** This fee may vary by state. See your Contract for more information.
7
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(3) ANNUAL UNDERLYING PORTFOLIO EXPENSES: Total expenses of the Underlying
Portfolios are not fixed or specified under the terms of the Contract and will
vary from year to year. The levels of fees and expenses also vary among the
Underlying Portfolios. The following table shows the expenses of the Underlying
Portfolios as a percentage of average net assets for the year ended
December 31, 1999, as adjusted for any material changes.
<TABLE>
<CAPTION>
TOTAL PORTFOLIO
MANAGEMENT FEE EXPENSES (AFTER
(AFTER ANY OTHER EXPENSES ANY FEE
FEE REDUCTIONS/ (AFTER ANY REDUCTIONS/WAIVERS/
UNDERLYING PORTFOLIO VOLUNTARY WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- -------------------- ------------------ --------------- -------------------
<S> <C> <C> <C>
Kemper Aggressive Growth Portfolio*......... 0.00% 0.95% 0.95%(2)
Kemper Technology Growth Portfolio *........ 0.51% 0.44% 0.95%(2)
KVS Dreman Financial Services Portfolio..... 0.70% 0.29% 0.99%(2)
Kemper Small Cap Growth Portfolio........... 0.65% 0.06% 0.71%
Kemper Small Cap Value Portfolio............ 0.75% 0.09% 0.84%(1)
KVS Dreman High Return Equity Portfolio..... 0.75% 0.11% 0.86%(2)
Kemper International Portfolio.............. 0.75% 0.19% 0.94%
Kemper New Europe Portfolio................. 0.00% 1.12% 1.12%(2)
Kemper Global Blue Chip Portfolio........... 0.00% 1.56% 1.56%(2)
Kemper Growth Portfolio..................... 0.60% 0.06% 0.66%
Kemper Contrarian Value Portfolio........... 0.75% 0.05% 0.80%(1)
Kemper Blue Chip Portfolio.................. 0.65% 0.06% 0.71%(1)
Kemper Value+Growth Portfolio............... 0.75% 0.08% 0.83%(1)
KVS Index 500 Portfolio **.................. 0.16% 0.39% 0.55%(2)
Kemper Horizon 20+ Portfolio................ 0.60% 0.18% 0.78%(1)
Kemper Total Return Portfolio............... 0.55% 0.06% 0.61%
Kemper Horizon 10+ Portfolio................ 0.60% 0.12% 0.72%(1)
Kemper High Yield Portfolio................. 0.60% 0.07% 0.67%
Kemper Horizon 5 Portfolio.................. 0.60% 0.16% 0.76%(1)
Kemper Strategic Income Portfolio........... 0.65% 0.28% 0.93%(3)
Kemper Investment Grade Bond Portfolio...... 0.60% 0.05% 0.65%(1)
Kemper Government Securities Portfolio...... 0.55% 0.08% 0.63%
Kemper Money Market Portfolio............... 0.50% 0.04% 0.54%
KVS Focused Large Cap Growth Portfolio***... 0.00% 1.15% 1.15%(2)
KVS Growth Opportunities Portfolio***....... 0.00% 1.15% 1.15%(2)
KVS Growth And Income Portfolio***.......... 0.00% 1.15% 1.15%(2)
Scudder 21st Century Growth Portfolio....... 0.00% 1.50% 1.50%(4)
Scudder International Portfolio............. 0.85% 0.18% 1.03%
Scudder Global Discovery Portfolio.......... 0.60% 0.65% 1.25%(4)
Scudder Capital Growth Portfolio............ 0.46% 0.03% 0.49%
Scudder Growth and Income Portfolio......... 0.47% 0.08% 0.55%
Alger American Leveraged AllCap Portfolio... 0.85% 0.08%(5) 0.93%
Alger American Balanced Portfolio........... 0.75% 0.18% 0.93%
Dreyfus MidCap Stock Portfolio.............. 0.75% 0.71% 1.46%(6)
Dreyfus Socially Responsible Growth Fund.... 0.75% 0.04% 0.79%
Warburg Pincus Emerging Markets Portfolio... 0.00% 1.40% 1.40%(7)
Warburg Pincus Global Post-Venture Capital
Portfolio.................................. 1.07% 0.33% 1.40%(7)
</TABLE>
*These portfolios commenced operations on May 1, 1999, 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 annualized. Actual expenses may be greater or less than shown.
8
<PAGE>
***These portfolios commenced operations on October 29, 1999, therefore "other
expenses" are 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, 2000, to limit their respective fees and to
reimburse other expenses to the extent necessary to limit total operating
expenses of the following described portfolios to the amounts set forth after
the portfolio names: KVS Dreman High Return Equity (formerly Kemper-Dreman High
Return Equity) (0.87%), Kemper Value+Growth (0.84%), Kemper Contrarian Value
(0.80%), Kemper Small Cap Value (0.84%), Kemper Horizon 5 (0.97%), Kemper
Horizon 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 at or lower than
these expense limits, after the benefit of any custodial credits, as reflected
in the table.
(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,
2000, to limit their respective fees and to reimburse other expenses to the
extent necessary to limit total operating expenses of the KVS Focused Large Cap
Growth, KVS Growth And Income, KVS Growth Opportunities, KVS Index 500 (formerly
Kemper Index 500), Kemper Aggressive Growth, Kemper Technology Growth, KVS
Dreman Financial Services (formerly Kemper-Dreman Financial Services), Kemper
New Europe (formerly Kemper International Growth and Income), and Kemper Global
Blue Chip Portfolios of KVS to the amounts set forth in the Total Portfolio
Expenses column of the table above. Without taking into effect these expense
caps, for the Kemper Aggressive Growth, Kemper Technology Growth, KVS Dreman
Financial Services, Kemper New Europe, Kemper Global Blue Chip, KVS Index 500,
KVS Growth Opportunities, KVS Growth And Income, and KVS Focused Large Cap
Growth Portfolios of KVS, management fees are estimated to be 0.75%, 0.75%,
0.75%, 1.00%, 1.00%, 0.45%, 0.95%, 0.95%, and 0.95%, respectively. Other
expenses are estimated to be 1.91%, 0.44%, 0.29%, 3.30%, 2.47%, 0.39%, 1.65%,
1.63%, and 6.54%, respectively; and total operating expenses would have been
2.66%, 1.19%, 1.04%, 4.30%, 3.47%, 0.84%, 2.60%, 2.58%, and 7.49%, respectively.
In addition, for the Kemper New Europe and Kemper Global Blue Chip Portfolios,
the investment manager has agreed to limit its management fees to 0.70% and
0.85%, respectively, of such portfolios for one year, commencing May 1, 2000.
(3)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,
2000, to limit their respective fees and to reimburse other expenses to the
extent necessary to limit total operating expenses of Kemper Strategic Income
Portfolio (formerly Kemper Global Income) to 1.05%. The Management Fee,
reflected in the above table, has been restated to reflect a fee reduction
effective May 1, 2000 and the Other Expenses reflect actual expenses for the
past fiscal year.
(4)The investment manager for the Scudder 21st Century Growth Portfolio and
Scudder Global Discovery Portfolio has agreed, for the period from May 1, 2000
through April 30, 2001, to maintain the expenses at 1.50% and 1.25%,
respectively, of the Portfolio's average daily net assets. Without taking into
effect these expense caps, the management fees would be 0.875% and 0.975%,
respectively, other expenses are estimated to be 1.02% and 0.65%, respectively,
and total operating expenses are estimated to be 1.90% and 1.63%, respectively.
(5)Included in "Other Expenses" of the Alger American Leveraged AllCap Portfolio
is 0.01% of interest expense.
(6)The Dreyfus Corporation, the Dreyfus MidCap Stock Portfolio's investment
advisor, has voluntarily agreed to waive receipt of its fees and/or assume the
expenses of the portfolio so that total expenses (excluding taxes, brokerage
commissions, extraordinary expenses, interest expenses and commitment fees on
borrowings) do not exceed 1.00%. Total portfolio expenses prior to waivers
and/or reimbursements by the investment advisor, total 1.46%, annualized, at
December 31, 1999.
9
<PAGE>
(7)The investment adviser of the Warburg Pincus Emerging Markets Portfolio and
Warburg Pincus Global Post-Venture Capital Portfolio has voluntarily agreed to
waive or reimburse a portion of the management fees and/or other expenses
resulting in a reduction of total expenses. Absent any waiver or reimbursement,
the Management Fee, Other Expenses and Total Portfolio Expenses would have been
1.25%, 1.88% and 3.13% for the Warburg Pincus Emerging Markets Portfolio and
1.25%, 0.33% and 1.58% for the Warburg Pincus Global Post-Venture Capital
Portfolio, respectively, for the year ended December 31, 1999.
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 and assumes that the Underlying Portfolio
expenses listed above remain the same in each of the 1, 3, 5, and 10-year
intervals. As required by rules of the Securities and Exchange Commission
("SEC"), the Contract fee is reflected in the examples by a method designed 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
deducted only when the accumulated value is less than $50,000. Lower costs apply
to Contracts owned and maintained under a 401(k) plan. Because the expenses of
the Underlying Portfolios differ, separate examples are used to illustrate the
expenses incurred by an Owner on an investment in the various Sub-Accounts.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
10
<PAGE>
(1)(a) If, at the end of the applicable time period, you surrender your Contract
or annuitize* under any commutable variable period certain option or a
noncommutable fixed period certain option of less than ten years, you would pay
the following expenses on a $1,000 investment, assuming a 5% annual return on
assets and no Rider:**
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................................... $85 $120 $157 $273
Kemper Technology Growth................................... $85 $120 $157 $273
KVS Dreman Financial Services.............................. $86 $122 $159 $277
Kemper Small Cap Growth.................................... $83 $114 $145 $248
Kemper Small Cap Value..................................... $84 $117 $151 $262
KVS Dreman High Return..................................... $84 $118 $152 $264
Kemper International....................................... $85 $120 $156 $272
Kemper New Europe.......................................... $87 $125 $165 $290
Kemper Global Blue Chip.................................... $91 $138 $186 $332
Kemper Growth.............................................. $83 $112 $142 $243
Kemper Contrarian Value.................................... $84 $116 $149 $257
Kemper Blue Chip........................................... $83 $114 $145 $248
Kemper Value+Growth........................................ $84 $117 $151 $261
KVS Index 500.............................................. $81 $109 $137 $232
Kemper Horizon 20+......................................... $84 $116 $148 $255
Kemper Total Return........................................ $82 $111 $140 $238
Kemper Horizon 10+......................................... $83 $114 $145 $249
Kemper High Yield.......................................... $83 $112 $143 $244
Kemper Horizon 5........................................... $83 $115 $147 $253
Kemper Strategic Income.................................... $85 $120 $156 $271
Kemper Investment Grade Bond............................... $82 $112 $142 $242
Kemper Government Securities............................... $82 $111 $141 $240
Kemper Money Market........................................ $81 $109 $136 $231
KVS Focused Large Cap Growth............................... $87 $126 $166 $292
KVS Growth Opportunities................................... $87 $126 $166 $292
KVS Growth And Income...................................... $87 $126 $166 $292
Scudder 21st Century Growth................................ $90 $136 $183 $326
Scudder International...................................... $86 $123 $160 $281
Scudder Global Discovery................................... $88 $129 $171 $302
Scudder Capital Growth..................................... $81 $107 $134 $225
Scudder Growth and Income.................................. $82 $109 $137 $233
Alger American Leveraged AllCap............................ $85 $120 $156 $271
Alger American Balanced.................................... $85 $120 $156 $271
Dreyfus MidCap Stock....................................... $90 $135 $181 $322
Dreyfus Socially Responsible Growth........................ $84 $116 $149 $256
Warburg Pincus Emerging Markets............................ $89 $133 $178 $317
Warburg Pincus Global Post-Venture Capital................. $89 $133 $178 $317
</TABLE>
11
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your Contract
or annuitize* under any commutable period certain option or a noncommutable
fixed period certain option of less than ten years, you would pay the following
expenses on a $1,000 investment, assuming 5% annual return on assets and
election of the Minimum Guaranteed Annuity Payout (M-GAP) Rider** with a
ten-year waiting period:
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................................... $88 $128 $169 $297
Kemper Technology Growth................................... $88 $128 $169 $297
KVS Dreman Financial Services.............................. $88 $129 $171 $301
Kemper Small Cap Growth.................................... $85 $121 $157 $274
Kemper Small Cap Value..................................... $87 $124 $163 $287
KVS Dreman High Return..................................... $87 $125 $164 $289
Kemper International....................................... $88 $127 $168 $296
Kemper New Europe.......................................... $89 $132 $177 $314
Kemper Global Blue Chip.................................... $93 $145 $198 $355
Kemper Growth.............................................. $85 $119 $155 $269
Kemper Contrarian Value.................................... $86 $123 $161 $283
Kemper Blue Chip........................................... $85 $121 $157 $274
Kemper Value+Growth........................................ $86 $124 $163 $286
KVS Index 500.............................................. $84 $116 $149 $257
Kemper Horizon 20+......................................... $86 $123 $160 $281
Kemper Total Return........................................ $84 $118 $152 $264
Kemper Horizon 10+......................................... $85 $121 $158 $275
Kemper High Yield.......................................... $85 $120 $155 $270
Kemper Horizon 5........................................... $86 $122 $159 $279
Kemper Strategic Income.................................... $87 $127 $168 $295
Kemper Investment Grade Bond............................... $85 $119 $154 $268
Kemper Government Securities............................... $85 $118 $153 $266
Kemper Money Market........................................ $84 $116 $149 $256
KVS Focused Large Cap Growth............................... $89 $133 $178 $317
KVS Growth Opportunities................................... $89 $133 $178 $317
KVS Growth And Income...................................... $89 $133 $178 $317
Scudder 21st Century Growth................................ $93 $143 $195 $349
Scudder International...................................... $88 $130 $173 $305
Scudder Global Discovery................................... $90 $136 $183 $326
Scudder Capital Growth..................................... $83 $114 $146 $251
Scudder Growth and Income.................................. $84 $116 $150 $258
Alger American Leveraged AllCap............................ $87 $127 $168 $295
Alger American Balanced.................................... $87 $127 $168 $295
Dreyfus MidCap Stock....................................... $92 $142 $193 $346
Dreyfus Socially Responsible Growth........................ $86 $123 $161 $282
Warburg Pincus Emerging Markets............................ $92 $140 $190 $340
Warburg Pincus Global Post-Venture Capital................. $92 $140 $190 $340
</TABLE>
12
<PAGE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable fixed period certain option of ten years or longer, or
if you do not surrender or annuitize the Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and no
Rider:**
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................................... $24 $75 $128 $273
Kemper Technology Growth................................... $24 $75 $128 $273
KVS Dreman Financial Services.............................. $25 $76 $130 $277
Kemper Small Cap Growth.................................... $22 $67 $115 $248
Kemper Small Cap Value..................................... $23 $71 $122 $262
KVS Dreman High Return..................................... $23 $72 $123 $264
Kemper International....................................... $24 $74 $127 $272
Kemper New Europe.......................................... $26 $80 $136 $290
Kemper Global Blue Chip.................................... $30 $93 $158 $332
Kemper Growth.............................................. $21 $66 $113 $243
Kemper Contrarian Value.................................... $23 $70 $120 $257
Kemper Blue Chip........................................... $22 $67 $115 $248
Kemper Value+Growth........................................ $23 $71 $122 $261
KVS Index 500.............................................. $20 $62 $107 $232
Kemper Horizon 20+......................................... $23 $69 $119 $255
Kemper Total Return........................................ $21 $64 $110 $238
Kemper Horizon 10+......................................... $22 $68 $116 $249
Kemper High Yield.......................................... $21 $66 $113 $244
Kemper Horizon 5........................................... $22 $69 $118 $253
Kemper Strategic Income.................................... $24 $74 $127 $271
Kemper Investment Grade Bond............................... $21 $65 $112 $242
Kemper Government Securities............................... $21 $65 $111 $240
Kemper Money Market........................................ $20 $62 $107 $231
KVS Focused Large Cap Growth............................... $26 $81 $138 $292
KVS Growth Opportunities................................... $26 $81 $138 $292
KVS Growth And Income...................................... $26 $81 $138 $292
Scudder 21st Century Growth................................ $30 $91 $155 $326
Scudder International...................................... $25 $77 $132 $281
Scudder Global Discovery................................... $27 $84 $142 $302
Scudder Capital Growth..................................... $20 $61 $104 $225
Scudder Growth and Income.................................. $20 $63 $108 $233
Alger American Leveraged AllCap............................ $24 $74 $127 $271
Alger American Balanced.................................... $24 $74 $127 $271
Dreyfus MidCap Stock....................................... $29 $90 $153 $322
Dreyfus Socially Responsible Growth........................ $23 $70 $119 $256
Warburg Pincus Emerging Markets............................ $29 $88 $150 $317
Warburg Pincus Global Post-Venture Capital................. $29 $88 $150 $317
</TABLE>
13
<PAGE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable fixed period certain option of ten years or longer, or
if you do not surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets and
election of the Minimum Guaranteed Annuity Payout (M-GAP) Rider** with a
ten-year waiting period:
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................................... $27 $ 82 $140 $297
Kemper Technology Growth................................... $27 $ 82 $140 $297
KVS Dreman Financial Services.............................. $27 $ 83 $142 $301
Kemper Small Cap Growth.................................... $24 $ 75 $128 $274
Kemper Small Cap Value..................................... $26 $ 79 $135 $287
KVS Dreman High Return..................................... $26 $ 79 $136 $289
Kemper International....................................... $27 $ 82 $140 $296
Kemper New Europe.......................................... $28 $ 87 $148 $314
Kemper Global Blue Chip.................................... $33 $100 $170 $355
Kemper Growth.............................................. $24 $ 73 $126 $269
Kemper Contrarian Value.................................... $25 $ 78 $133 $283
Kemper Blue Chip........................................... $24 $ 75 $128 $274
Kemper Value+Growth........................................ $26 $ 78 $134 $286
KVS Index 500.............................................. $23 $ 70 $120 $257
Kemper Horizon 20+......................................... $25 $ 77 $132 $281
Kemper Total Return........................................ $23 $ 72 $123 $264
Kemper Horizon 10+......................................... $24 $ 75 $129 $275
Kemper High Yield.......................................... $24 $ 74 $126 $270
Kemper Horizon 5........................................... $25 $ 76 $131 $279
Kemper Strategic Income.................................... $27 $ 81 $139 $295
Kemper Investment Grade Bond............................... $24 $ 73 $125 $268
Kemper Government Securities............................... $24 $ 72 $124 $266
Kemper Money Market........................................ $23 $ 70 $119 $256
KVS Focused Large Cap Growth............................... $29 $ 88 $150 $317
KVS Growth Opportunities................................... $29 $ 88 $150 $317
KVS Growth And Income...................................... $29 $ 88 $150 $317
Scudder 21st Century Growth................................ $32 $ 98 $167 $349
Scudder International...................................... $28 $ 84 $144 $305
Scudder Global Discovery................................... $30 $ 91 $155 $326
Scudder Capital Growth..................................... $22 $ 68 $117 $251
Scudder Growth and Income.................................. $23 $ 70 $120 $258
Alger American Leveraged AllCap............................ $27 $ 81 $139 $295
Alger American Balanced.................................... $27 $ 81 $139 $295
Dreyfus MidCap Stock....................................... $32 $ 97 $165 $346
Dreyfus Socially Responsible Growth........................ $25 $ 77 $132 $282
Warburg Pincus Emerging Markets............................ $31 $ 95 $162 $340
Warburg Pincus Global Post-Venture Capital................. $31 $ 95 $162 $340
</TABLE>
*The Contract fee is not deducted after annuitization. Any applicable surrender
charge is assessed at the time of annuitization if you elect a noncommutable
fixed period certain option of less than ten years or any commutable period
certain option. No charge is assessed if you elect any life contingency option
or a noncommutable fixed period certain option of ten years or longer.
**If the Minimum Guaranteed Annuity Payout (M-GAP) Rider is exercised, you may
only annuitize under a fixed annuity payout option involving a life contingency
at the Company's guaranteed fixed annuity option rates listed under the Annuity
Option Tables in your Contract.
14
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE KEMPER GATEWAY ELITE VARIABLE ANNUITY?
The Kemper Gateway Elite 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;
- 26 KVS Portfolios, 5 Scudder VLIF Portfolios, 2 Alger Portfolios, 1
Dreyfus Investment Portfolios Portfolio, 1 Dreyfus Socially Responsible
Growth Fund Portfolio and 2 Warburg Pincus Trust 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-seven portfolios of securities ("Underlying
Portfolios") (in addition to the Kemper Money Market Portfolio) under your
Contract, to the Guarantee Period Accounts, and to the Fixed Account
(collectively "the investment options"). 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. You do not pay
taxes on any earnings under the Contract until you withdraw money. In addition,
during the accumulation phase, your beneficiaries receive certain protections in
the event of the Annuitant's death. See discussion below, WHAT HAPPENS UPON
DEATH DURING THE ACCUMULATION PHASE?
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant 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
Underlying Portfolios, fixed-amount annuity benefit payments with 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 lifetime;
- periodic payments for the Annuitant's life and the life of another person
selected by you;
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<PAGE>
- periodic payments for the Annuitant's lifetime with any remaining
guaranteed payments continuing to your beneficiary 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 the
fixed version of this option you may reserve the right to convert
remaining payments to a lump-sum payout by electing a "commutable" option.
Variable period certain options are automatically commutable.
An optional Minimum Guaranteed Annuity Payout ("M-GAP") Rider is currently
available during the accumulation phase in most jurisdictions for a separate
monthly charge. If elected, the Rider provides the Annuitant a guaranteed
minimum amount of income after the specified waiting period under a life
contingent fixed annuity payout option, 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 Company's guaranteed fixed annuity option 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, on the Contract anniversary that the M-GAP Benefit Base is
being determined; or
(b) the Accumulated Value on the effective date of the Rider accumulated
daily at an effective annual yield of 5% plus gross payments made
thereafter accumulated daily at an effective annual yield of 5%, starting
on the date each payment is applied, proportionately reduced to reflect
withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after being increased for subsequent
payments and any positive Market Value Adjustment, if applicable, and
proportionately reduced for subsequent withdrawals.
For more details see "M. Optional Minimum Guaranteed Annuity Payout (M-GAP)
Rider" under DESCRIPTION OF THE CONTRACT.
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 the
Annuitant), an Annuitant and one or more beneficiaries. As Owner, you make
payments, choose investment allocations, receive annuity benefit payments and
select the Annuitant and beneficiary. The Annuitant is the individual who
receives annuity benefit payments under the Contract. The beneficiary is the
person who receives any payment on the death of the Owner or Annuitant.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject to the minimum
and maximum payment amounts outlined in "A. Payments" under DESCRIPTION OF THE
CONTRACT.
WHAT ARE MY INVESTMENT CHOICES?
You may allocate payments among the Sub-Accounts investing in the Underlying
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 (in addition to the Kemper Money Market Portfolio) during the life
of the Contract and prior to the Annuity Date.
16
<PAGE>
VARIABLE ACCOUNT. Subject to the 17 fund maximum, you have a choice of
Sub-Accounts investing in the following Underlying Portfolios:
<TABLE>
<S> <C>
KEMPER VARIABLE SERIES SCUDDER VARIABLE LIFE INVESTMENT FUND (CLASS A)
Kemper Aggressive Growth Portfolio Scudder 21st Century Growth Portfolio
Kemper Technology Growth Portfolio Scudder International Portfolio
KVS Dreman Financial Services Portfolio Scudder Global Discovery Portfolio
Kemper Small Cap Growth Portfolio Scudder Capital Growth Portfolio
Kemper Small Cap Value Portfolio Scudder Growth and Income Portfolio
KVS Dreman High Return Equity Portfolio
Kemper International Portfolio THE ALGER AMERICAN FUND
Kemper New Europe Portfolio Alger American Leveraged AllCap Portfolio
Kemper Global Blue Chip Portfolio Alger American Balanced Portfolio
Kemper Growth Portfolio
Kemper Contrarian Value Portfolio DREYFUS INVESTMENT PORTFOLIOS
Kemper Blue Chip Portfolio Dreyfus MidCap Stock Portfolio
Kemper Value+Growth Portfolio
KVS Index 500 Portfolio THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
Kemper Horizon 20+ Portfolio FUND, INC.
Kemper Total Return Portfolio Dreyfus Socially Responsible Growth Fund
Kemper Horizon 10+ Portfolio
Kemper High Yield Portfolio WARBURG PINCUS TRUST
Kemper Horizon 5 Portfolio Warburg Pincus Emerging Markets Portfolio
Kemper Strategic Income Portfolio Warburg Pincus Global Post-Venture Capital
Kemper Investment Grade Bond Portfolio Portfolio
Kemper Government Securities Portfolio
Kemper Money Market Portfolio
KVS Focused Large Cap Growth Portfolio
KVS Growth Opportunities Portfolio
KVS Growth And Income Portfolio
</TABLE>
Each Underlying Portfolio operates pursuant to different investment objectives
and this range of investment options enables you to allocate your money among
the Underlying Portfolios to meet your particular investment needs. For a more
detailed description of the Underlying 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 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
17
<PAGE>
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-adviser for the KVS Dreman Financial
Services Portfolio and KVS 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 KVS Index 500 Portfolio. Eagle Asset
Management, Inc. ("EAM") is the sub-adviser for the KVS Focused Large Cap Growth
Portfolio and Janus Capital Corporation ("JCC") is the sub-adviser for the KVS
Growth Opportunities and KVS Growth And Income Portfolios pursuant to
sub-advisory agreements between Scudder Kemper and EAM and JCC. 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 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. Credit Suisse Asset Management, LLC ("CSAM") is the investment adviser for
the Warburg Pincus Emerging Markets and Warburg Pincus Global Post-Venture
Capital Portfolios. Abbott Capital Management, LLC ("Abbott") provides
sub-investment advisory services for the Warburg Pincus Global Post-Venture
Capital Portfolio.
CAN I MAKE TRANSFERS AMONG THE INVESTMENT OPTIONS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Underlying Portfolios, the Guarantee Period Accounts, and the
Fixed Account. As of the date of this Prospectus, transfers may be made to a
maximum of seventeen variable Sub-Accounts, in addition to the Kemper Money
Market Portfolio, during the life of the Contract. You will incur no current
taxes on transfers while your money remains in the Contract. 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 does not currently
charge, but reserves the right to assess a processing charge guaranteed never to
exceed $25. See "D. Transfer Privilege" under DESCRIPTION OF THE CONTRACT.
You also may elect at no additional charge Automatic Transfers (Dollar Cost
Averaging) to gradually move money to one or more of the Underlying Portfolios
or Automatic Account Rebalancing to ensure assets remain allocated according to
your designated percentage allocation mix.
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. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 15% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. (Similarly, no surrender charge will apply if an amount is withdrawn
based on the Annuitant's life expectancy if the Owner is a trust or other
nonnatural person.) A 10% federal tax penalty may apply to all amounts deemed to
be income if you are under age 59 1/2. Additional amounts may be withdrawn at
any time but payments that have not been invested in the Contract for more than
six years may be subject to a surrender charge. (A Market Value Adjustment,
which may increase or decrease the value of your account, may apply to any
withdrawal made from a Guarantee Period Account prior to the expiration of the
Guarantee Period.)
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<PAGE>
In addition, you may withdraw all or a portion of your money without a surrender
charge if, after the Contract is issued and before age 65, you become disabled.
Also, except in New York and New Jersey where not permitted by state law, you
may withdraw money without a surrender charge if, after the Contract is issued,
you are admitted to a medical care facility or diagnosed with a fatal illness.
For details and restrictions, see "Reduction or Elimination of Surrender Charge
and Additional Amounts Credited" under "E. Surrender Charge" under CHARGES AND
DEDUCTIONS.
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
GREATEST of:
- The Accumulated Value on the Valuation Date that the Company receives
proof of death, increased by any positive Market Value Adjustment;
- Gross payments, accumulated daily at an effective annual yield of 5%,
starting on the date each payment was applied and continuing throughout
that payment's entire accumulation phase, (5% not available in Hawaii and
New York), reduced proportionately to reflect withdrawals; or
- The death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments accumulated daily at an effective annual yield
of 5% (except in Hawaii and New York where (b) equals gross payments). The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments accumulated daily at an effective annual yield of
5% (gross payments in Hawaii and New York) or (c) the locked-in value of the
death benefit at the first anniversary. The greatest of (a), (b) or (c) will be
locked in until the next Contract anniversary. This calculation will then be
repeated on each anniversary while the Contract remains in force and prior to
the Annuity Date. As noted above, the values of (b) and (c) will be decreased
proportionately if withdrawals are taken.
At the death of an Owner who is not also the Annuitant during the accumulation
phase, the death benefit will equal the Accumulated Value on the Valuation Date
that the Company receives proof of death, increased by any positive Market Value
Adjustment.
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See
"G. Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value on a Contract anniversary or upon surrender is less
than $50,000, the Company will deduct a $35 Contract Fee (a lower fee of $30 may
apply in some states) from the Contract. There will be no Contract fee if the
Accumulated Value is $50,000 or more. The Contract fee is currently waived for a
Contract issued to and maintained by a trustee of a 401(k) plan.
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity options, you may be subject to a surrender
charge. If applicable, this charge will be between 2% and 7% of payments
withdrawn, based on when the payments were originally made.
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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 in "D. Premium Taxes" under
CHARGES AND DEDUCTIONS.
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 Underlying Portfolio. The
Underlying Portfolios will incur certain management fees and expenses described
more fully in "Other Charges" under "A. Variable Account Deductions" and in the
prospectuses of the Underlying Portfolios which accompany this Prospectus. These
charges vary among the Underlying Portfolios and may change from year to year.
In addition, management fee waivers and/or reimbursements may be in effect for
certain or all of the Underlying Portfolios. For specific information regarding
the existence and effect of any waivers/ reimbursements see "Annual Underlying
Portfolio Expenses" under SUMMARY OF FEES AND EXPENSES.
Subject to state availability, the Company currently offers an optional M-GAP
Rider for an additional charge. If you elect the Rider, a separate monthly
charge is deducted from the Contract's Accumulated Value at the end of each
month within which the Rider has been in effect. The charge is assessed by
multiplying the Accumulated Value on the last day of each month and, if
applicable, on the date the Rider is terminated by 1/12th of the following
annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout (M-GAP) Rider with a ten-year
waiting period................................................................ 0.25%
Minimum Guaranteed Annuity Payout (M-GAP) Rider with a fifteen-year
waiting period................................................................ 0.15%
</TABLE>
For a description of this Rider, see "C. Optional Minimum Guaranteed Annuity
Payout (M-GAP) Rider Charge" under CHARGES AND DEDUCTIONS, and "M. Optional
Minimum Guaranteed Annuity Payout (M-GAP) Rider" under DESCRIPTION OF THE
CONTRACT.
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" under DESCRIPTION OF THE CONTRACT.
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- You may assign your ownership to someone else, except under certain
qualified plans; see FEDERAL TAX CONSIDERATIONS.
- 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 your Contract within ten days of delivery (or longer if
required by state law).
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DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS
AND THE UNDERLYING INVESTMENT COMPANIES
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, 1999, Allmerica Financial had over $17 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, 1999, First Allmerica and its
subsidiaries had over $25 billion in combined assets and over $43 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.
THE VARIABLE ACCOUNTS. Each Company maintains a separate investment account
called Separate Account KG (the "Variable Account"). The Variable Accounts of
Separate Account KG were authorized by votes of the Board of Directors of the
Companies on June 13, 1996. Each Variable Account 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.
The assets used to fund the variable portions of the Contracts are set aside in
Sub-Accounts kept separate from the general assets of the Company. Each
Sub-Account invests in a corresponding investment portfolio of Kemper Variable
Series, Scudder Variable Life Investment Fund, The Alger American Fund, Dreyfus
Investment Portfolios, The Dreyfus Socially Responsible Growth Fund, Inc. or
Warburg Pincus Trust. 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.
Obligations under the contracts are obligations 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
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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.
THE UNDERLYING INVESTMENT COMPANIES
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.
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.
The investment adviser for the Alger American Leveraged AllCap Portfolio and
Alger American Balanced Portfolio is Fred Alger Management, Inc. Fred Alger
Management, Inc. is located at 1 World Trade Center, Suite 9333, New York, NY
10048.
DREYFUS INVESTMENT PORTFOLIOS. The Dreyfus Investment Portfolios is a
Massachusetts business trust that commenced operations May 1, 1998. The Fund
consists of several portfolios, each a separate series of the Fund, an open-end
management investment company, known as a mutual fund. Each portfolio is
diversified. Dreyfus is located at 144 Glenn Curtiss Boulevard, Uniondale, NY
11556.
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, and commenced operations
on October 7, 1993. It 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. Dreyfus is located at
144 Glenn Curtiss Boulevard, Uniondale, NY 11556.
WARBURG PINCUS TRUST. Warburg Pincus Trust is an open-end, management
investment company registered with the SEC. It was organized as a Massachusetts
business trust on March 15, 1995. Credit Suisse Asset Management, LLC ("CSAM")
is the investment adviser of the Warburg Pincus Trust. Abbott Capital
Management, LLC ("Abbott") serves as sub-investment adviser for the Global
Post-Venture Capital Portfolio with respect to the Portfolio's investments in
private-equity portfolios.
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 INVESTMENT COMPANIES MAY BE FOUND
IN THEIR RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS. PLEASE READ
THEM CAREFULLY BEFORE INVESTING. Also, the Statements of Additional Information
of the Underlying Portfolios are available upon request. There can be no
assurance that the investment objectives of the Underlying Portfolios can be
achieved or that the value of the Contract will equal or exceed the aggregate
amount of payments made under the Contract.
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KEMPER VARIABLE SERIES:
KEMPER AGGRESSIVE GROWTH PORTFOLIO -- seeks capital appreciation through the use
of aggressive investment techniques.
KEMPER TECHNOLOGY GROWTH PORTFOLIO -- seeks growth of capital.
KVS 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. This portfolio was formerly known as Kemper-Dreman
Financial Services Portfolio.
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.
KVS DREMAN HIGH RETURN EQUITY PORTFOLIO -- seeks to achieve a high rate of total
return. This portfolio was formerly known as Kemper-Dreman High Return Equity
Portfolio.
KEMPER INTERNATIONAL PORTFOLIO -- seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
KEMPER NEW EUROPE PORTFOLIO -- seeks long-term capital appreciation by investing
in a portfolio consisting primarily of equity securities of European companies.
This portfolio was formerly known as Kemper International Growth and Income
Portfolio.
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.
KVS 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.
This portfolio was formerly known as Kemper Index 500 Portfolio.
*"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 KVS 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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<PAGE>
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 STRATEGIC INCOME PORTFOLIO -- seeks high current return by investing
primarily in bonds issued by U.S. and foreign corporations and governments. This
portfolio was formerly known as Kemper Global Income Portfolio.
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.
KVS GROWTH OPPORTUNITIES PORTFOLIO -- seeks long-term growth of capital in a
manner consistent with the preservation of capital.
KVS GROWTH AND INCOME PORTFOLIO -- seeks long-term capital growth and current
income.
SCUDDER VARIABLE LIFE INVESTMENT FUND:
SCUDDER 21ST CENTURY GROWTH PORTFOLIO -- pursues long-term growth of capital by
investing primarily in equity securities issued by emerging growth companies.
SCUDDER INTERNATIONAL PORTFOLIO -- seeks long term growth of capital primarily
through diversified holdings of marketable foreign equity investments.
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
through a broad and flexible investment program.
SCUDDER GROWTH AND INCOME PORTFOLIO -- seeks long-term growth of capital,
current income and growth of income.
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THE ALGER AMERICAN FUND:
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO -- seeks long-term capital
appreciation. Under normal circumstances, the Portfolio invests in the equity
securities of companies of any size that demonstrate promising growth potential.
ALGER AMERICAN BALANCED PORTFOLIO -- seeks current income and long-term capital
appreciation. The Portfolio focuses on stocks of companies with growth potential
and fixed-income securities, with emphasis on income-producing securities which
appear to have some potential for 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 provide capital growth,
with current income as a secondary goal. To pursue these goals, the fund invests
primarily in the common stock of companies that, in the opinion of the fund's
management, meet traditional investment standards and conduct their business in
a manner that contributes to the enhancement of the quality of life in America.
WARBURG PINCUS TRUST:
WARBURG PINCUS EMERGING MARKETS PORTFOLIO -- seeks long-term growth of capital.
To pursue this goal, it invests in equity securities of companies located in or
conducting a majority of their business in emerging markets.
WARBURG PINCUS GLOBAL POST-VENTURE CAPITAL PORTFOLIO -- seeks long-term growth
of capital. To pursue this goal, it invests primarily in equity securities of
U.S. and foreign companies considered to be in their post-venture capital stage
of development.
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.
If there is a material change in the investment policy of a Sub-Account or the
Underlying Portfolio in which it invests, the Owner will be notified of the
change. If the Owner has values allocated to that Sub-Account, the Company will
transfer it without charge on written request by the Owner to another
Sub-Account or to the Fixed Account. The Company must receive such written
request within 60 days of the later of (1) the effective date of the change in
the investment policy, or (2) the receipt of the notice of the Owner's right to
transfer.
PERFORMANCE INFORMATION
The Contract was first offered to the public by Allmerica Financial Life
Insurance and Annuity Company in 1996 and by First Allmerica Financial Life
Insurance Company in 1997. 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 are calculated with all charges assumed to be those applicable to the
Contract, the Sub-Accounts and the Underlying Portfolios and also assume that
the Contract is surrendered at the end of the applicable period. Performance
results in Tables 1B and 2B do not include the Contract fee and assume that the
Contract is not surrendered at the end of the applicable period. Both the total
return and yield figures are based on
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historical earnings and are not intended to indicate future performance. All
performance tables referenced in this section may be found in the SAI.
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 are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.40%, the
Underlying Portfolio charges, the annual Contract fee and the surrender charge
which would be assessed if the investment were completely withdrawn at the end
of the specified period. The calculation is not adjusted to reflect the
deduction of an M-GAP Rider charge. Quotations of supplemental average total
returns, as shown in Table 1B, are calculated in exactly the same manner and for
the same periods of time except that they do not reflect the Contract fee and
assume that the Contract is not surrendered at the end of the periods shown.
The performance shown in Tables 2A and 2B in the SAI is calculated in exactly
the same manner as that in Tables 1A and 1B, respectively; however, the period
of time is based on the Underlying Portfolios' lifetime, which may predate the
Sub-Account's inception date. These performance calculations are based on the
assumption that the Sub-Account corresponding to the applicable Underlying
Portfolio was actually in existence throughout the stated period and that the
contractual charges and expenses during that period were equal to those
currently assessed under the Contract. For more detailed information about these
performance calculations, including actual formulas, see the SAI.
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 separate accounts or other investment
products
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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 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.
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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 and/or signature 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 is credited to the Contract and allocated among the requested investment
options 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 applicant authorizes the Company to retain it pending completion of all
issue requirements. Subsequent payments will be credited as of the Valuation
Date received at the Principal Office, on the basis of accumulation unit value
next determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date, or
prior to payment of the death benefit, subject to certain minimums:
- Currently, the initial payment must be at least $2,000.
- Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $167.
- Each subsequent payment must be at least $100.
- Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a contract on the employee if the plan's
average annual contribution per eligible plan participant is at least
$600.
- 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.
Generally, unless otherwise requested, all payments will be allocated among the
investment options 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 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 the Owner elects telephone requests, a properly
completed authorization must be on file before telephone requests will be
honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. Such procedures may include, among other things, requiring some
form of personal identification prior to acting upon instructions received by
telephone. All telephone instructions are tape recorded.
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B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Contract intended to qualify as an IRA my 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, to the Company's
Principal Office at 440 Lincoln Street, Worcester, MA 01653, or to an authorized
representative. Mailing or delivery must occur within ten days after receipt of
the Contract for cancellation to be effective.
Within seven days the Company will provide a refund equal to the gross
payment(s) received. In some states, however, the refund may equal the greater
of (a) gross payments or (b) any amounts allocated to the Fixed Account and the
Guarantee Period Accounts plus the Accumulated Value of amounts allocated to the
Variable Account plus any amounts deducted under the Contract or by the
Portfolios for taxes, charges or fees. At the time the Contract is issued, the
"Right to Examine" provision on the cover of the Contract will specifically
indicate whether the refund will be equal to gross payments or equal to the
greater of (a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO CANCEL ALL OTHER CONTRACTS
An owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the payment received, 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 payments(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
investment options subject to the seventeen variable Sub-Account restriction
noted in "A. Payments." 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.
Transfer values will be based on the Accumulated Value next computed after
receipt of the transfer request.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Kemper Money
Market Portfolio. Transfers from a Guarantee Period Account prior to the
expiration of the Guarantee Period will be subject to a Market Value Adjustment.
The first twelve transfers in a Contract year are guaranteed to be free of any
transfer charge. The Company does not currently charge for additional transfers
but reserves the right to asses a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing these additional transfers. If you
authorize periodic transfers under an Automatic Transfer option (Dollar Cost
Averaging) or an Automatic Account Rebalancing option, the first automatic
transfer or rebalancing under a request counts as one transfer for purposes of
the 12 transfers guaranteed
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to be free of a transfer charge in each Contract year. Each subsequent transfer
or rebalancing under that request is without charge and does not reduce the
remaining number of transfers which may be made free of charge in that Contract
year.
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 to. The Company does not charge the Owner for providing additional
support services.
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 either the Fixed Account, the Sub-Account
investing in the Kemper Money Market Portfolio or the Sub-Account investing in
the Kemper Government Securities Portfolio, (the "source accounts") to one or
more of the available 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 Sub-Accounts. 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 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
Account as the source account from which to process automatic transfers. For
more information see "Enhanced Automatic Transfer (Dollar Cost Averaging)
Program" in the SAI.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
percentage allocations specified by the Owner. As frequently as specified by the
Owner, 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. 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 Surrender Value, less any 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.
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Before the Annuity Date, a surrender charge may be deducted when a Contract is
surrendered if payments have been credited to the Contract during the last six
full Contract years. See CHARGES AND DEDUCTIONS. The Contract fee will be
deducted upon surrender of the Contract.
After the Annuity Date, only Contracts annuitized under a commutable period
certain option may be surrendered. The amount payable is the commuted value of
any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No surrender charge is imposed
after the Annuity Date.
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."
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
Contract's Accumulated Value, subject to the limits stated below. The Owner must
submit to the Principal Office a signed, written request for withdrawals,
satisfactory to the Company. The written request must indicate the dollar amount
the Owner wishes to receive and the investment options from which such amount is
to be withdrawn. The amount withdrawn equals the amount requested by the Owner
plus any applicable surrender charge, as described under CHARGES AND DEDUCTIONS.
In addition, amounts withdrawn from a Guarantee Period Account prior to the end
of the applicable Guarantee Period will be subject to a Market Value Adjustment,
as described under GUARANTEE PERIOD ACCOUNTS.
Where allocations have been made to more than one investment option, a
percentage of the withdrawal may be allocated to each such option. 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.
The minimum withdrawal amount is $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 above under "E.
Surrender."
After the Annuity Date, withdrawals are allowed only if the Contract is
annuitized under a commutable period certain option. 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.
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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, and will be subject to any
applicable withdrawal charges. 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 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.
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 without a surrender charge 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, "C. Taxation of the Contracts in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the Company's LED amount, a surrender charge may apply to the
amount in excess of the LED amount.)
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 the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the beneficiary a death benefit,
except where the Contract is continued as provided below in "H. The Spouse of
the Owner as Beneficiary." The amount of the death benefit and the time
requirements for receipt of payment may vary depending upon whether the
Annuitant or an Owner dies first, and whether death occurs prior to or after the
Annuity Date.
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DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the death benefit is equal to
the greatest of (a) the Accumulated Value on the Valuation Date that the Company
receives proof of death, increased by any positive Market Value Adjustment;
(b) gross payments accumulated daily at an effective annual yield of 5% starting
on the date each payment is applied and continuing throughout that payment's
entire accumulation phase, decreased proportionately to reflect withdrawals
(except in Hawaii and New York where (b) equals gross payments decreased
proportionately by withdrawals); or (c) the death benefit that would have been
payable on the most recent Contract anniversary, increased for subsequent
payments and decreased proportionately for subsequent withdrawals. For each
withdrawal under (b) or (c), 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.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments accumulated daily at an effective annual yield
of 5% (except in Hawaii and New York where (b) equals gross payments). The
higher of (a) or (b) will then be locked in until the second anniversary, at
which time the death benefit will be equal to the greatest of (a) the Contract's
then current Accumulated Value increased by any positive Market Value
Adjustment; (b) gross payments accumulated daily at an effective annual yield of
5% (gross payments in Hawaii and New York) or (c) the locked-in value of the
death benefit at the first anniversary. The greatest of (a), (b) or (c) will be
locked in until the next Contract anniversary. This calculation will then be
repeated on each anniversary date while the Contract remains in force and prior
to the Annuity Date. As noted above, the values of (b) and (c) will be decreased
proportionately if withdrawals are taken. See APPENDIX C -- THE DEATH BENEFIT
for specific examples of death benefit calculations.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If
an Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by any positive Market Value
Adjustment. The death benefit never will be reduced by a negative Market Value
Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive distributions over the life of the beneficiary 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 added 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 will be based on the
unit values next computed after due proof of the death has been received.
DEATH OF THE ANNUITANT ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
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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 rather than receiving payment of the death benefit. Upon
such election, the spouse will become the Owner and Annuitant subject to the
following: (1) any value in the Guarantee Period Accounts will be transferred to
the Sub-Account investing in the Kemper Money Market Portfolio and (2) the
excess, if any, of the death benefit over the Contract's Accumulated Value also
will be added to the Sub-Account investing in the Kemper Money Market Portfolio.
The resulting value never will be subject to a surrender charge when withdrawn.
The new Owner may also make additional payments; however, a surrender charge
will apply to these amounts if they are withdrawn before they have been invested
in the Contract for at least six years. 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 when the new Owner dies.
I. ASSIGNMENT
The Contract, other than one sold in connection with certain qualified plans,
may be assigned by the Owner at any time prior to the Annuity Date and while the
Annuitant is alive (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.
For important tax liability which may result from assignments, see FEDERAL TAX
CONSIDERATIONS.
J. ELECTING THE FORM OF ANNUITY AND ANNUITY DATE
The Owner selects the Annuity Date. To the extent permitted by law, the Annuity
Date may be the first day of any month: (1) before the Annuitant's 85th
birthday, if the Annuitant'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 Annuitant's 90th birthday, if the Annuitant'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 Annuitant's 90th birthday, and must be within the
life expectancy of the Annuitant. The Company shall determine such life
expectancy at the time a change in Annuity Date is requested. In no event will
the latest possible annuitization age exceed 90. 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. Certain annuity
options may be commutable or noncommutable. A commutable option provides the
Owner with the right to request a lump sum payment of any remaining balance
after annuity payments have commenced. Under a noncommutable option, the Owner
may not request a lump sum payment. 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 account(s) selected. See "Annuity
Benefit Payments" in the SAI.
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 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
Annuitant cannot make withdrawals or surrender the annuity benefit, except where
the Annuitant 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 the Owner exercises the M-GAP Rider, annuity benefit payments must be made
under a fixed annuity payout option involving a life contingency and will occur
at the Company's guaranteed fixed annuity option rates listed under the Annuity
Option Tables in the Contract.
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS
The Company 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 annuity option).
Regardless of how payments were allocated during the accumulation period, any of
the variable annuity payout options or the fixed annuity payout options may be
selected, or any of the variable annuity payout options may be selected in
combination with any of the fixed 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.
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 all payments have been made,
the remaining annuity benefit payments will continue to the beneficiary.
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 Annuitant to receive only one annuity benefit
payment if he/she dies prior to the due date of the second annuity benefit
payment, two annuity benefit payments if he/she dies before the due date of the
third annuity benefit payment, and so on. Payments will continue, however,
during the Annuitant's lifetime, 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 (1) exceeds (2) then
periodic variable annuity benefit payments will continue to the beneficiary
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
(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
jointly to the Annuitant and another individual during their joint lifetime, and
then continues thereafter during the lifetime of the survivor. The amount of
each payment to the survivor is based on the same number of Annuity Units which
applied during the joint lifetime of the two payees. One of the payees must be
either the person designated as the Annuitant under the Contract or the
beneficiary. There is no minimum number of payments under this option.
JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is
payable jointly to the Annuitant and another individual during their joint
lifetime, and then continues thereafter during the lifetime of the survivor. The
amount of each periodic payment to the survivor, however, is based upon
two-thirds of the number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be the person designated as
the Annuitant under the Contract or the beneficiary. 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 thirty. If the Annuitant
dies before the end of the period, remaining payments will continue to be paid.
A fixed period certain annuity may be either commutable or noncommutable. A
variable period certain annuity is automatically commutable.
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 the 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.
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.
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 fixed 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 noncommutable fixed 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
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<PAGE>
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
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 M-GAP Rider, at annuitization the annuity benefit
payments provided under the Rider (calculated 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 (M-GAP) Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER
An optional Minimum Guaranteed Annuity Payout ("M-GAP") Rider is currently
available in most jurisdictions for a separate monthly charge. The M-GAP Rider
provides a guaranteed minimum amount of fixed annuity lifetime income during the
annuity payout phase, after a ten-year or fifteen-year waiting period, 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 Company's guaranteed
fixed annuity option rates listed under the Annuity Option Tables in the
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, on the Contract anniversary that the M-GAP Benefit Base is
being determined; or
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<PAGE>
(b) the Accumulated Value on the effective date of the Rider accumulated
daily at an effective annual yield of 5% plus gross payments made
thereafter accumulated daily at an effective annual yield of 5%, starting
on the date each payment is applied, proportionately reduced to reflect
withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after being increased for subsequent
payments and any positive Market Value Adjustment, if applicable, and
proportionately reduced 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 ON ELECTION OF THE M-GAP RIDER.
- The Owner may elect the M-GAP 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 78th 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 73rd birthday.
EXERCISING THE M-GAP RIDER.
- The Owner may only exercise the M-GAP 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 Company's guaranteed annuity option
rates listed under the Annuity Option Tables in the Contract.
TERMINATING THE M-GAP RIDER.
- The Owner may not terminate the M-GAP Rider prior to the seventh Contract
anniversary after the effective date of the Rider, unless such termination
occurs (1) on or within thirty days after any Contract anniversary and
(2) in conjunction with the repurchase of an M-GAP Rider with a waiting
period of equal or greater length at its then current price, if available.
- The Owner may terminate the Rider at any time after the seventh Contract
Anniversary following the effective date of the Rider.
- 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.
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<PAGE>
- 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 M-GAP 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 M-GAP 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 Annuitant age 60 (at issue) and exercise of an M-GAP 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 would be received
under the M-GAP 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>
MINIMUM
POLICY MINIMUM GUARANTEED
ANNIVERSARY GUARANTEED ANNUAL
AT 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."
The M-GAP Rider does not create Accumulated Value or guarantee performance of
any investment option. Because this Rider is based on guaranteed actuarial
factors, the level of lifetime income that it guarantees may often be less than
the level that would be provided by applying the then current annuity factors.
Therefore, the Rider should be regarded as providing a guarantee of a minimum
amount of annuity income. As described above, withdrawals will reduce the
benefit base. The Company reserves the right to terminate the availability of
the M-GAP Rider at any time. Such a termination would not effect Riders issued
prior to the termination date, but, as noted above, Owners would not be able to
purchase a new Rider under the repurchase feature. (See "TERMINATING THE M-GAP
RIDER.")
NOTE: Adding the M-GAP Rider after the issue date or repurchasing the benefit
will impact the Program to Protect Principal and Provide Growth Potential
offered under the GPA Accounts since the 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.
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<PAGE>
O. COMPUTATION OF VALUES
THE ACCUMULATION UNIT. Each net payment is allocated to the investment options
selected by the Owner. Allocations to the Sub-Accounts are credited to the
Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received in good order
at the Company's Principal Office. The number of Accumulation Units resulting
from each payment will remain fixed unless changed by a subsequent split of
Accumulation Unit value, a transfer, a withdrawal, or surrender. The dollar
value of an Accumulation Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account, and will
reflect the investment performance, expenses and charges of its Portfolios. The
value of an Accumulation Unit was set at $1.00 on the first Valuation Date for
each Sub-Account.
Allocations to Guarantee Period Accounts and the Fixed Account are not converted
into Accumulation Units, but are credited interest at a rate periodically set by
the Company. See GUARANTEE PERIOD ACCOUNTS and APPENDIX A -- MORE INFORMATION
ABOUT THE FIXED ACCOUNT.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and
(3) adding the amount of the accumulations in the Fixed Account and Guarantee
Period Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.15% on an annual basis of the
daily value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of Accumulation Unit calculation using a
hypothetical example see the SAI.
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<PAGE>
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.
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 payee) 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 mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's assets. This charge may not be increased. 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. The Company estimates
that a reasonable allocation might be 0.85% for mortality risk and 0.40% for
expense risk.
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. This charge may not be increased. 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. There is no direct
relationship, however, between the amount of administrative expenses imposed on
a given Contract and the amount of expenses actually attributable to that
Contract.
Deductions for the Contract fee (described below under "B. Contract Fee") and
for the administrative expense charge are designed to reimburse the Company for
the cost of administration and related expenses and are not expected to be a
source of profit. The administrative functions and expense assumed by the
Company in connection with the Variable Account and the Contract include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expense of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
OTHER CHARGES. Because the Sub-Accounts hold shares of the Underlying
Portfolios, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying
Portfolios. The prospectuses and SAIs of the Underlying Portfolios contain
additional information concerning expenses of the Underlying Portfolios.
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<PAGE>
B. CONTRACT FEE
A $35 Contract fee (a lower fee may apply in certain states) currently is
deducted on the Contract anniversary date and upon full surrender of the
Contract if the Accumulated Value is less than $50,000 on the date assessed. The
Contract fee is currently waived for Contracts issued to and maintained by the
trustee of a 401(k) plan. The Company reserves the right to impose a Contract
Fee up to $35 on Contracts issued to 401(k) plans but only with respect to
Contracts issued after the date the waiver is no longer available. Where
Contract value has been allocated to more than one account, a percentage of the
total Contract fee will be deducted from the value in each account. The portion
of the charge deducted from each account will be equal to the percentage which
the value in that account bears to the Accumulated Value under the Contract. The
deduction of the Contract fee from a Sub-Account will result in cancellation of
a number of Accumulation Units equal in value to the percentage of the charge
deducted from that account.
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the issue date, either the Owner or the Annuitant is within the following
classes of individuals: employees and registered representatives of any
broker-dealer which has entered into a sales agreement with the Company to sell
the Contract; employees of the Company, its affiliates and subsidiaries;
officers, directors, trustees and employees of any of the Underlying Portfolios;
investment managers or sub-advisers of the Underlying Portfolios; 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 MINIMUM GUARANTEED ANNUITY PAYOUT (M-GAP) RIDER CHARGE
Subject to state availability, the Company currently offers an optional M-GAP
Rider that may be elected by the Owner. A separate monthly charge is made for
the Rider. 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 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 within which the Rider has been in effect and, if applicable, on the
date the Rider is terminated, multiplied by 1/12th of the following annual
percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout (M-GAP) Rider with
ten-year waiting period................................... 0.25%
Minimum Guaranteed Annuity Payout (M-GAP) Rider with
fifteen-year waiting period............................... 0.15%
</TABLE>
For a description of the Rider, see "M. Optional Minimum Guaranteed Annuity
Payout (M-GAP) 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.
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<PAGE>
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. SURRENDER CHARGE
No charge for sales expense is deducted from payments at the time the payments
are made. However, a surrender charge is deducted from the Accumulated Value of
the Contract in the case of surrender and/or withdrawals or at the time annuity
benefit payments begin, within certain time limits described below.
For purposes of determining the surrender charge, the Accumulated Value is
divided into three categories: (1) New Payments - payments received by the
Company during the six years preceding the date of the surrender; (2) Old
Payments - accumulated payments invested in the Contract for more than six
years; and (3) the amount available under the Withdrawal Without Surrender
Charge provision. See "Withdrawal Without Surrender Charge" below. For purposes
of determining the amount of any surrender charge, surrenders will be deemed to
be taken first from amounts available as a Withdrawal Without Surrender Charge,
if any; then from Old Payments, and then from New Payments. Amounts available as
a Withdrawal Without Surrender Charge, followed by Old Payments, may be
withdrawn from the Contract at any time without the imposition of a surrender
charge. If a withdrawal is attributable all or in part to New Payments, a
surrender charge may apply.
An Owner may withdraw the greater of 100% of cumulative earnings, or 15% of the
Accumulated Value in any calendar year, without assessment of a Withdrawal
Charge. If the Owner withdraws an amount in excess of the Withdrawal Without
Surrender Charge amount in any calendar year, the excess may be subject to a
Withdrawal Charge.
CHARGES FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered or if New
Payments are withdrawn while the Contract is in force and before the Annuity
Date, a surrender charge may be imposed. This charge never will be applied to
earnings. The amount of the charge will depend upon the number of years that any
New Payments, to which the withdrawal is attributed have remained credited under
the Contract. Amounts withdrawn are deducted first from Old Payments. Then, for
the purpose of calculating surrender charges for New Payments, all amounts
withdrawn are assumed to be deducted first from the oldest New Payment and then
from the next oldest New Payment and so on, until all New Payments have been
exhausted pursuant to the first-in-first-out ("FIFO") method of accounting. (See
FEDERAL TAX CONSIDERATIONS for a discussion of how withdrawals are treated for
income tax purposes.)
The Surrender Charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE
DATE OF OF NEW
PAYMENT PAYMENTS WITHDRAWN
------- ------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
More than 6 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the surrender
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total surrender
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<PAGE>
charge exceed a maximum limit of 7% of total gross New Payments. Such total
charge equals the aggregate of all applicable surrender charges for surrender,
withdrawals and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE AND ADDITIONAL AMOUNTS
CREDITED. Where permitted by law, the Company will waive the surrender charge
in the event that the Owner (or the Annuitant, if the Owner is not an
individual) becomes physically disabled after the issue date of the Contract and
before attaining age 65. Under New York Contracts, the disability also must
exist for a continuous period of at least four months. The Company may require
proof of such disability and continuing disability, including written
confirmation of receipt and approval of any claim for Social Security Disability
Benefits and reserves the right to obtain an examination by a licensed physician
of its choice and at its expense. In addition, except in New York and New Jersey
where not permitted by state law, the Company will waive the surrender charge in
the event that an Owner (or the Annuitant, if the Owner is not an individual)
is: (1) admitted to a medical care facility after the issue date and remains
confined there until the later of one year after the issue date or 90
consecutive days or (2) first diagnosed by a licensed physician as having a
fatal illness after the issue date of the Contract.
For purposes of the above provision, "medical care facility" means any
state-licensed facility (or, in a state that does not require licensing, a
facility that is operating pursuant to state law) providing medically necessary
in-patient care which is prescribed in writing by a licensed "physician" and
based on physical limitations which prohibit daily living in a non-institutional
setting; "fatal illness" means a condition diagnosed by a licensed physician
which is expected to result in death within two years of the diagnosis; and
"physician" means a person other than the Owner, Annuitant or a member of one of
their families who is state licensed to give medical care or treatment and is
acting within the scope of that license.
Where surrender charges have been waived under any of the situations discussed
above, no additional payments under the Contract will be accepted.
In addition, from time to time, the Company may allow a reduction in or
elimination of the surrender charges, the period during which the charges apply,
or both, and/or credit additional amounts on 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 also may
reduce or waive the surrender charge, and/or credit additional amounts on the
Contract where either the Owner or the Annuitant on the date of issue is within
the following class of individuals ("eligible persons"): employees and
registered representatives of any broker-dealer which has entered into a Sales
Agreement with the Company to sell the Contract; employees of the Company, its
affiliates or subsidiaries; officers, directors, trustees and employees of any
of the Undelrying Portfolios, investment managers or sub-advisers of the
Underlying Portfolios; 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. Finally, if permitted under
state law, surrender charges may be waived under Section 403(b) Contracts where
the amount withdrawn is being contributed to a life insurance policy issued by
the Company as part of the individual's Section 403(b) plan.
Any reduction or elimination in the amount or duration of the surrender charge
will not discriminate unfairly among purchasers of the Contract. The Company
will not make any changes to this charge where prohibited by law.
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Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the surrender
charge is modified to effect certain exchanges of existing contracts issued by
the Company for this Contract. See "Exchange Offer" in the SAI.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, including the
calendar year in which the Contract is issued, the Company will waive the
surrender charge, if any, on an amount ("Withdrawal Without Surrender Charge")
equal to the greatest of (1), (2) or (3):
Where (1) is: 100% of Cumulative Earnings (calculated as the Accumulated Value
as of the Valuation Date the Company receives the withdrawal
request, or the following day), reduced by the total gross
payments not previously withdrawn;
Where (2) is: 15% of the Accumulated Value as of the Valuation Date the Company
receives the withdrawal request, or the following day, reduced by
the total amount of any prior withdrawals made in the same
calendar year to which no surrender charge was applied;
Where (3) is: the amount calculated under the Company's life expectancy
distribution (LED) option (see Life Expectancy Distributions,
above) whether or not the withdrawal was part of such
distribution (applies only if Annuitant is also an Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without
Surrender Charge amount of $2,250, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 15% of Accumulated Value ($2,250); or
(3) LED distribution of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge will be deducted first from Cumulative
Earnings. If the Withdrawal Without Surrender Charge exceeds Cumulative
Earnings, the excess amount will be deemed withdrawn from payments not
previously withdrawn on a last-in-first-out ("LIFO") basis. This means that the
last payments credited to the Contract will be withdrawn first. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the surrender charge, if any, until the entire Withdrawal Without
Surrender Charge has been withdrawn. Amounts withdrawn from a Guarantee Period
Account prior to the end of the applicable Guarantee Period may be subject to a
Market Value Adjustment.
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the Surrender Value under the Contract, net of any applicable
tax withholding. Subject to the same rules applicable to withdrawals, the
Company will not assess a surrender charge on an amount equal to the highest
Withdrawal Without Surrender Charge Amount, described above.
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, with no
deduction for any otherwise applicable surrender charge. 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 further information on surrender and withdrawals, including minimum limits
on amount withdrawn and amount remaining under the Contract in the case of
withdrawals, and important tax considerations, see "E. Surrender" and "F.
Withdrawals" under DESCRIPTION OF THE CONTRACT, and see FEDERAL TAX
CONSIDERATIONS.
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CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If the Owner chooses any
commutable period certain option or a noncommutable fixed period certain option
for less than ten years (less than six years under New York contracts), a
surrender charge will be deducted from the Accumulated Value of the Contract if
the Annuity Date occurs at any time when a surrender charge would still apply
had the Contract been surrendered on the Annuity Date. (See discussion of period
certain variable annuity under "K. Description of Variable Annuity Payout
Options.")
No surrender charge is imposed at the time of annuitization in any Contract year
under an option involving a life contingency or for any noncommutable fixed
period certain option for ten years or more (six or more years under New York
contracts). A Market Value Adjustment, however, may apply. See GUARANTEE PERIOD
ACCOUNTS. If an owner of a fixed annuity contract issued by the Company wishes
to elect a variable annuity payout option, the Company may permit such owner to
exchange, at the time of annuitization, the fixed contract for a Contract
offered in this Prospectus. The proceeds of the fixed contract, minus any
surrender charge applicable under the fixed contract if a period certain option
is chosen, 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.
F. TRANSFER CHARGE
The first 12 transfers in a Contract are guaranteed to year be free of any
transfer charge, The Company does not currently charge for additional transfers
but reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing transfers. For more information, see
"D. Transfer Privilege" under DESCRIPTION OF THE CONTRACT.
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GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's 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
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, the Company currently gives 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 with notice at
the Company's discretion. However, under Contracts issued in New York, the
Company guarantees that it 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, although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "G. Death Benefit" under
DESCRIPTION OF THE CONTRACT. A Market Value Adjustment will apply to all other
transfers, withdrawals or a surrender. Amounts applied under an annuity option
are
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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 before deduction of any surrender charge by the market
value factor. The market value factor for each Guarantee Period Account is equal
to:
[(1+i)/(1+j)]TO THE POWER OF n/365 - 1
where: i is the Guaranteed Interest Rate expressed as a decimal (for
example: 3% = 0.03) being credited to the current Guarantee
Period;
j is the new Guaranteed Interest Rate, expressed as a decimal,
for a Guarantee Period with a duration equal to the number of
years remaining in the current Guarantee Period, rounded to
the next higher number of whole years. If that rate is not
available, the Company will use a suitable rate or index
allowed by the Department of Insurance; and
n is the number of days remaining from the Effective Valuation
Date to the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even if the account value
is decreased after application of a Market Value Adjustment, it will equal or
exceed the Owner's principal plus 3% earnings per year less applicable Contract
fees. Conversely, if the then current market rates are lower and the account
value is increased after the Market Value Adjustment is applied, the increase in
value also is affected by the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, See APPENDIX B -- SURRENDER CHARGES
AND THE MARKET VALUE ADJUSTEMENT.
PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals, in order
to ensure that the value in the Guarantee Period Account on the last day of the
Guarantee Period 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" under
DESCRIPTION OF THE CONTRACT.
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" under DESCRIPTION OF THE CONTRACT. In
addition, the following provisions also apply to withdrawals from a Guarantee
Period Account: (1) a Market Value Adjustment will apply to all withdrawals,
including Withdrawals without Surrender Charge, 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. If a surrender charge applies to
the withdrawal, it will be calculated as set forth in "E. Surrender Charge"
under CHARGES AND DEDUCTIONS after application of the Market Value Adjustment.
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FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Contract, on withdrawals
or surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, 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.
A. GENERAL
THE COMPANY. 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.
DIVERSIFICATION REQUIREMENTS. The IRS has issued regulations under Section
817(h) of the Code relating to the diversification requirements for variable
annuity and variable life insurance contracts. 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 Funds 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.
INVESTOR CONTROL. 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
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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.
B. 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 "E. Provisions Applicable to Qualified Employer Plans."
C. TAXATION OF THE CONTRACTS 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 Annuitant'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 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. 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 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. If the Annuitant dies
before the total investment in the Contract is recovered, a deduction for the
difference is allowed on the Annuitant'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 payee. 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,
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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
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. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
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 GOVERNMENT 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.
D. 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.
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E. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS
Federal income taxation of assets held inside a qualified retirement plan and of
earnings on those assets is deferred until distribution of plan benefits begins.
As such, it is not necessary to purchase a variable annuity contract solely to
obtain its tax deferral feature. However, other features offered under this
Contract and described in this Prospectus -- such as the minimum guaranteed
death benefit, the guaranteed fixed annuity rates and the wide variety of
investment options -- may make this Contract a suitable investment for your
qualified retirement plan.
The tax rules applicable to qualified employer plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to an 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 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,
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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 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
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
Underlying Portfolio no longer are available for investment or if in the
Company's judgment further investment in any Underlying 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 Underlying 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
53
<PAGE>
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.
Shares of the Underlying Portfolios also are issued to separate accounts of
other insurance companies which issue variable life contracts ("mixed funding").
Shares of the Underlying 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.
The Company reserves the right, subject to compliance with applicable law, to:
(1) transfer assets from the Variable Account or any of its Sub-Accounts to
another of the Company's separate 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 Underlying Portfolio shares held by a Sub-Account, in the event that
Underlying Portfolio shares are unavailable for investment, or if the
Company determines that further investment in such Underlying Portfolio
shares is inappropriate in view of the purpose of the Sub-Account,
(5) to change the methodology for determining the net investment factor,
(6) to change the names of the Variable Account or of the Sub-Accounts, and
(7) to combine with other Sub-Accounts or other Separate Accounts of the
Company.
If any of these substitutions or changes are made, the Company may endorse the
Contract to reflect the substitution or change, and will notify Owners of all
such changes. In no event will the changes described above 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, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation. Any such changes will apply uniformly to all
Contracts that are affected. You will be given written notice of such changes.
54
<PAGE>
VOTING RIGHTS
The Company will vote Underlying Portfolio shares held by each Sub-Account in
accordance with instructions received from Owners and, after the Annuity Date,
from the Annuitants. Each person having a voting interest in a Sub-Account will
be provided with proxy materials of the Underlying 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 or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Portfolio.
During the accumulation phase, the number of Underlying 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 Underlying Portfolio shares attributable to each Annuitant will be determined
by dividing the reserve held in each Sub-Account for the Annuitant's variable
annuity by the net asset value of one Underlying Portfolio share. Ordinarily,
the Annuitant's voting interest in the Underlying 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 7.0% of payments, to broker-dealers
that sell the Contract. Alternative commission schedules are available with
lower initial commission amounts based on payments, plus ongoing annual
compensation of up to 1% of Contract value. To the extent permitted by NASD
rules, promotional incentives or payments also may be provided to such
broker-dealers based on sales volumes, the assumption of wholesaling functions,
or other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated surrender charges and profits from the Company's
General Account, which may include amounts derived from mortality and expense
risk charges. Commissions paid on the Contract, including additional incentives
or payments, do not result in any additional charge to Owners or to the Variable
Account. Any surrender charges assessed on a Contract will be retained by the
Company.
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.
55
<PAGE>
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.
56
<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 the Contract is surrendered, or if an Excess Amount is withdrawn while the
Contract is in force and before the Annuity Date, a surrender charge is imposed
if such event occurs before the payments attributable to the surrender or
withdrawal have been credited to the Contract for at least six full Contract
years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If the Contract is issued prior to the Annuitant's 60th birthday,
allocations to the Fixed Account will be permitted until the
Annuitant's 61st birthday. On and after the Annuitant's 61st
birthday, no additional Fixed Account allocations will be
accepted. If the Contract is issued on or after the Annuitant's
60th birthday, up through and including the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the
first Contract year. On and after the first Contract anniversary,
no additional allocations to the Fixed Account will be permitted.
If a Contract is issued after the Annuitant's 81st birthday, no
payments to the Fixed Account will be permitted at any time.
In Oregon, no additional allocations will be accepted into the Fixed Account on
or after the third Contract anniversary. Further, no payments to the Fixed
Account will be permitted if the Contract is issued after the Annuitant's 81st
birthday.
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.
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER -- Assume a Payment of $50,000 is made on the issue date and no
additional payments are made. Assume there are no withdrawals and that the
Withdrawal Without Surrender Charge amount is equal to the greater of 15% of the
current Accumulated Value or the accumulated earnings in the Contract. The table
below presents examples of the surrender charge resulting from a full surrender
of the Owners' Contract, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE AMOUNT PERCENTAGE CHARGE
- ------- ------------ ---------------- ---------- ---------
<S> <C> <C> <C> <C>
1 $54,000.00 $ 8,100.00 7% $3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 12,985.60 5% 2,500.00
4 68,024.45 18,024.45 4% 2,000.00
5 73,466.40 23,466.40 3% 1,500.00
6 79,343.72 29,343.72 2% 1,000.00
7 85,691.21 35,691.21 0% 0.00
</TABLE>
WITHDRAWAL -- Assume a Payment of $50,000 is made on the issue date and no
additional payments are made. Assume that the Withdrawal Without Surrender
Charge amount is equal to the greater of 15% of the current Accumulated Value or
the accumulated earnings in the contract and there are withdrawals as detailed
below. The table below presents examples of the surrender charge resulting from
withdrawals from the Owners' Contract, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE SURRENDER
ACCOUNT ACCUMULATED WITHDRAWAL CHARGE SURRENDER
YEAR VALUE WITHDRAWAL AMOUNT PERCENTAGE CHARGE
- ------- ------------ ---------------- ---------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1 $54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 12,985.60 5% 0.00
4 68,024.45 30,000.00 18,024.45 4% 479.02
5 41,066.40 10,000.00 6,159.96 3% 115.20
6 33,551.72 5,000.00 5,032.76 2% 0.00
7 30,835.85 10,000.00 4,625.38 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
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.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
B-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<C> <C> <S>
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
= -.12054
The market value adjustment = the market value factor multiplied by the withdrawal
= -.12054 X $62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)*
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<C> <C> <S>
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
</TABLE>
*Uncapped is a straight application of the Market Value Adjustment formula when
the value produced is less than the cap.
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<C> <C> <S>
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 (-.17454 X $62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
</TABLE>
B-2
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)*
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<C> <C> <S>
The market value factor = [(1+i)/(1+j)] TO THE POWER OF n/365 - 1
= [(1+.08)/(1+.06)] TO THE POWER OF 2555/365 - 1
= (1.01887) TO THE POWER OF 7 - 1
= .13981
The market value adjustment = Minimum of the market value factor multiplied by the
withdrawal or the excess interest earned over 3%
The market value factor = Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
*Capped takes into account the excess interest part of the Market Value
Adjustment formula when the value produced is greater than the cap.
B-3
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1: DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Death Benefit Effective
Annual Yield is equal to 5%. The table below presents examples of the Death
Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) DEATH BENEFIT
- ---- ------------ ------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $0.00 $53,000.00 $52,500.00 $50,000.00 $53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield of 5%, reduced proportionately to reflect withdrawals.
Death Benefit (c) is the death benefit that would have been payable on the most
recent Contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
C-1
<PAGE>
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below and that
the Death Benefit Effective Annual Yield is equal to 5%. The table below
presents examples of the Death Benefit based on the hypothetical Accumulated
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED PARTIAL MARKET VALUE DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A)
- --------------------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
1 $53,000.00 $0.00 $0.00 $53,000.00
2 53,530.00 0.00 500.00 54,030.00
3 3,883.00 50,000.00 0.00 3,883.00
4 3,494.70 0.00 500.00 3,994.70
5 3,844.17 0.00 0.00 3,844.17
6 4,228.59 0.00 500.00 4,728.59
7 4,651.45 0.00 0.00 4,651.45
8 5,116.59 0.00 500.00 5,616.59
9 5,628.25 0.00 0.00 5,628.25
10 691.07 5,000.00 0.00 691.07
</TABLE>
<TABLE>
<CAPTION>
CONTRACT DEATH DEATH HYPOTHETICAL
YEAR BENEFIT (B) BENEFIT (C) DEATH BENEFIT
- --------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
1 $52,500.00 $50,000.00 $53,000.00
2 55,125.00 53,000.00 55,125.00
3 4,171.13 3,972.50 4,171.13
4 4,379.68 4,171.13 4,379.68
5 4,598.67 4,379.68 4,598.67
6 4,828.60 4,598.67 4,828.60
7 5,070.03 4,828.60 5,070.03
8 5,323.53 5,070.03 5,616.69
9 5,589.71 5,616.69 5,628.25
10 712.70 683.44 712.70
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
Death Benefit (b) is the gross payments accumulated daily at the Death Benefit
Effective Annual Yield reduced proportionately to reflect withdrawals.
Death Benefit (c) is the death benefit that would have been payable on the most
recent Contract anniversary, increased for subsequent payments, and decreased
proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
C-2
<PAGE>
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a Payment of $50,000 is made on the issue date and no additional Payments
are made. Assume there are no withdrawals. The table below presents examples of
the Death Benefit based on the hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT DEATH BENEFIT
- -------- ------------ ------------ -------------
<S> <C> <C> <C>
1 $53,000.00 $0.00 $53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
C-3
<PAGE>
APPENDIX D
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
SUB-ACCOUNT 1999 1998 1997 1996
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
KEMPER AGGRESSIVE GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.386 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 5,432 N/A N/A N/A
KEMPER TECHNOLOGY GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.761 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 31,063 N/A N/A N/A
KVS DREMAN FINANCIAL SERVICES PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.057 1.000 N/A N/A
End of Period....................................... 0.907 1.057 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 20,494 0 N/A N/A
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.528 1.309 0.989 1.000
End of Period....................................... 2.027 1.528 1.309 0.989
Number of Units Outstanding at End of Period (in
thousands)........................................... 37,457 34,993 16,339 210
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.074 1.227 1.022 1.000
End of Period....................................... 1.089 1.074 1.227 1.022
Number of Units Outstanding at End of Period (in
thousands)........................................... 39,614 49,408 29,597 314
KVS DREMAN HIGH RETURN EQUITY PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.057 1.000 N/A N/A
End of Period....................................... 0.893 1.057 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 78,707 0 N/A N/A
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.194 1.100 1.019 1.000
End of Period....................................... 1.715 1.194 1.100 1.019
Number of Units Outstanding at End of Period (in
thousands)........................................... 41,325 46,830 30,789 360
KEMPER NEW EUROPE PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.057 1.000 N/A N/A
End of Period....................................... 1.016 1.057 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 4,224 0 N/A N/A
KEMPER GLOBAL BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.057 1.000 N/A N/A
End of Period....................................... 1.235 1.057 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 8,559 0 N/A N/A
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
SUB-ACCOUNT 1999 1998 1997 1996
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.352 1.191 0.995 1.000
End of Period....................................... 1.828 1.352 1.191 0.995
Number of Units Outstanding at End of Period (in
thousands)........................................... 76,104 56,608 24,186 370
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.566 1.332 1.036 1.000
End of Period....................................... 1.387 1.566 1.332 1.036
Number of Units Outstanding at End of Period (in
thousands)........................................... 89,798 90,048 53,634 317
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.241 1.105 1.000 N/A
End of Period....................................... 1.532 1.241 1.105 N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 85,136 49,320 13,179 N/A
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.438 1.213 0.981 1.000
End of Period....................................... 1.652 1.438 1.213 0.981
Number of Units Outstanding at End of Period (in
thousands)........................................... 66,589 64,931 30,946 197
KVS INDEX 500 PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.090 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 17,600 N/A N/A N/A
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.318 1.183 0.995 1.000
End of Period....................................... 1.420 1.318 1.183 0.995
Number of Units Outstanding at End of Period (in
thousands)........................................... 16,868 19,538 7,768 226
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.321 1.164 0.984 1.000
End of Period....................................... 1.496 1.321 1.164 0.984
Number of Units Outstanding at End of Period (in
thousands)........................................... 141,157 85,265 31,284 353
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.267 1.154 1.002 1.000
End of Period....................................... 1.354 1.267 1.154 1.002
Number of Units Outstanding at End of Period (in
thousands)........................................... 32,883 28,551 10,199 39
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.124 1.123 1.020 1.000
End of Period....................................... 1.132 1.124 1.123 1.020
Number of Units Outstanding at End of Period (in
thousands)........................................... 130,757 132,619 64,934 941
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.206 1.114 1.002 1.000
End of Period....................................... 1.247 1.206 1.114 1.002
Number of Units Outstanding at End of Period (in
thousands)........................................... 25,267 19,335 7,888 53
</TABLE>
D-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
SUB-ACCOUNT 1999 1998 1997 1996
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
KEMPER STRATEGIC INCOME PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.115 1.019 1.000 N/A
End of Period....................................... 1.035 1.115 1.019 N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 3,483 2,760 1,317 N/A
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.148 1.079 1.003 1.000
End of Period....................................... 1.109 1.148 1.079 1.003
Number of Units Outstanding at End of Period (in
thousands)........................................... 41,387 29,010 8,255 22
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.126 1.067 0.993 1.000
End of Period....................................... 1.118 1.126 1.067 0.993
Number of Units Outstanding at End of Period (in
thousands)........................................... 45,653 28,997 7,815 498
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.080 1.042 1.004 1.000
End of Period....................................... 1.116 1.080 1.042 1.004
Number of Units Outstanding at End of Period (in
thousands)........................................... 59,036 28,692 15,760 1,904
KVS FOCUSED LARGE CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.281 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 637 N/A N/A N/A
KVS GROWTH OPPORTUNITIES PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.162 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 11,026 N/A N/A N/A
KVS GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.147 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 10,483 N/A N/A N/A
SCUDDER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.057 1.000 N/A N/A
End of Period....................................... 1.501 1.057 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 19,494 0 N/A N/A
SCUDDER GLOBAL DISCOVERY PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.057 1.000 N/A N/A
End of Period....................................... 1.563 1.057 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 10,987 0 N/A N/A
SCUDDER CAPITAL GROWTH PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.057 1.000 N/A N/A
End of Period....................................... 1.411 1.057 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 30,553 0 N/A N/A
</TABLE>
D-3
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
SUB-ACCOUNT 1999 1998 1997 1996
- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
SCUDDER GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.057 1.000 N/A N/A
End of Period....................................... 0.981 1.057 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 34,413 0 N/A N/A
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.197 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 1,495 N/A N/A N/A
ALGER AMERICAN BALANCED PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.058 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 0 N/A N/A N/A
DREYFUS MID CAP STOCK PORTFOLIO
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.080 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 516 N/A N/A N/A
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND
Unit Value $:
Beginning of Period................................. 1.000 N/A N/A N/A
End of Period....................................... 1.177 N/A N/A N/A
Number of Units Outstanding at End of Period (in
thousands)........................................... 878 N/A N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1999.
D-4
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT KG
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
SUB-ACCOUNT 1999 1998 1997
- ----------- -------- -------- --------
<S> <C> <C> <C>
KEMPER AGGRESSIVE GROWTH PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.386 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 119 N/A N/A
KEMPER TECHNOLOGY GROWTH PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.761 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 627 N/A N/A
KVS DREMAN FINANCIAL SERVICES PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.127 1.000 N/A
End of Period............................................. 1.055 1.127 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 272 51 N/A
KEMPER SMALL CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.150 0.985 1.000
End of Period............................................. 1.526 1.150 0.985
Number of Units Outstanding at End of Period (in
thousands)................................................. 498 232 18
KEMPER SMALL CAP VALUE PORTFOLIO
Unit Value $:
Beginning of Period....................................... 0.878 1.003 1.000
End of Period............................................. 0.890 0.878 1.003
Number of Units Outstanding at End of Period (in
thousands)................................................. 701 707 52
KVS DREMAN HIGH RETURN EQUITY PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.153 1.000 N/A
End of Period............................................. 1.010 1.153 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 2,012 450 N/A
KEMPER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.012 0.932 1.000
End of Period............................................. 1.453 1.012 0.932
Number of Units Outstanding at End of Period (in
thousands)................................................. 545 377 48
KEMPER NEW EUROPE PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.036 1.000 N/A
End of Period............................................. 1.166 1.036 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 196 5 N/A
KEMPER GLOBAL BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.042 1.000 N/A
End of Period............................................. 1.302 1.042 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 302 50 N/A
</TABLE>
D-5
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
SUB-ACCOUNT 1999 1998 1997
- ----------- -------- -------- --------
<S> <C> <C> <C>
KEMPER GROWTH PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.105 0.973 1.000
End of Period............................................. 1.494 1.105 0.973
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,323 512 16
KEMPER CONTRARIAN VALUE PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.193 1.014 1.000
End of Period............................................. 1.056 1.193 1.014
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,769 1,914 174
KEMPER BLUE CHIP PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.241 1.105 1.000
End of Period............................................. 1.532 1.241 1.105
Number of Units Outstanding at End of Period (in
thousands)................................................. 2,885 931 43
KEMPER VALUE+GROWTH PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.138 0.960 1.000
End of Period............................................. 1.307 1.138 0.960
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,627 1,081 125
KVS INDEX 500 PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.090 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 60 N/A N/A
KEMPER HORIZON 20+ PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.092 0.980 1.000
End of Period............................................. 1.177 1.092 0.980
Number of Units Outstanding at End of Period (in
thousands)................................................. 126 35 5
KEMPER TOTAL RETURN PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.151 1.014 1.000
End of Period............................................. 1.303 1.151 1.014
Number of Units Outstanding at End of Period (in
thousands)................................................. 2,696 1,222 42
KEMPER HORIZON 10+ PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.115 1.016 1.000
End of Period............................................. 1.192 1.115 1.016
Number of Units Outstanding at End of Period (in
thousands)................................................. 1,102 789 21
KEMPER HIGH YIELD PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.005 1.004 1.000
End of Period............................................. 1.012 1.005 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 2,786 2,121 75
KEMPER HORIZON 5 PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.101 1.017 1.000
End of Period............................................. 1.138 1.101 1.017
Number of Units Outstanding at End of Period (in
thousands)................................................. 197 643 81
</TABLE>
D-6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
SUB-ACCOUNT 1999 1998 1997
- ----------- -------- -------- --------
<S> <C> <C> <C>
KEMPER STRATEGIC INCOME PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.115 1.019 1.000
End of Period............................................. 1.035 1.115 1.019
Number of Units Outstanding at End of Period (in
thousands)................................................. 55 26 11
KEMPER INVESTMENT GRADE BOND PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.069 1.004 1.000
End of Period............................................. 1.032 1.069 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 643 404 21
KEMPER GOVERNMENT SECURITIES PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.060 1.004 1.000
End of Period............................................. 1.052 1.060 1.004
Number of Units Outstanding at End of Period (in
thousands)................................................. 696 971 21
KEMPER MONEY MARKET PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.037 1.000 1.000
End of Period............................................. 1.072 1.037 1.000
Number of Units Outstanding at End of Period (in
thousands)................................................. 2,322 772 5
KVS FOCUSED LARGE CAP GROWTH PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.281 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 2 N/A N/A
KVS GROWTH OPPORTUNITIES PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.162 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 2 N/A N/A
KVS GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.147 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 2 N/A N/A
SCUDDER INTERNATIONAL PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.099 1.000 N/A
End of Period............................................. 1.675 1.099 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 327 201 N/A
SCUDDER GLOBAL DISCOVERY PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 1.000 N/A
End of Period............................................. 1.412 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 57 0 N/A
SCUDDER CAPITAL GROWTH PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.172 1.000 N/A
End of Period............................................. 1.562 1.172 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 848 143 N/A
</TABLE>
D-7
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
SUB-ACCOUNT 1999 1998 1997
- ----------- -------- -------- --------
<S> <C> <C> <C>
SCUDDER GROWTH AND INCOME PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.103 1.000 N/A
End of Period............................................. 1.153 1.103 N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 779 411 N/A
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.197 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 24 N/A N/A
ALGER AMERICAN BALANCED PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.058 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 2 N/A N/A
DREYFUS MID CAP STOCK PORTFOLIO
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.110 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 4 N/A N/A
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND
Unit Value $:
Beginning of Period....................................... 1.000 N/A N/A
End of Period............................................. 1.173 N/A N/A
Number of Units Outstanding at End of Period (in
thousands)................................................. 2 N/A N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1999.
D-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT KG
INVESTING IN SHARES OF THE UNDERLYING PORTFOLIOS
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE READ
IN CONJUNCTION WITH THE KEMPER GATEWAY ELITE PROSPECTUS OF SEPARATE ACCOUNT KG,
DATED MAY 1, 2000 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM
ANNUITY CLIENT SERVICES, FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY, 440
LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE 1-800-782-8380.
DATED MAY 1, 2000
FAFLIC Kemper Gateway Elite
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
GENERAL INFORMATION AND HISTORY..............................................2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE
COMPANY.................................................................3
SERVICES.....................................................................3
UNDERWRITERS.................................................................3
ANNUITY BENEFIT PAYMENTS.....................................................4
EXCHANGE OFFER...............................................................6
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM..................8
PERFORMANCE INFORMATION......................................................8
TAX-DEFERRED ACCUMULATION....................................................15
FINANCIAL STATEMENTS.........................................................F-1
</TABLE>
GENERAL INFORMATION AND HISTORY
Separate Account KG (the "Variable Account") is a separate investment account of
First Allmerica Financial Life Insurance Company (the "Company") authorized by
vote of its Board of Directors on June 13, 1996. The Company, organized under
the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1999, the Company and its subsidiaries
had over $43 billion in combined assets and over $8 billion in life insurance in
force. Effective October 16, 1995, the Company 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. At that time, the
Company became a wholly owned subsidiary of Allmerica Financial Corporation
("AFC"). The Company's 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 Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, the Company is subject to the insurance laws and
regulations of other states and jurisdictions in which it is licensed to
operate.
Currently, 37 Sub-Accounts of the Variable Account are available under the
Kemper Gateway Elite contract. (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 Alger American Fund
("Alger') or Warburg Pincus Trust, open-end, registered management investment
companies.
Twenty-six different portfolios of KVS are available under the Contract: the
Kemper Aggressive Growth Portfolio, Kemper Technology Growth Portfolio, KVS
Dreman Financial Services Portfolio (formerly Kemper-Dreman Financial Services
Portfolio), Kemper Small Cap Growth Portfolio, Kemper Small Cap Value Portfolio,
KVS Dreman High Return Equity Portfolio (formerly Kemper-Dreman High Return
Equity Portfolio), Kemper International Portfolio, Kemper International Growth
and Income Portfolio, Kemper Global Blue Chip Portfolio, Kemper Growth
Portfolio, Kemper Contrarian Value Portfolio, Kemper Blue Chip Portfolio, Kemper
Value+Growth Portfolio, KVS Index 500 Portfolio (formerly Kemper Index 500
Portfolio), Kemper Horizon 20+
2
<PAGE>
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 KVS Growth Opportunities Portfolio, KVS
Growth And Income Portfolio and KVS Focused Large Cap Growth Portfolio. Five
portfolios of Scudder VLIF are available under the Contract: the Scudder 21st
Century Growth Portfolio, 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 Alger are
available under the Contract: the Alger American Leveraged AllCap Portfolio and
the Alger American Balanced Portfolio. Two portfolios of Warburg Pincus Trust
are available under the Contract: the Warburg Pincus Emerging Markets Portfolio
and the Warburg Pincus Global Post-Venture Capital 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 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, 1999 and
1998 and for each of the three years in the period ended December 31, 1999, and
the financial statements of Separate Account KG of the Company as of December
31, 1999 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 7.0% of purchase payments, to
broker-dealers that 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 1.0% 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. The Company intends to recoup the commission and
other sales expense through a combination of anticipated surrender, withdrawal
and/or annuitization charges, profits from the Company's general account,
including the investment earnings on amounts allocated to accumulate on a fixed
basis in excess of the interest credited on fixed accumulations by the Company,
and the profit, if any, from the mortality and expense risk charge.
The aggregate amounts of commissions paid to Allmerica Investments for sales of
all contracts funded by Separate Account KG (including contracts not described
in the Prospectus) for the years 1997, 1998 and 1999 were $97,905, $1,218,883
and $1,213,957.
No commissions were retained by Allmerica Investments for sales of all contracts
funded by Separate Account KG (including contracts not described in the
Prospectus) for the years 1997, 1998 and 1999.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period........................................$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period............................................$5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses...................................$1,675
4
<PAGE>
(4) Adjusted Gross Investment Rate for the Valuation Period (3) divided by (2)...................0.000335
(5) Annual Charge (one-day equivalent of 1.40% per annum)........................................0.000039
(6) Net Investment Rate (4) - (5)................................................................0.000296
(7) Net Investment Factor 1.000000 + (6).........................................................1.000296
(8) Accumulation Unit Value -- Current Period (1) x (7).........................................$ 1.135336
</TABLE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134576.
The method for determining the amount of annuity benefit payments is described
in detail under "Determination of the First Variable Annuity Benefit Payment" 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 Variable Account, and that the
value of an Accumulation Unit on the Valuation Date used to determine the amount
of the first variable annuity benefit 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 or surrender
charge, the first monthly payment would be $4.80 ($44,800 divided by $1,000)
multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed interest 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 fixed period certain annuity options and
commutable variable 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
5
<PAGE>
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.
EXCHANGE OFFER
A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER
The Company will permit Owners of certain variable annuity contracts issued by
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC"), described
below, to exchange their contracts at net asset value for the variable annuity
contracts described in the Prospectus, which are issued on Form No. A3025-96 or
a state variation thereof ("new Contract"). The Company reserves the right to
suspend this exchange offer at any time.
This offer applies to the exchange of Elective Payment Variable Annuity
contracts issued by AFLIAC on Forms A3012-79 and A3013-79 ("Elective Payment
Exchanged Contract," all such contracts having numbers with a "JQ" or "JN"
prefix), and Single Payment Variable Annuity contracts issued on Forms A3014-79
and A3015-79 ("Single Payment Exchanged Contract," all such contracts having
numbers with a "KQ" or "KN" prefix). These contracts are referred to
collectively as the "Exchanged Contract." To effect an exchange, the Company
should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
SURRENDER CHARGE COMPUTATION. No surrender charge otherwise applicable to the
Exchanged Contract will be assessed as a result of the exchange. Instead, the
surrender charge under the new Contract will be computed as if the payments that
had been made to the Exchanged Contract were made to the new Contract, as of the
date of issue of the Exchanged Contract. Any additional payments to the new
Contract after the exchange will be subject to the surrender charge computation
outlined in the new Contract and Prospectus; i.e., the charge will be computed
based on the number of years that the additional payment (or portion of that
payment) that is being withdrawn has been credited to the new Contract.
SUMMARY OF DIFFERENCES BETWEEN EXCHANGED CONTRACT AND THE NEW CONTRACT. The new
Contract and the Exchanged Contract differ substantially as summarized below.
There may be additional differences important to a person considering an
exchange, and the Prospectuses for the new Contract and the Exchanged Contract
should be reviewed carefully before the exchange request is submitted to the
Company.
SURRENDER CHARGE. The surrender charge under the new Contract, as described in
the Prospectus, imposes higher charge percentages against the excess amount
redeemed than the Exchanged Contract and, in the case of a Single Payment
Exchanged Contract, applies the charge for a greater number of years. In
addition, if an Elective Payment Exchanged Contract was issued more than nine
years before the date of an exchange under this offer, additional payments to
the Exchanged Contract would not be subject to a surrender charge. New payments
to the new Contract may be subject to a charge if withdrawn prior to the
surrender charge period described in the Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k) plan. No
Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Exchanged Contract if the
Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.15% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
6
<PAGE>
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25 for
each transfer after the twelfth in any contract year.
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity rates.
INVESTMENTS. Accumulated Values and payments under the new Contract may be
allocated to significantly more investment options than are available under the
Exchanged Contract.
DEATH BENEFIT. The Exchanged Contract offers a death benefit that is guaranteed
to be the greater of a Contract's Accumulated Value or gross payments made (less
withdrawals). At the time an exchange is processed, the Accumulated Value of the
Exchanged Contract becomes the "payment" for the new Contract. Therefore, prior
purchase payments made under the Exchanged Contract (if higher than the
Exchanged Contract's Accumulated Value) no longer are a basis for determining
the death benefit under the new Contract. Consequently, whether the initial
minimum death benefit under the new Contract is greater than, equal to, or less
than, the death benefit of the Exchanged Contract depends on whether the
Accumulated Value transferred to the new Contract is greater than, equal to, or
less than, the gross payments under the Exchanged Contract. In addition, under
the Exchanged Contract, the amount of any prior withdrawals is subtracted from
the value of the death benefit. Under the new Contract, where there is a
reduction in the death benefit amount due to a prior withdrawal, the value of
the death benefit is reduced in the same proportion that the new Contract's
Accumulated Value was reduced on the date of the withdrawal.
B. FIXED ANNUITY EXCHANGE OFFER
This exchange offer also applies to all fixed annuity contracts issued by the
Company's subsidiary, Allmerica Financial Life Insurance and Annuity Company. A
fixed annuity contract to which this exchange offer applies may be exchanged at
net asset value for the Contract described in this Prospectus, subject to the
same provisions for effecting the exchange and for applying the new Contract's
surrender charge as described above for variable annuity contracts. This
Prospectus should be read carefully before making such exchange. Unlike a fixed
annuity, the new Contract's value is not guaranteed and will vary depending on
the investment performance of the Underlying Portfolios to which it is
allocated. The new Contract has a different charge structure than a fixed
annuity contract, which includes not only a surrender charge that may vary from
that of the class of contracts to which the exchanged fixed contract belongs,
but also Contract fees, mortality and expense risk charges (for the Company's
assumption of certain mortality and expense risks), administrative expense
charges, transfer charges (for transfers permitted among Sub-Accounts and the
Fixed Account), and expenses incurred by the Underlying Portfolios.
Additionally, the interest rates offered under the Fixed Account of the new
Contract and the Annuity Tables for determining minimum annuity benefit payments
may be different from those offered under the exchanged fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE
Persons who, under the terms of this exchange offer, exchange their contract for
the new Contract and subsequently cancel the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right to
Cancel Individual Retirement Annuity" and "Right to Cancel All Other Contracts,"
will have their exchanged contract automatically reinstated as of the date of
cancellation. The refunded amount will be applied as the new current Accumulated
Value under the reinstated contract, which may be more or less than it would
have been had no exchange and reinstatement occurred. The refunded amount will
be allocated initially among the Fixed Account and Sub-Accounts of the
reinstated contract in the same proportion that the value in the Fixed Account
and the value in each Sub-Account bore to the transferred Accumulated Value on
the date of the exchange of the contract for the new Contract. For purposes of
calculating any surrender charge under the reinstated contract, the reinstated
contract will be deemed to have been issued and to have received past purchase
payments as if there had been no exchange.
7
<PAGE>
ENHANCED AUTOMATIC TRANSFER (DOLLAR COST AVERAGING) PROGRAM
To the extent permitted by law, the Company reserves the right to offer an
Enhanced Automatic Transfer (Dollar Cost Averaging) Program from time to time.
If an Owner elects automatic transfers while the enhanced program is in effect,
the Company will credit an enhanced interest rate to eligible payments made to
the Enhanced Automatic Transfer Program. Eligible payments:
- must be new payments to the Contract, including the initial payment,
- must be allocated to the Fixed Account, which will be the source
account,
- must be automatically transferred out of the Fixed Account to one or
more Sub-Accounts over a specified time period and
- will receive the enhanced rate while they remain in the Fixed Account.
Any new eligible payments made to an existing Enhanced Automatic Transfer
program will start a new Enhanced Automatic Transfer program. In this case, the
following rules apply:
- The money remaining in the Fixed Account from the original program
will be combined with the new eligible payment to determine the new
monthly transfer amount.
- The new monthly transfer amount will be transferred out of the Fixed
Account in accordance with the allocation instructions specified for
the new payment. If no allocation instructions are specified with the
new eligible payment, the allocation instructions for the original
eligible payment will be used. The new monthly transfer amount will be
transferred out of the Fixed Account on a LIFO (last-in, first-out
basis) to the selected Sub-Accounts on the date designated for the new
eligible payment.
- A new enhanced interest rate may be applied to the new eligible
payment, while the money remaining in the Fixed Account from the
original program will continue to receive the enhanced rate in effect
at the time the older payment was received.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on various
topics of interest to Owners and prospective Owners. These topics may include
the relationship between sectors of the economy and the economy as a whole and
its effect on various securities markets, investment strategies and techniques
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparisons
between the Contract and the characteristics of and market for such financial
instruments. Total return data and supplemental total return information may be
advertised based on the period of time that an Underlying Portfolio and/or 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
8
<PAGE>
"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 and any applicable surrender charge which
would be assessed upon complete withdrawal of the investment.
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 deduction of the surrender charge, if any, applicable at the end of
the period is included in the calculation, according to the following schedule:
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF NEW PURCHASE PAYMENTS
WITHDRAWAL WITHDRAWN*
---------- ----------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
Thereafter 0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No surrender charge is deducted upon expiration of the periods specified above.
In each calendar year, a certain amount (withdrawal without surrender charge
amount, as described in the Prospectus) is not subject to the surrender charge.
The calculations of Total Return reflect the deduction of the $30 annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section 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 charges.
However, it is assumed that the investment is NOT withdrawn at the end of each
period.
9
<PAGE>
The quotations of Supplemental Total Return 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 values, according to the following
formula:
(n)
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable
Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of
the specified period
The calculation of Supplemental Total Return reflects the 1.40% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
Contract is NOT surrendered at the end of the specified period, and therefore
there is no adjustment for the surrender charge that would be applicable if the
Contract was surrendered at the end of the period. The calculation of
supplemental total return does not include the deduction of the $30 annual
Contract fee.
10
<PAGE>
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/99 SUB-ACCOUNT
- -------------------- -------------- -------- -----------
<S> <C> <C> <C>
Kemper Aggressive Growth........................................... 5/3/99 N/A 31.59%
Kemper Technology Growth........................................... 5/3/99 N/A 69.05%
KVS Dreman Financial Services...................................... 10/27/98 -11.97% 0.08%
Kemper Small Cap Growth............................................ 10/16/97 25.47% 18.94%
Kemper Small Cap Value............................................. 11/18/97 -4.89% -7.66%
KVS Dreman High Return Equity...................................... 10/12/98 -17.64% -3.45%
Kemper International............................................... 10/16/97 36.48% 16.30%
Kemper New Europe.................................................. 12/9/98 5.80% 10.00%
Kemper Global Blue Chip............................................ 11/17/98 17.93% 21.32%
Kemper Growth...................................................... 10/16/97 28.00% 17.80%
Kemper Contrarian Value............................................ 10/14/97 -17.06% 0.07%
Kemper Blue Chip................................................... 5/1/97 16.15% 15.57%
Kemper Value+Growth................................................ 10/14/97 7.77% 10.46%
KVS Index 500...................................................... 9/1/99 N/A 2.56%
Kemper Horizon 20+................................................. 10/16/97 1.28% 5.50%
Kemper Total Return................................................ 11/17/97 6.12% 10.73%
Kemper Horizon 10+................................................. 11/25/97 0.43% 6.41%
Kemper High Yield.................................................. 10/16/97 -5.58% -1.87%
Kemper Horizon 5................................................... 11/10/97 -2.82% 4.03%
Kemper Strategic Income............................................ 5/1/97 -12.72% -0.35%
Kemper Investment Grade Bond....................................... 12/11/97 -9.27% -0.71%
Kemper Government Securities....................................... 12/11/97 -6.69% 0.26%
Kemper Money Market................................................ 12/29/97 -2.82% 1.25%
KVS Focused Large Cap Growth....................................... 10/29/99 N/A 21.09%
KVS Growth Opportunities........................................... 10/29/99 N/A 9.24%
KVS Growth And Income.............................................. 10/29/99 N/A 7.84%
Scudder 21st Century Growth........................................ N/A N/A N/A
Scudder International.............................................. 8/28/98 45.35% 43.11%
Scudder Global Discovery........................................... 10/20/99 N/A 34.18%
Scudder Capital Growth............................................. 10/28/98 26.34% 41.38%
Scudder Growth and Income.......................................... 8/28/98 -1.64% 6.97%
Alger American Leveraged AllCap.................................... 11/15/99 N/A 12.67%
Alger American Balanced............................................ 11/15/99 N/A -0.49%
Dreyfus MidCap Stock............................................... 9/21/99 N/A 4.41%
Dreyfus Socially Responsible Growth................................ 9/21/99 N/A 10.28%
Warburg Pincus Emerging Markets.................................... N/A N/A N/A
Warburg Pincus Global Post-Venture Capital......................... N/A N/A N/A
</TABLE>
11
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN SUB-ACCOUNT ENDED INCEPTION OF
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/99 SUB-ACCOUNT
- -------------------- -------------- -------- -----------
<S> <C> <C> <C>
Kemper Aggressive Growth................................................. 5/3/99 N/A 38.59%
Kemper Technology Growth................................................. 5/3/99 N/A 76.05%
KVS Dreman Financial Services............................................ 10/27/98 -6.38% 4.65%
Kemper Small Cap Growth.................................................. 10/16/97 32.68% 21.10%
Kemper Small Cap Value................................................... 11/18/97 1.36% -5.38%
KVS Dreman High Return Equity............................................ 10/12/98 -12.40% 0.83%
Kemper International..................................................... 10/16/97 43.67% 18.44%
Kemper New Europe........................................................ 12/9/98 12.50% 15.57%
Kemper Global Blue Chip.................................................. 11/17/98 24.93% 26.55%
Kemper Growth............................................................ 10/16/97 35.21% 19.93%
Kemper Contrarian Value.................................................. 10/14/97 -11.47% 2.50%
Kemper Blue Chip......................................................... 5/1/97 23.48% 17.34%
Kemper Value+Growth...................................................... 10/14/97 14.89% 12.87%
KVS Index 500............................................................ 9/1/99 N/A 9.04%
Kemper Horizon 20+....................................................... 10/16/97 7.73% 7.65%
Kemper Total Return...................................................... 11/17/97 13.20% 13.31%
Kemper Horizon 10+....................................................... 11/25/97 6.87% 8.72%
Kemper High Yield........................................................ 10/16/97 0.72% 0.54%
Kemper Horizon 5......................................................... 11/10/97 3.39% 6.24%
Kemper Strategic Income.................................................. 5/1/97 -7.17% 1.31%
Kemper Investment Grade Bond............................................. 12/11/97 -3.43% 1.55%
Kemper Government Securities............................................. 12/11/97 -0.72% 2.50%
Kemper Money Market...................................................... 12/29/97 3.37% 3.52%
KVS Focused Large Cap Growth............................................. 10/29/99 N/A 28.09%
KVS Growth Opportunities................................................. 10/29/99 N/A 16.15%
KVS Growth And Income.................................................... 10/29/99 N/A 14.66%
Scudder 21st Century Growth.............................................. N/A N/A N/A
Scudder International.................................................... 8/28/98 52.35% 47.08%
Scudder Global Discovery................................................. 10/20/99 N/A 41.18%
Scudder Capital Growth................................................... 10/28/98 33.34% 46.18%
Scudder Growth and Income................................................ 8/28/98 4.60% 11.26%
Alger American Leveraged AllCap.......................................... 11/15/99 N/A 19.67%
Alger American Balanced.................................................. 11/15/99 N/A 5.81%
Dreyfus MidCap Stock..................................................... 9/21/99 N/A 11.02%
Dreyfus Socially Responsible Growth...................................... 9/21/99 N/A 17.26%
Warburg Pincus Emerging Markets.......................................... N/A N/A N/A
Warburg Pincus Global Post-Venture Capital............................... N/A N/A N/A
</TABLE>
12
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(ASSUMING COMPLETE WITHDRAWAL OF INVESTMENT)
<TABLE>
<CAPTION>
UNDERLYING FOR YEAR 10 YEARS
SUB-ACCOUNT INVESTING IN PORTFOLIO ENDED (OR SINCE
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/99 5 YEARS INCEPTION IF LESS)
- -------------------- -------------- -------- ------- ------------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth.............................. 5/3/99 N/A N/A 31.59%
Kemper Technology Growth.............................. 5/3/99 N/A N/A 69.05%
KVS Dreman Financial Services......................... 5/4/98 -11.97% N/A -8.65%
Kemper Small Cap Growth............................... 5/2/94 25.47% 26.72% 23.92%
Kemper Small Cap Value................................ 5/1/96 -4.89% N/A 0.79%
KVS Dreman High Return Equity......................... 5/4/98 -17.64% N/A -9.53%
Kemper International.................................. 1/6/92 36.48% 16.05% 12.67%
Kemper New Europe..................................... 5/5/98 5.80% N/A -2.16%
Kemper Global Blue Chip............................... 5/5/98 17.93% N/A 8.90%
Kemper Growth......................................... 12/9/83 28.00% 23.24% 17.17%
Kemper Contrarian Value............................... 5/1/96 -17.06% N/A 11.75%
Kemper Blue Chip...................................... 5/1/97 16.15% N/A 15.57%
Kemper Value+Growth................................... 5/1/96 7.77% N/A 18.41%
KVS Index 500......................................... 9/1/99 N/A N/A 2.56%
Kemper Horizon 20+.................................... 5/1/96 1.28% N/A 13.45%
Kemper Total Return................................... 4/6/82 6.12% 16.22% 11.48%
Kemper Horizon 10+.................................... 5/1/96 0.43% N/A 10.60%
Kemper High Yield..................................... 4/6/82 -5.58% 6.94% 8.91%
Kemper Horizon 5...................................... 5/1/96 -2.82% N/A 7.60%
Kemper Strategic Income............................... 5/1/97 -12.72% N/A -0.35%
Kemper Investment Grade Bond.......................... 5/1/96 -9.27% N/A 2.41%
Kemper Government Securities.......................... 9/3/87 -6.69% 5.41% 5.56%
Kemper Money Market................................... 4/6/82 -2.82% 3.13% 3.47%
KVS Focused Large Cap Growth.......................... 10/29/99 N/A N/A 21.09%
KVS Growth Opportunities.............................. 10/29/99 N/A N/A 9.24%
KVS Growth And Income................................. 10/29/99 N/A N/A 7.84%
Scudder 21st Century Growth........................... 5/3/99 N/A N/A 66.36%
Scudder International................................. 5/1/87 45.35% 18.55% 11.67%
Scudder Global Discovery.............................. 5/1/96 56.59% N/A 22.99%
Scudder Capital Growth................................ 7/16/85 26.34% 26.43% 16.39%
Scudder Growth and Income............................. 5/2/94 -1.64% 16.97% 15.72%
Alger American Leveraged AllCap....................... 1/25/95 68.59% N/A 44.31%
Alger American Balanced............................... 9/5/89 20.43% 21.62% 12.04%
Dreyfus MidCap Stock.................................. 5/1/98 2.78% N/A -0.06%
Dreyfus Socially Responsible Growth................... 10/7/93 21.30% 24.87% 20.44%
Warburg Pincus Emerging Markets...................... 12/31/97 71.82% N/A 18.24%
Warburg Pincus Global Post-Venture Capital........... 9/30/96 53.65% N/A 19.19%
</TABLE>
13
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1999
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(ASSUMING NO WITHDRAWAL OF INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
UNDERLYING FOR YEAR 10 YEARS
SUB-ACCOUNT INVESTING IN PORTFOLIO ENDED (OR SINCE
UNDERLYING PORTFOLIO INCEPTION DATE 12/31/99 5 YEARS INCEPTION IF LESS)
- -------------------- -------------- -------- ------- ------------------
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................................ 5/3/99 N/A N/A 38.59%
Kemper Technology Growth................................ 5/3/99 N/A N/A 76.05%
KVS Dreman Financial Services........................... 5/4/98 -6.38% N/A -5.71%
Kemper Small Cap Growth................................. 5/2/94 32.68% 27.13% 24.24%
Kemper Small Cap Value.................................. 5/1/96 1.36% N/A 1.98%
KVS Dreman High Return Equity........................... 5/4/98 -12.40% N/A -6.60%
Kemper International.................................... 1/6/92 43.67% 16.56% 12.84%
Kemper New Europe....................................... 5/5/98 12.50% N/A 0.98%
Kemper Global Blue Chip................................. 5/5/98 24.93% N/A 12.29%
Kemper Growth........................................... 12/9/83 35.21% 23.63% 17.29%
Kemper Contrarian Value................................. 5/1/96 -11.47% N/A 12.82%
Kemper Blue Chip........................................ 5/1/97 23.48% N/A 17.34%
Kemper Value+Growth..................................... 5/1/96 14.89% N/A 19.34%
KVS Index 500........................................... 9/1/99 N/A N/A 9.04%
Kemper Horizon 20+...................................... 5/1/96 7.73% N/A 14.26%
Kemper Total Return..................................... 4/6/82 13.20% 16.82% 11.74%
Kemper Horizon 10+...................................... 5/1/96 6.87% N/A 11.50%
Kemper High Yield....................................... 4/6/82 0.72% 7.63% 9.10%
Kemper Horizon 5........................................ 5/1/96 3.39% N/A 8.53%
Kemper Strategic Income................................. 5/1/97 -7.17% N/A 1.31%
Kemper Investment Grade Bond............................ 5/1/96 -3.43% N/A 3.49%
Kemper Government Securities............................ 9/3/87 -0.72% 5.97% 5.63%
Kemper Money Market..................................... 4/6/82 3.37% 3.72% 3.55%
KVS Focused Large Cap Growth............................ 10/29/99 N/A N/A 28.09%
KVS Growth Opportunities................................ 10/29/99 N/A N/A 16.15%
KVS Growth And Income................................... 10/29/99 N/A N/A 14.66%
Scudder 21st Century Growth............................. 5/3/99 N/A N/A 73.37%
Scudder International................................... 5/1/87 52.35% 18.85% 11.67%
Scudder Global Discovery................................ 5/1/96 63.59% N/A 23.61%
Scudder Capital Growth.................................. 7/16/85 33.34% 26.67% 16.40%
Scudder Growth and Income............................... 5/2/94 4.60% 17.29% 15.90%
Alger American Leveraged AllCap......................... 1/25/95 75.59% N/A 44.45%
Alger American Balanced................................. 9/5/89 27.43% 21.90% 12.04%
Dreyfus MidCap Stock.................................... 5/1/98 9.28% N/A 3.13%
Dreyfus Socially Responsible Growth..................... 10/7/93 28.30% 26.89% 22.39%
Warburg Pincus Emerging Markets......................... 12/31/97 78.83% N/A 20.76%
Warburg Pincus Global Post-Venture Capital.............. 9/30/96 60.66% N/A 20.23%
</TABLE>
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, 1999:
14
<PAGE>
<TABLE>
<S> <C>
Yield 4.72%
Effective Yield 4.83%
</TABLE>
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, 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 $30 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 TAX CONSIDERATIONS" 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; 7%
maximum surrender charge; and $30 annual Contract fee. The tax-deferred
accumulation would be reduced if these charges were reflected. No implication is
intended by the use of these assumptions that the return shown is guaranteed in
any way or that the return shown represents an average or expected rate of
return over the period of the Contract. (IMPORTANT -- THIS IS NOT AN
ILLUSTRATION OF YIELD OR RETURN.)
Unlike savings plans, contributions to non-qualified annuity contracts provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of
15
<PAGE>
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 First Allmerica Financial Life Insurance
Company and for its Separate Account KG.
16
<PAGE>
FIRST ALLMERICA
FINANCIAL LIFE
INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
First Allmerica Financial Life Insurance 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 First Allmerica Financial Life Insurance Company (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 1, 2000
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 954.5 $1,969.5 $1,980.4
Universal life and investment product
policy fees.............................. 359.3 296.6 237.3
Net investment income...................... 503.1 593.9 619.5
Net realized investment gains.............. 100.3 60.9 76.3
Other income............................... 107.3 100.0 81.5
-------- -------- --------
Total revenues......................... 2,024.5 3,020.9 2,995.0
-------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 1,056.3 1,803.0 1,763.9
Policy acquisition expenses................ 240.9 449.6 421.8
Sales practice litigation.................. -- 31.0 --
Loss from cession of disability income
business................................. -- -- 53.9
Restructuring costs........................ -- 9.0 --
Other operating expenses................... 346.3 419.7 404.0
-------- -------- --------
Total benefits, losses and expenses.... 1,643.5 2,712.3 2,643.6
-------- -------- --------
Income from continuing operations before
federal income taxes.......................... 381.0 308.6 351.4
-------- -------- --------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 88.7 74.6 74.4
Deferred................................... 4.3 (15.4) 14.2
-------- -------- --------
Total federal income tax expense....... 93.0 59.2 88.6
-------- -------- --------
Income from continuing operations before
minority interest............................. 288.0 249.4 262.8
Minority interest.......................... (39.9) (55.0) (79.4)
-------- -------- --------
Income from continuing operations.............. 248.1 194.4 183.4
(Loss) income from operations of discontinued
business (less applicable income taxes
(benefit) of $(10.1), $(7.0) and $8.9 for the
years ended December 31, 1999, 1998 and 1997,
respectively) (17.2) (13.5) 16.6
Loss on disposal of group life and health
business, including provision of $72.2 for
operating losses during phase-out period for
the year ended December 31, 1999 (less
applicable income tax benefit of $16.4) (30.5) -- --
-------- -------- --------
Net income..................................... $ 200.4 $ 180.9 $ 200.0
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-1
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998
------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$3,721.6 and $7,520.8)............................ $ 3,660.7 $ 7,683.9
Equity securities at fair value (cost of $27.9 and
$253.1)........................................... 51.4 397.1
Mortgage loans...................................... 521.2 562.3
Policy loans........................................ 170.5 154.3
Real estate and other long-term investments......... 177.0 163.1
--------- ---------
Total investments............................... 4,580.8 8,960.7
--------- ---------
Cash and cash equivalents............................. 279.3 504.0
Accrued investment income............................. 73.3 141.0
Deferred policy acquisition costs..................... 1,219.5 1,161.2
Reinsurance receivable on unpaid losses, benefits and
unearned premiums................................... 480.3 1,136.4
Deferred federal income taxes......................... 18.1 19.4
Premiums, accounts and notes receivable............... 81.0 510.5
Other assets.......................................... 199.6 530.6
Closed Block assets................................... 772.3 803.1
Separate account assets............................... 17,629.6 13,697.7
--------- ---------
Total assets.................................... $25,333.8 $27,464.6
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,825.0 $ 2,802.2
Outstanding claims, losses and loss adjustment
expenses.......................................... 218.8 2,815.9
Unearned premiums................................... 6.6 843.2
Contractholder deposit funds and other policy
liabilities....................................... 2,025.5 2,637.0
--------- ---------
Total policy liabilities and accruals........... 5,075.9 9,098.3
--------- ---------
Expenses and taxes payable............................ 512.0 681.9
Reinsurance premiums payable.......................... 17.9 50.2
Trust instruments supported by funding obligations.... 50.6 --
Short-term debt....................................... -- 221.3
Closed Block liabilities.............................. 842.1 872.0
Separate account liabilities.......................... 17,628.9 13,691.5
--------- ---------
Total liabilities............................... 24,127.4 24,615.2
--------- ---------
Minority interest..................................... -- 532.9
Commitments and contingencies (Notes 16 and 21)
SHAREHOLDER'S EQUITY
Common stock, $10 par value, 1 million shares
authorized, 500,001 shares issued and outstanding... 5.0 5.0
Additional paid-in capital............................ 569.0 444.0
Accumulated other comprehensive (loss) income......... (14.9) 169.2
Retained earnings..................................... 647.3 1,698.3
--------- ---------
Total shareholder's equity...................... 1,206.4 2,316.5
--------- ---------
Total liabilities and shareholder's equity...... $25,333.8 $27,464.6
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 5.0 $ 5.0 $ 5.0
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 444.0 453.7 392.4
Capital contribution from parent........... 125.0 -- 61.3
Loss on change of interest-Allmerica P&C... -- (9.7) --
-------- -------- --------
Balance at end of period................... 569.0 444.0 453.7
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (depreciation) appreciation
on investments:
Balance at beginning of period............. 169.2 209.3 131.4
(Depreciation) appreciation during the
period:
Net (depreciation) appreciation on
available-for-sale securities.......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes........................... 105.0 28.9 (59.8)
Minority interest........................ 31.8 13.4 (33.2)
-------- -------- --------
Distribution of subsidiaries (Note 3)...... (22.7) -- --
-------- -------- --------
(184.1) (40.1) 77.9
-------- -------- --------
Balance at end of period................... (14.9) 169.2 209.3
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 1,698.3 1,567.4 1,367.4
Net income................................. 200.4 180.9 200.0
Dividend to shareholder.................... -- (50.0) --
Distribution of subsidiaries (Note 3)...... (1,251.4) -- --
-------- -------- --------
Balance at end of period................... 647.3 1,698.3 1,567.4
-------- -------- --------
Total shareholder's equity............. $1,206.4 $2,316.5 $2,235.4
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- ------- ------- ------
<S> <C> <C> <C>
Net income.................................. $ 200.4 $ 180.9 $200.0
Other comprehensive (loss) income:
Net (depreciation) appreciation on
available-for-sale securities......... (298.2) (82.4) 170.9
Benefit (provision) for deferred federal
income taxes.......................... 105.0 28.9 (59.8)
Minority interest....................... 31.8 13.4 (33.2)
Distribution of subsidiaries (Note 3)... (22.7) -- --
------- ------- ------
Other comprehensive (loss) income... (184.1) (40.1) 77.9
------- ------- ------
Comprehensive (loss) income................. $ (16.3) $ 140.8 $277.9
======= ======= ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 200.4 $ 180.9 $ 200.0
Adjustments to reconcile net income to
net cash provided by operating
activities:
Minority interest................... 39.9 55.0 79.4
Net realized gains.................. (100.9) (62.7) (77.8)
Net amortization and depreciation... 31.5 20.7 31.6
Deferred federal income taxes....... 20.7 (15.4) 14.2
Sales practice litigation expense... -- 31.0 --
Loss from exiting reinsurance
pools............................. -- 25.3 --
Payment related to exiting
reinsurance pools................. -- (30.3) --
Loss from cession of disability
income business................... -- -- 53.9
Payment related to cession of
disability income business........ -- -- (207.0)
Loss from disposal of group life and
health business................... 30.5 -- --
Change in deferred acquisition
costs............................. (181.6) (185.8) (189.7)
Change in premiums and notes
receivable, net of reinsurance
payable........................... (41.8) 56.7 (15.1)
Change in accrued investment
income............................ 8.3 0.8 7.1
Change in policy liabilities and
accruals, net..................... (15.6) 168.1 (134.9)
Change in reinsurance receivable.... (46.3) (115.4) 27.2
Change in expenses and taxes
payable........................... 79.4 (3.3) 49.4
Separate account activity, net...... 5.5 (48.5) --
Other, net.......................... 18.5 (63.8) 20.4
--------- --------- ---------
Net cash provided by (used in)
operating activities.......... 48.5 13.3 (141.3)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and
maturities of available-for-sale
fixed maturities.................. 2,801.0 1,715.2 2,892.9
Proceeds from disposals of equity
securities........................ 422.9 285.3 162.7
Proceeds from disposals of other
investments....................... 30.3 120.8 116.3
Proceeds from mortgages matured or
collected......................... 131.2 171.2 204.7
Purchase of available-for-sale fixed
maturities........................ (2,227.3) (2,374.5) (2,596.0)
Purchase of equity securities....... (78.9) (119.9) (67.0)
Purchase of other investments....... (140.6) (274.4) (175.0)
Capital expenditures................ (29.2) (22.3) (15.3)
Purchase of minority interest in
Citizens Corporation.............. -- (195.9) --
Distribution of subsidiaries........ (202.2) -- --
Other investing activities, net..... -- 26.7 1.3
--------- --------- ---------
Net cash provided by (used in)
investing activities.......... 707.2 (667.8) 524.6
--------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds...... 1,514.6 1,419.2 457.6
Withdrawals from contractholder
deposit funds..................... (2,037.5) (625.0) (647.1)
Change in trust agreements supported
by funding agreements............. 50.6 -- --
Change in short-term debt........... (180.9) 188.3 (5.4)
Change in long-term debt............ -- (2.6) (0.1)
Dividend paid to shareholder........ -- (50.0) (9.4)
Contribution from parent............ 36.0 -- 0.1
Subsidiary treasury stock purchased,
at cost........................... (350.0) (1.0) (140.0)
--------- --------- ---------
Net cash (used in) provided by
financing activities.......... (967.2) 928.9 (344.3)
--------- --------- ---------
Net change in cash and cash equivalents..... (211.5) 274.4 39.0
Net change in cash held in the Closed
Block...................................... (13.2) 15.7 (1.0)
Cash and cash equivalents, beginning of
period..................................... 504.0 213.9 175.9
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 279.3 $ 504.0 $ 213.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.1 $ 7.3 $ 3.6
Income taxes paid....................... $ 24.0 $ 135.3 $ 66.3
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
First Allmerica Financial Life Insurance Company ("FAFLIC" or the "Company") is
organized as a stock life insurance company, and is a wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC").
Prior to July 1, 1999, the consolidated financial statements of FAFLIC included
the accounts of its wholly-owned life insurance subsidiary Allmerica Financial
Life Insurance and Annuity Company ("AFLIAC"), its non-insurance subsidiaries
(principally brokerage and investment advisory services), Allmerica Property and
Casualty Companies, Inc. ("Allmerica P&C") (an 85.0%-owned non-insurance holding
company), and various other non-insurance subsidiaries.
Effective July 1, 1999, AFC made certain changes to its corporate structure
(Note 3). These changes included the transfer of the Company's ownership of
Allmerica P&C and its subsidiaries, as well as several other non-insurance
subsidiaries from the Company to AFC. In exchange, AFC contributed capital to
the Company and agreed to maintain the Company's statutory surplus at specified
levels during the following 6 years. Comparability between current and prior
period financial statements and footnotes has been significantly impacted by the
Company's divestiture of these subsidiaries during 1999, as disclosed in Note 3.
The Closed Block (Note 1B) assets and liabilities at December 31, 1999 and 1998
are presented in the consolidated balance sheets as single line items. The
contribution from the Closed Block is included in the consolidated statements of
income in other income. Unless specifically stated, all disclosures contained
herein supporting the consolidated financial statements at December 31, 1999,
1998 and 1997, and the years then ended exclude the Closed Block related
amounts. All significant intercompany accounts and transactions have been
eliminated.
On or about December 3, 1998, the Company acquired all of the outstanding common
stock of Citizens Corporation (formerly an 82.5% owned non-insurance subsidiary
of The Hanover Insurance Company ("Hanover"), a wholly-owned subsidiary of
Allmerica P&C) that it did not already own in exchange for cash of $195.9
million (Note 4). The acquisition has been recognized as a purchase. The
minority interest acquired totaled $158.5 million. A total of $40.8 million
representing the excess of the purchase price over the fair values of the net
assets acquired, net of deferred taxes, has been allocated to goodwill and is
being amortized over a 40-year period.
Prior to the July 1, 1999 changes in AFC's corporate structure, minority
interest relates to the Company's investment in Allmerica P&C and its only
significant subsidiary, Hanover. Hanover's wholly-owned subsidiary is Citizens
Corporation, the holding company for Citizens. Minority interest also includes
an amount related to the minority interest in Citizens Corporation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. CLOSED BLOCK
The Company established and began operating a closed block ("the Closed Block")
for the benefit of the participating policies included therein, consisting of
certain individual life insurance participating policies,
F-7
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual deferred annuity contracts and supplementary contracts not involving
life contingencies which were in force as of FAFLIC's demutualization on
October 16, 1995; such policies constitute the "Closed Block Business". The
purpose of the Closed Block is to protect the policy dividend expectations of
such FAFLIC dividend paying policies and contracts. Unless the Commonwealth of
Massachusetts Insurance Commissioner ("the Insurance Commissioner") consents to
an earlier termination, the Closed Block will continue to be in effect until the
date none of the Closed Block policies are in force. FAFLIC allocated to the
Closed Block assets in an amount that is expected to produce cash flows which,
together with future revenues from the Closed Block Business, are reasonably
sufficient to support the Closed Block Business, including provision for payment
of policy benefits, certain future expenses and taxes and for continuation of
policyholder dividend scales payable in 1994 so long as the experience
underlying such dividend scales continues. The Company expects that the factors
underlying such experience will fluctuate in the future and policyholder
dividend scales for Closed Block Business will be set accordingly.
Although the assets and income allocated to the Closed Block inure solely to the
benefit of the holders of policies included in the Closed Block, the excess of
Closed Block liabilities over Closed Block assets as measured on a GAAP basis
represent the expected future post-tax income from the Closed Block which may be
recognized in income over the period the policies and contracts in the Closed
Block remain in force.
If the actual income from the Closed Block in any given period equals or exceeds
the expected income for such period as determined at the inception of the Closed
Block, the expected income would be recognized in income for that period.
Further, any excess of the actual income over the expected income would also be
recognized in income to the extent that the aggregate expected income for all
prior periods exceeded the aggregate actual income. Any remaining excess of
actual income over expected income would be accrued as a liability for
policyholder dividends in the Closed Block to be paid to the Closed Block
policyholders. This accrual for future dividends effectively limits the actual
Closed Block income recognized in income to the Closed Block income expected to
emerge from operation of the Closed Block as determined at inception.
If, over the period the policies and contracts in the Closed Block remain in
force, the actual income from the Closed Block is less than the expected income
from the Closed Block, only such actual income (which could reflect a loss)
would be recognized in income. If the actual income from the Closed Block in any
given period is less than the expected income for that period and changes in
dividends scales are inadequate to offset the negative performance in relation
to the expected performance, the income inuring to shareholders of the Company
will be reduced. If a policyholder dividend liability had been previously
established in the Closed Block because the actual income to the relevant date
had exceeded the expected income to such date, such liability would be reduced
by this reduction in income (but not below zero) in any periods in which the
actual income for that period is less than the expected income for such period.
C. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"), the Company is required to classify its investments into
one of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Debt securities and marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a separate
component of shareholders' 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.
F-8
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted a plan to dispose of all real estate assets. As
of December 31, 1999, there were 2 properties remaining in the Company's real
estate portfolio, both of which are being actively marketed. These assets are
carried at the estimated fair value less costs of disposal. Depreciation is not
recorded on these assets while they are held for disposal.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other than temporary impairment of the value of a specific
investment 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.
D. 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, investment and loan
commitments, swap contracts and interest rate futures contracts. 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.
Derivative financial instruments are accounted for under three different
methods: fair value accounting, deferral accounting and accrual accounting.
Interest rate swap contracts used to hedge interest rate risk are accounted for
using a combination of the fair value method and accrual method, with changes in
fair value reported in unrealized gains and losses in equity consistent with the
underlying hedged security, and the net payment or receipt on the swaps reported
in net investment income. Foreign currency swap contracts used to hedge the
foreign currency exchange risk associated with investment securities are
accounted for using a combination of the fair value method and accrual method,
with changes in fair value reported in unrealized gains and losses in equity
consistent with the underlying hedged security, and the net payment or receipt
on the swaps reported in net investment income. Foreign currency swap contracts
used to hedge foreign currency exchange risk associated with funding agreements
are accounted for using the fair value method, with changes in fair value
reported in other operating income consistent with the underlying hedged trust
obligation liability. Futures contracts used to hedge interest rate risk are
accounted for using the deferral method, with gains and losses deferred in
unrealized gains and losses in equity and recognized in earnings in conjunction
with the earnings recognition of the underlying hedged item. Default swap
contracts entered into for investment purposes are accounted for using the fair
value method, with changes in fair value, if any, reported in realized
investment gains and losses in earnings. Premium paid to the Company on default
swap contracts is reported in net investment income in earnings. Other swap
contracts entered into for investment purposes are accounted for using the fair
value method, with changes in fair value reported in realized investment gains
and
F-9
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses in earnings. Any ineffective swaps or futures hedges are recognized
currently in realized investment gains and losses in earnings.
E. 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.
F. 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.
Property and casualty, group life and group health insurance business
acquisition costs are deferred and amortized over the terms of the insurance
policies. 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 life product and property and casualty line
of business 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.
G. PROPERTY AND EQUIPMENT
Property, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line or accelerated method over the estimated useful lives of the
related assets which generally range from 3 to 30 years. Amortization of
leasehold improvements is provided using the straight-line method over the
lesser of the term of the leases or the estimated useful life of the
improvements.
H. 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.
F-10
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity products.
Such liabilities are established in amounts adequate to meet the estimated
future obligations of policies in force. The liabilities associated with
traditional life insurance products are computed using the net level premium
method for individual life and annuity policies, and are based upon estimates as
to future investment yield, mortality and withdrawals that include provisions
for adverse deviation. Future policy benefits for individual life insurance and
annuity policies are computed using interest rates ranging from 2 1/2% to 6.0%
for life insurance and 2% to 9 1/2% for annuities. Estimated liabilities are
established for group life and health policies that contain experience rating
provisions. Mortality, morbidity and withdrawal assumptions for all policies are
based on the Company's own experience and industry standards. Liabilities for
universal life, variable universal life and variable annuities include deposits
received from customers and investment earnings on their fund balances, less
administrative charges. Universal life fund balances are also assessed mortality
and surrender charges. Liabilities for variable annuities include a reserve for
benefit claims in excess of a guaranteed minimum fund value.
Liabilities for outstanding claims, losses and loss adjustment expenses ("LAE")
are estimates of payments to be made on property and casualty and health
insurance for reported losses and LAE and estimates of losses and LAE incurred
but not reported. These liabilities are determined using case basis evaluations
and statistical analyses and represent estimates of the ultimate cost of all
losses incurred but not paid. These estimates are continually reviewed and
adjusted as necessary; such adjustments are reflected in current operations.
Estimated amounts of salvage and subrogation on unpaid property and casualty
losses are deducted from the liability for unpaid claims.
Premiums for property and casualty insurance are reported as earned on a
pro-rata basis over the contract period. The unexpired portion of these premiums
is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products such as guaranteed investment contracts ("GICs"),
deposit administration funds and immediate participation guarantee funds 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.
J. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual and group
annuity products, excluding universal life and investment-related products, are
considered revenue when due. Property and casualty insurance premiums are
recognized as revenue over the related contract periods. Benefits, losses and
related expenses are matched with premiums, resulting in their recognition over
the lives of the contracts. This matching is accomplished through the provision
for future benefits, estimated and unpaid losses and amortization of deferred
policy acquisition costs. Revenues for investment-related products consist of
net investment income and contract charges assessed against the fund values.
Related benefit expenses include annuity benefit claims in excess of a
guaranteed minimum fund value, and net investment income credited to the fund
values after deduction for investment and risk charges. Revenues for universal
life 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
F-11
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to be provided in future periods are deferred and amortized over the period
benefited using the same assumptions used to amortize capitalized acquisition
costs.
K. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries (including certain non-insurance operations)
file a consolidated United States federal income tax return. Entities included
within the consolidated group are segregated into either a life insurance or
non-life insurance company subgroup. The consolidation of these subgroups is
subject to certain statutory restrictions on the percentage of eligible non-life
tax losses that can be applied to offset life company taxable income. Prior to
the merger on July 16, 1997, Allmerica P&C and its subsidiaries filed a separate
United States federal income tax return.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated return of AFC is
calculated on a separate return basis. Any current tax liability is paid to AFC.
Tax benefits resulting from taxable operating losses or credits of AFC's
subsidiaries are not reimbursed to the subsidiary until such losses or credits
can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement No. 109"). These differences result primarily from loss and LAE
reserves, policy reserves, policy acquisition expenses, and unrealized
appreciation or depreciation on investments.
L. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges: fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investments in foreign operations. This statement is effective for fiscal years
beginning after June 15, 2000. The Company is currently assessing the impact of
the adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter of 1998, the Company
adopted SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax
income of $12.4 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 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 on 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
F-12
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and determinable. In addition, it provides criteria for when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges. This
statement is effective for fiscal years beginning after December 15, 1998. The
adoption of this statement did not have a material effect on the results of
operations or financial position of the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years beginning after December 15, 1997. The Company
adopted Statement No. 131 for the first quarter of 1998, which resulted in
certain segment re-definitions, which have no impact on the consolidation
results of operations (See Note 15).
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("Statement No. 130"). Statement
No. 130 establishes standards for the reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income are to be reported in a financial statement
that is displayed with the same prominence as other financial statements. This
statement stipulates that comprehensive income reflect the change in equity of
an enterprise during a period from transactions and 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.
M. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation, resulting primarily from the reporting of Discontinued Operations
as disclosed in Note 2.
2. DISCONTINUED OPERATIONS
During the second quarter of 1999, the Company approved a plan to exit its group
life and health insurance business, consisting of its Employee Benefit Services
("EBS") business, its Affinity Group Underwriters ("AGU") business and its
accident and health assumed reinsurance pool business ("reinsurance pool
business"). During the third quarter of 1998, the Company ceased writing new
premium in the reinsurance pool business, subject to certain contractual
obligations. Prior to 1999, these businesses comprised substantially all of the
former Corporate Risk Management Services segment. Accordingly, the operating
results of the discontinued segment, including its reinsurance pool business,
have been reported in the Consolidated Statements of Income as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB Opinion No. 30"). In the third quarter of 1999,
the operating results from the discontinued segment were adjusted to reflect the
recording of additional reserves related to accident claims from prior years. On
October 6, 1999, the Company entered into an agreement with Great-West Life and
Annuity Insurance Company of Denver,
F-13
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which provides for the sale of the Company's EBS business effective March 1,
2000. The Company has recorded a $30.5 million loss, net of taxes, on the
disposal of its group life and health business. Subsequent to the June 30, 1999
measurement date, operations from the discontinued business generated losses of
approximately $8.7 million, net of taxes.
As permitted by APB Opinion No. 30, the Consolidated Balance Sheets have not
been segregated between continuing and discontinued operations. At December 31,
1999, the discontinued segment had assets of approximately $531.1 million
consisting primarily of invested assets, premiums and fees receivable, and
reinsurance recoverables, and liabilities of approximately $482.5 million
consisting primarily of policy liabilities. Revenues for the discontinued
operations were $361.1 million, $398.5 million, and $389.2 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
3. REORGANIZATION OF AFC CORPORATE STRUCTURE
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes included transfer of the Company's ownership of Allmerica P&C and
all of its subsidiaries, as well as certain other non-insurance subsidiaries,
from FAFLIC to AFC, referred to as the "distribution of subsidiaries". The
Company retained its ownership of its primary insurance subsidiary, AFLIAC and
certain broker dealer and investment management and advisory subsidiaries. AFC
contributed capital to FAFLIC in the amount of $125.0 million, consisting of
cash and securities of $36.0 million and $89.0 million, respectively, and agreed
to maintain the Company's statutory surplus at specified levels during the
following six years. In addition, any dividend from FAFLIC to AFC during 2000
and 2001 requires the prior approval of the Commonwealth of Massachusetts
Insurance Commissioner. This transaction was approved by the Commissioner on
May 24, 1999.
The equity of the subsidiaries transferred from FAFLIC on July 1, 1999 was
$1,274.1 million. As of June 30, 1999, the transferred subsidiaries had total
assets of $5,334.1 million, including cash and cash equivalents of $202.2
million, and total revenue of $1,196.5 million.
The Company's consolidated results of operations in 1999 include $107.2 million
of net income associated with these subsidiaries through June 30, 1999. The
unaudited pro forma information below presents consolidated results of
operations as if the reorganization had occurred at the beginning of 1998.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the Company had the transfer occurred
at the beginning of 1998, nor is it necessarily indicative of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Revenue..................................................... $828.0 $750.2
====== ======
Net realized capital (losses) gains included in revenue..... (11.8) 19.6
====== ======
Income from continuing operations before taxes.............. 192.1 141.2
Income taxes................................................ 51.2 41.2
------ ------
Net income from continuing operations....................... $140.9 100.0
(Loss) from operations of discontinued business (less
applicable income taxes (benefit) of $(10.4), $(7.0) and
$8.9 for the years ended December 31, 1999, 1998 and 1997,
respectively............................................... (17.2) (13.5)
</TABLE>
F-14
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
(Loss) on disposal of group life and health business,
including provision of $72.2 for operating losses during
phase-out period for the tear ended December 31, 1999 (less
applicable income tax benefit of $16.4).................... (30.5) --
------ ------
Net income.................................................. $ 93.2 $ 86.5
====== ======
</TABLE>
4. ACQUISITION OF MINORITY INTEREST OF CITIZENS CORPORATION
On December 3, 1998 Citizens Acquisition Corporation, a wholly-owned subsidiary
of the Allmerica P&C, completed a cash tender offer to acquire the outstanding
shares of Citizens Corporation common stock that AFC or its subsidiaries did not
already own at a price of $33.25 per share. Approximately 99.8% of publicly held
shares of Citizens Corporation common stock were tendered. On December 14, 1998,
the Company completed a short-form merger, acquiring all shares of common stock
of Citizens Corporation not purchased in its tender offer, through the merger of
its wholly-owned subsidiary, Citizens Acquisition Corporation with Citizens
Corporation at a price of $33.25 per share. Total consideration for the
transactions amounted to $195.9 million. The acquisition has been recognized as
a purchase. The minority interest acquired totaled $158.5 million. A total of
$40.8 million representing the excess of the purchase price over the fair values
of the net assets acquired, net of deferred taxes, has been allocated to
goodwill and is being amortized over a 40-year period.
The Company's consolidated results of operations include minority interest in
Citizens Corporation prior to December 3, 1998. The unaudited pro forma
information below presents consolidated results of operation as if the
acquisition had occurred at the beginning of 1997.
The following unaudited pro forma information is not necessarily indicative of
the consolidated results of operations of the combined Company had the
acquisition occurred at the beginning of 1997, nor is it necessarily indicative
of future results.
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Revenue..................................................... $3,006.6 $2,977.1
======== ========
Net realized capital gains included in revenue.............. $ 58.1 $ 71.6
======== ========
Income before taxes and minority interest................... 293.4 332.5
Income taxes................................................ (54.2) (82.4)
Minority Interest:
Equity in earnings........................................ (42.6) (64.1)
-------- --------
Net income.................................................. $ 196.6 $ 186.0
======== ========
</TABLE>
5. OTHER SIGNIFICANT TRANSACTIONS
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated reinsurer. The
reinsurance agreement provides accident year coverage for the three years 1999
to 2001 for the Company's property and casualty business, and is subject to
cancellation or commutation annually at the Company's option. The program covers
losses and allocated loss adjustment
F-15
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses, including those incurred but not yet reported, in excess of a
specified whole account loss and allocated LAE ratio. The annual and aggregate
coverage limits for losses and allocated LAE are $150.0 million and $300.0
million, respectively. The effect of this agreement on results of operations in
each reporting period is based on losses and allocated LAE ceded, reduced by a
sliding scale premium of 50.0-67.0% depending on the size of the loss, and
increased by a ceding commission of 20.0% of ceded premium. In addition, net
investment income is reduced for amounts credited to the reinsurer. Prior to the
AFC corporate reorganization, the Company recognized a net benefit of $16.9
million as a result of this agreement, based on year-to-date and annual
estimates of losses and allocated loss adjustment expenses for accident year
1999.
On October 29, 1998, the Company announced that it had adopted a formal
restructuring plan for its Risk Management business. As part of this initiative,
the segment consolidated its property and casualty field support activities from
fourteen regional branches into three hub locations. As a result of the
Company's restructuring initiative, it recognized a pretax loss of $9.0 million,
in the fourth quarter of 1998.
Approximately $4.8 million of this loss relates to severance and other employee
related costs resulting from the elimination of 306 positions, of which 207 and
106 employees had been terminated as of December 31, 1999 and 1998,
respectively. In addition, lease cancellations and contract terminations
resulted in losses of approximately $2.5 million and $1.7 million, respectively.
The Company made payments of approximately $4.2 million and $0.1 million through
June 30, 1999 and in 1998, respectively, related to this restructuring
initiative.
Effective July 1, 1998, the Company entered into a reinsurance agreement with a
highly rated reinsurer that cedes current and future underwriting losses,
including unfavorable development of prior year reserves, up to a $40.0 million
maximum, relating to the Company's reinsurance pool business. These pools
consist primarily of the Company's assumed stop loss business, small group
managed care pools, long-term disability and long-term care pools, student
accident and special risk business. The agreement is consistent with
management's decision to exit this line of business, which the Company expects
to run-off over the next three years. As a result of this transaction, the
Company recognized a $25.3 million pre-tax loss in the third quarter of 1998.
This loss is reported in 1999 as part of the discontinued operations of the
Company.
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on substantially all of the
universal life and variable universal life blocks of business. The agreement did
not have a material effect on its results of operations or financial position.
In 1999, 1998 and 1997, Allmerica P&C redeemed 8,662.7, 3,289.5 and 5,735.3
shares, respectively, of its issued and outstanding common stock owned by AFC
for $350.0 million, $125.0 million and $195.0 million, respectively, thereby
increasing the Company's total ownership to 84.5% as of June 30, 1999. The
increases in the Company's ownership of Allmerica P&C through June 30, 1999, and
for 1998 and 1997 were 14.5%, 4.3% and 6.3%, respectively. The 1999 transaction
consisted of cash and cash equivalents. The 1998 transaction consisted of $124.0
million of securities and $1.0 million of cash. The 1997 transaction consisted
of $55.0 million of securities and $140.0 million of cash.
The merger of Allmerica P&C and a wholly-owned subsidiary of AFC was consummated
on July 16, 1997. Through the merger, AFC acquired all of the outstanding common
stock of Allmerica P&C that FAFLIC did not already own in exchange for cash of
$425.6 million and approximately 9.7 million shares of AFC stock valued at
$372.5 million. At consummation of this transaction AFC owned 59.5% through
FAFLIC and 40.5% directly. The merger has been recognized as a purchase. Total
consideration of approximately $798.1 million
F-16
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
has been allocated to the minority interest in the assets and liabilities based
on estimates of their fair values. The minority interest acquired totaled $703.5
million. A total of $90.6 million representing the excess of the purchase price
over the fair values of the net assets acquired, net of deferred taxes, has been
allocated to goodwill and is being amortized over a 40-year period.
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.
6. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 62.6 $ 1.0 $ 0.5 $ 63.1
States and political subdivisions....... 13.5 0.1 0.1 13.5
Foreign governments..................... 80.0 2.1 0.1 82.0
Corporate fixed maturities.............. 3,206.5 63.2 116.9 3,152.8
Mortgage-backed securities.............. 359.0 1.3 11.0 349.3
-------- ------ ------ --------
Total fixed maturities.................. $3,721.6 $ 67.7 $128.6 $3,660.7
======== ====== ====== ========
Equity securities....................... $ 27.9 $ 24.7 $ 1.2 $ 51.4
======== ====== ====== ========
</TABLE>
<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....... $ 192.8 $ 12.0 $ 24.5 $ 180.3
States and political subdivisions....... 2,408.9 83.0 5.2 2,486.7
Foreign governments..................... 107.9 7.7 4.5 111.1
Corporate fixed maturities.............. 4,293.3 167.8 81.9 4,379.2
Mortgage-backed securities.............. 517.9 11.5 2.8 526.6
-------- ------ ------ --------
Total fixed maturities.................. $7,520.8 $282.0 $118.9 $7,683.9
======== ====== ====== ========
Equity securities....................... $ 253.1 $151.1 $ 7.1 $ 397.1
======== ====== ====== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
F-17
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 general account liabilities of
AFLIAC for New York policyholders, claimants and creditors. At December 31,
1999, the amortized cost and market value of these assets on deposit in New York
were $196.4 million and $193.0 million, respectively. At December 31, 1998, the
amortized cost and market value of assets on deposit were $268.5 million and
$284.1 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $18.3 million and
$105.4 million were on deposit with various state and governmental authorities
at December 31, 1999 and 1998, respectively.
There were no contractual fixed maturity investment commitments at December 31,
1999.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1999
-------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 224.4 $ 225.7
Due after one year through five years....................... 1,324.0 1,328.4
Due after five years through ten years...................... 1,409.1 1,369.9
Due after ten years......................................... 764.1 736.7
-------- --------
Total....................................................... $3,721.6 $3,660.7
======== ========
</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>
1999
Net appreciation, beginning of year......................... $ 79.0 $ 90.2 $169.2
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (254.4) (122.3) (376.7)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 78.5 -- 78.5
Provision for deferred federal income taxes and minority
interest................................................... 72.1 64.7 136.8
Distribution of subsidiaries (See Note 3)................... (5.6) (17.1) (22.7)
------ ------ ------
(109.4) (74.7) (184.1)
------ ------ ------
Net appreciation, end of year............................... $(30.4) $ 15.5 $(14.9)
====== ====== ======
</TABLE>
F-18
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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......................... $122.6 $ 86.7 $209.3
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................. (99.3) 4.4 (94.9)
Appreciation due to Allmerica P&C purchase of minority in
interest of Citizens....................................... 10.7 10.7 21.4
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 6.3 -- 6.3
Provision for deferred federal income taxes and minority
interest................................................... 38.7 (11.6) 27.1
------ ------ ------
(43.6) 3.5 (40.1)
------ ------ ------
Net appreciation, end of year............................... $ 79.0 $ 90.2 $169.2
====== ====== ======
1997
Net appreciation, beginning of year......................... $ 71.3 $ 60.1 $131.4
------ ------ ------
Net appreciation (depreciation) on available-for-sale
securities................................................. 83.2 (5.9) 77.3
Appreciation due to AFC purchase of minority interest of
Allmerica P&C.............................................. 50.7 59.6 110.3
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (16.7) -- (16.7)
Provision for deferred federal income taxes and minority
interest................................................... (65.9) (27.1) (93.0)
------ ------ ------
51.3 26.6 77.9
------ ------ ------
Net appreciation, end of year............................... $122.6 $ 86.7 $209.3
====== ====== ======
</TABLE>
(1) Includes net (depreciation) appreciation on other investments of $(1.1)
million, $0.8 million, and $1.8 million, in 1999, 1998, and 1997, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
FAFLIC's mortgage loans 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 $533.6 million and $582.7 million at December 31, 1999
and 1998, respectively. Reserves for mortgage loans were $5.8 million and $11.5
million at December 31, 1999 and 1998, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets. At December 31, 1999, there were 2 properties remaining in the Company's
real estate portfolio which are being actively marketed. Depreciation is not
recorded on these assets while they are held for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1999, 1998 and 1997.
There were no material contractual commitments to extend credit under commercial
mortgage loan agreements at December 31, 1999.
F-19
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Property type:
Office building........................................... $301.5 $304.4
Residential............................................... 50.3 52.8
Retail.................................................... 92.2 108.5
Industrial/warehouse...................................... 83.6 110.0
Other..................................................... 11.8 18.5
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
Geographic region:
South Atlantic............................................ $132.2 $136.1
Pacific................................................... 133.6 155.1
East North Central........................................ 62.5 80.5
Middle Atlantic........................................... 50.3 61.2
West South Central........................................ 90.8 54.7
New England............................................... 40.7 60.7
Other..................................................... 29.3 45.9
Valuation allowances...................................... (5.8) (11.5)
------ ------
Total....................................................... $533.6 $582.7
====== ======
</TABLE>
At December 31, 1999, scheduled mortgage loan maturities were as follows: 2000
- -- $108.1 million; 2001 -- $33.9 million; 2002 -- $27.5 million; 2003 -- $40.6
million; 2004 -- $76.4 million; and $234.7 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1999, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the consolidated balance sheets and
changes thereto are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1999
Mortgage loans.............................................. $11.5 $(2.4) $ 3.3 $ 5.8
===== ===== ===== =====
1998
Mortgage loans.............................................. $20.7 $(6.8) $ 2.4 $11.5
===== ===== ===== =====
1997
Mortgage loans.............................................. $19.6 $ 2.5 $ 1.4 $20.7
Real estate................................................. 14.9 6.0 20.9 --
----- ----- ----- -----
Total....................................................... $34.5 $ 8.5 $22.3 $20.7
===== ===== ===== =====
</TABLE>
F-20
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Provisions on mortgages during 1999 and 1998 reflect the release of redundant
specific reserves. Write-offs of $20.9 million to the investment valuation
allowance related to real estate in 1997 primarily reflect write downs to the
estimated fair value less costs to sell pursuant to the aforementioned 1997 plan
of disposal.
The carrying value of impaired loans was $18.0 million and $22.0 million, with
related reserves of $0.8 million and $6.0 million as of December 31, 1999 and
1998, respectively. All impaired loans were reserved for as of December 31, 1999
and 1998.
The average carrying value of impaired loans was $21.0 million, $26.1 million
and $30.8 million, with related interest income while such loans were impaired
of $2.1 million, $3.2 million and $3.2 million as of December 31, 1999, 1998 and
1997, respectively.
D. FUTURES CONTRACTS
The Company purchases long futures contracts and sells short futures contracts
on margin to hedge against interest rate fluctuations associated with the sale
of Guaranteed Investment Contracts ("GICs") and other funding agreements. The
Company is exposed to interest rate risk from the time of sale of the GIC until
the receipt of the deposit and purchase of the underlying asset to back the
liability. The Company only trades futures contracts with nationally recognized
brokers, which the Company believes have adequate capital to ensure that there
is minimal danger of default. The Company does not require collateral or other
securities to support financial instruments with credit risk.
The notional amount of futures contracts outstanding was $37.1 million and $92.7
million at December 31, 1999 and 1998, respectively. The notional amounts of the
contracts represent the extent of the Company's investment but not future cash
requirements, as the Company generally settles open positions prior to maturity.
The maturity of all futures contracts outstanding is less than one year. The
fair value of futures contracts outstanding was $36.8 million and $92.5 million
at December 31, 1999 and 1998, respectively.
Gains and losses on hedge contracts related to interest rate fluctuations are
deferred and recognized in income over the period being hedged corresponding to
related guaranteed investment contracts. If instruments being hedged by futures
contracts are disposed, any unamortized gains or losses on such contracts are
included in the determination of the gain or loss from the disposition. Deferred
hedging losses were $0.9 million and $1.8 million in 1999 and 1998,
respectively. Gains and losses on hedge contracts that are deemed ineffective by
the Company are realized immediately. There was $0.1 million of gains realized
on ineffective hedges in 1998. There were no gains or losses in 1999 and 1997.
A reconciliation of the notional amount of futures contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- --------- --------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 92.7 $ -- $(33.0)
New contracts............................................... 947.0 1,117.5 (0.2)
Contracts terminated........................................ (1,002.6) (1,024.8) 33.2
--------- --------- ------
Contracts outstanding, end of year.......................... $ 37.1 $ 92.7 $ --
========= ========= ======
</TABLE>
E. FOREIGN CURRENCY SWAP CONTRACTS
The Company enters into foreign currency swap contracts with swap counterparties
to hedge foreign currency exposure on specific fixed income securities.
Additionally, in 1999, the Company entered into a foreign
F-21
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
currency swap contract to hedge foreign currency exposure on specific fixed rate
funding agreements. Interest and principal related to foreign fixed income
securities and liabilities payable in foreign currencies, at current exchange
rates, are exchanged for the equivalent payment in U.S dollars translated at a
specific currency exchange rate. The primary risk associated with these
transactions is the inability of the counterparty to meet its obligation. The
Company regularly assesses the financial strength of its counterparties and
generally enters into forward or swap agreements with counterparties rated "A"
or better by nationally recognized rating agencies. The Company's maximum
exposure to counterparty credit risk is the difference between the foreign
currency exchange rate, as agreed upon in the swap contract, and the foreign
currency spot rate on the date of the exchange, as indicated by the fair value
of the contract. The fair values of the foreign currency swap contracts
outstanding were $(4.7) million and $1.2 million at December 31, 1999 and 1998,
respectively. Changes in the fair value of contracts hedging fixed income
securities are reported as an unrealized gain or loss, consistent with the
underlying hedged security. Changes in fair value of contracts hedging fixed
rate funding agreements are reported as other operating income, consistent with
the underlying hedged liability. The net decrease in other operating income
related to these contracts was $2.6 million in 1999. The Company does not
require collateral or other security to support financial instruments with
credit risk.
The difference between amounts paid and received on foreign currency swap
contracts is reflected in the net investment income related to the underlying
assets and is not material in 1999, 1998 and 1997. Any gain or loss on the
termination of swap contracts is deferred and recognized with any gain or loss
on the hedged transaction. The Company had no deferred gain or loss on foreign
currency swap contracts in 1999 or 1998.
A reconciliation of the notional amount of foreign currency swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ----- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 42.6 $42.6 $ 47.6
New contracts............................................... 52.9 -- 5.0
Contracts expired........................................... (24.0) -- (10.0)
------ ----- ------
Contracts outstanding, end of year.......................... $ 71.5 $42.6 $ 42.6
====== ===== ======
</TABLE>
Expected maturities of foreign currency swap contracts outstanding at
December 31, 1999 are $8.3 million in 2000, $52.9 million in 2001 and $10.3
million thereafter. There are no expected maturities of such foreign currency
swap contracts in 2002, 2003 and 2004.
F. INTEREST RATE SWAP CONTRACTS
The Company enters into interest rate swap contracts to hedge exposure to
interest rate fluctuations. Specifically, for floating rate GIC liabilities that
are matched with fixed rate securities, the Company manages the interest rate
risk by hedging with interest rate swap contracts. Under these swap contracts,
the Company agrees to exchange, at specified intervals, the difference between
fixed and floating interest amounts calculated on an agreed-upon notional
principal amount. As with foreign currency swap contracts, the primary risk
associated with these transactions is the inability of the counterparty to meet
its obligation. The Company regularly assesses the financial strength of its
counterparties and generally enters into forward or swap agreements with
counterparties rated "A" or better by nationally recognized rating agencies.
Because the underlying principal of swap contracts is not exchanged, the
Company's maximum exposure to counterparty credit risk is the difference in
payments exchanged, which at December 31, 1999 and 1998 were net payables of
$4.2 million and $3.9 million, respectively. The Company does not require
collateral or other security to support financial instruments with credit risk.
F-22
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net amount receivable or payable is recognized over the life of the swap
contract as an adjustment to net investment income. The decrease in net
investment income related to interest rate swap contracts was $7.0 million, $2.8
million and $0.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The fair value of interest rate swap contracts outstanding was
$33.1 million and $(28.3) million at December 31, 1999 and 1998, respectively.
Changes in the fair value of contracts are reported as an unrealized gain or
loss, consistent with the underlying hedged security. Any gain or loss on the
termination of interest rate swap contracts accounted for as hedges are deferred
and recognized with the gain or loss on the hedged transaction. The Company had
no deferred gain or loss on interest rate swap contracts in 1999 or 1998.
A reconciliation of the notional amount of interest rate swap contracts is as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $1,112.6 $ 244.1 $ 5.0
New contracts............................................... 905.4 873.5 244.7
Contracts terminated........................................ (888.5) -- --
Contracts expired........................................... (80.0) (5.0) (5.6)
Distribution of subsidiaries (Note 3)....................... (23.6) -- --
-------- -------- ------
Contracts outstanding, end of year.......................... $1,025.9 $1,112.6 $244.1
======== ======== ======
</TABLE>
Expected maturities of interest rate swap contracts outstanding at December 31,
1999 are $44.0 million in 2000, $43.1 million in 2001, $83.5 million in 2002,
$536.0 million in 2003, and $319.3 million in 2004. There are no expected
maturities of such interest rate swap contracts thereafter.
G. OTHER SWAP CONTRACTS
The Company enters into insurance portfolio-linked and credit default swap
contracts for investment purposes. Under the insurance portfolio-linked swap
contracts, the Company agrees to exchange cash flows according to the
performance of a specified underwriter's portfolio of insurance business. As
with interest rate swap contracts, the primary risk associated with insurance
portfolio-linked swap contracts is the inability of the counterparty to meet its
obligation. Under the terms of the credit default swap contracts, the Company
assumes the default risk of a specific high credit quality issuer in exchange
for a stated annual premium. In the case of default, the Company will pay the
counterparty par value for a pre-determined security of the issuer. The primary
risk associated with these transactions is the default risk of the underlying
companies. The Company regularly assesses the financial strength of its
counterparties and the underlying companies in default swap contracts, and
generally enters into forward or swap agreements with counterparties rated "A"
or better by nationally recognized rating agencies. Because the underlying
principal of swap contracts is not exchanged, the Company's maximum exposure to
counterparty credit risk is the difference in payments exchanged, which at
December 31, 1999, was not material to the Company. The Company does not require
collateral or other security to support financial instruments with credit risk.
The swap contracts are marked to market with any gain or loss recognized
currently. The fair values of swap contracts outstanding were $(0.3) million and
$(0.1) million at December 31, 1999 and 1998, respectively. The net amount
receivable or payable under insurance portfolio-linked swap contracts is
recognized when the contracts are marked to market. The net (decrease) increase
in realized investment gains related to these contracts was $(0.2) million, $1.0
million and $(1.4) million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The stated annual premium under credit default swap contracts is recognized
currently in net investment income. The net increase to investment income
related to credit default swap contracts was $0.4 million and $0.2 million for
the years ended December 31, 1999 and 1998, respectively. There was no net
investment income recognized in 1997.
A reconciliation of the notional amount of other swap contracts is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------ -------
<S> <C> <C> <C>
Contracts outstanding, beginning of year.................... $ 255.0 $ 15.0 $ 58.6
New contracts............................................... 50.0 266.3 192.1
Contracts expired........................................... (115.0) (26.3) (211.6)
Contracts terminated........................................ -- -- (24.1)
------- ------ -------
Contracts outstanding, end of year.......................... $ 190.0 $255.0 $ 15.0
======= ====== =======
</TABLE>
Expected maturities of other swap contracts outstanding at December 31, 1999 are
as follows: $140.0 million in 2000 and $50.0 million in 2001. There are no
expected maturities of such other swap contracts in 2002, 2003, 2004 and
thereafter.
H. OTHER
At December 31, 1999 and 1998, FAFLIC had no concentration of investments in a
single investee exceeding 10% of shareholder's equity.
7. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $415.7 $509.6 $523.3
Mortgage loans.............................................. 45.5 57.6 57.1
Equity securities........................................... 1.7 7.2 10.5
Policy loans................................................ 12.7 11.9 10.9
Real estate and other long-term investments................. 14.4 7.0 31.5
Short-term investments...................................... 26.6 15.6 9.9
------ ------ ------
Gross investment income..................................... 516.6 608.9 643.2
Less investment expenses.................................... (13.5) (15.0) (23.7)
------ ------ ------
Net investment income....................................... $503.1 $593.9 $619.5
====== ====== ======
</TABLE>
At December 31, 1999, the company had fixed maturities with a carrying value of
$1.0 million on non-accrual status. There were no mortgage loans on non-accrual
status at December 31, 1999. At December 31, 1998, there was one mortgage loan
on non-accrual status which had an outstanding principal balance of $4.3
million. This loan was restructured and fully impaired. There were no fixed
maturities on non-accrual status at December 31, 1998. The effect of
non-accruals, compared with amounts that would have been recognized in
F-24
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accordance with the original terms of the investments, was a reduction in net
income by $1.4 million in 1999, and had no impact in 1998 and 1997.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $18.8 million, $28.7 million and $40.3 million at
December 31, 1999, 1998 and 1997, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $2.5 million, $3.3 million and $3.9 million in
1999, 1998 and 1997, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $3.3 million and $4.2
million in 1999, 1998 and 1997, respectively.
There were no mortgage loans which were non-income producing for the year ended
December 31, 1999. There were, however, fixed maturities with a carrying value
of $0.3 million which were non-income producing for the year ended December 31,
1999.
Included in other long-term investments is income from limited partnerships of
$6.6 million in 1999, losses of $6.3 million in 1998, and income of $7.6 million
in 1997.
B. NET REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ -----
<S> <C> <C> <C>
Fixed maturities............................................ $(52.0) $(11.6) $14.2
Mortgage loans.............................................. 2.5 8.8 (1.2)
Equity securities........................................... 141.3 63.7 53.5
Real estate and other....................................... 8.5 -- 9.8
------ ------ -----
Net realized investment gains............................... $100.3 $ 60.9 $76.3
====== ====== =====
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
PROCEEDS FROM
FOR THE YEARS ENDED DECEMBER 31, VOLUNTARY GROSS GROSS
(IN MILLIONS) SALES GAINS LOSSES
- ------------- ------------- ------ ------
<S> <C> <C> <C>
1999
Fixed maturities............................................ $1,480.5 $ 9.2 $ 27.1
Equity securities........................................... 421.2 149.0 7.6
1998
Fixed maturities............................................ $ 979.2 $ 17.9 $ 11.3
Equity securities........................................... 258.7 72.8 9.0
1997
Fixed maturities............................................ $1,870.7 $ 27.0 $ 15.9
Equity securities........................................... 144.9 55.5 1.2
</TABLE>
F-25
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE (LOSS) INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized (losses) gains
to the net balance shown in the Consolidated Statements of Comprehensive (Loss)
Income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- ------
<S> <C> <C> <C>
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period,
(includes $22.7 resulting from the distribution of
subsidiaries in 1999, net of taxes (benefit) and minority
interest of $(103.3) million, $(20.8) million and $123.7
million in 1999, 1998 and 1997, respectively).............. $ (121.9) $ (6.8) $115.5
Less: reclassification adjustment for (losses) gains
included in net income (net of taxes and minority interest
of $33.5 million, $21.5 million and $30.7 million in 1999,
1998 and 1997, respectively)............................... (62.2) 33.3 37.6
-------- -------- ------
Other comprehensive (loss) income........................... $ (184.1) $ (40.1) $ 77.9
======== ======== ======
</TABLE>
8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about certain financial
instruments (insurance contracts, real estate, goodwill and taxes are excluded)
for which it is practicable to estimate such values, whether or not these
instruments are included in the balance sheet. The fair values presented for
certain financial instruments are estimates which, in many cases may differ
significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses which utilize current interest
rates for similar financial instruments which have comparable terms and credit
quality. Included in the fair value of fixed maturities are swap contracts used
to hedge fixed maturities with a fair value of $31.1 million and $(27.1) million
at December 31, 1999 and 1998, respectively. In addition, the Company held
futures contracts with a carrying value of $(0.9) million and $(1.8) million at
December 31, 1999 and 1998, respectively. The fair value of these contracts was
$36.8 million and $92.5 million at December 31, 1999 and 1998, respectively.
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.
F-26
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
POLICY LOANS
The carrying amount reported in the consolidated balance sheets 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 guaranteed investment type
contracts are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued. Liabilities under individual fixed
annuity contracts are estimated based on current surrender values, supplemental
contracts without life contingencies reflect current fund balances, and other
individual contract funds represent the present value of future policy benefits.
All other liabilities are based on surrender values.
TRUST INSTRUMENTS SUPPORTED BY FUNDING OBLIGATIONS
Fair values are estimated using discounted cash flow calculations using current
interest rates for similar contracts with maturities consistent with those
remaining for the contracts being valued.
DEBT
The carrying value of short-term debt reported in the balance sheet approximates
fair value.
F-27
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 279.3 $ 279.3 $ 504.0 $ 504.0
Fixed maturities.......................................... 3,660.7 3,660.7 7,683.9 7,683.9
Equity securities......................................... 51.4 51.4 397.1 397.1
Mortgage loans............................................ 521.2 521.9 562.3 587.1
Policy loans.............................................. 170.5 170.5 154.3 154.3
-------- -------- -------- --------
$4,683.1 $4,683.8 $9,301.6 $9,326.4
======== ======== ======== ========
FINANCIAL LIABILITIES
Guaranteed investment contracts........................... $1,316.0 $1,341.4 $1,791.8 $1,830.8
Supplemental contracts without life contingencies......... 48.8 48.8 37.3 37.3
Dividend accumulations.................................... 88.1 88.1 88.4 88.4
Other individual contract deposit funds................... 48.4 48.2 61.6 61.1
Other group contract deposit funds........................ 602.9 583.5 700.4 704.0
Individual fixed annuity contracts........................ 1,092.5 1,057.1 1,110.6 1,073.6
Trust instruments supported by funding obligations........ 50.6 49.6 -- --
Short-term debt........................................... -- -- 221.3 221.3
-------- -------- -------- --------
$3,247.3 $3,216.7 $4,011.4 $4,016.5
======== ======== ======== ========
</TABLE>
F-28
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CLOSED BLOCK
Included in other income in the Consolidated Statements of Income in 1999, 1998
and 1997 is a net pre-tax contribution from the Closed Block of $13.8 million,
$10.4 million and $9.1 million, respectively. Summarized financial information
of the Closed Block as of December 31, 1999 and 1998 and for the periods ended
December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Assets
Fixed maturities, at fair value (amortized cost of $387.4
and $399.1
respectively)........................................... $372.9 $414.2
Mortgage loans............................................ 136.3 136.0
Policy loans.............................................. 201.1 210.9
Cash and cash equivalents................................. 22.6 9.4
Accrued investment income................................. 14.0 14.1
Deferred policy acquisition costs......................... 13.1 15.6
Other assets.............................................. 12.3 2.9
------ ------
Total assets................................................ $772.3 $803.1
====== ======
Liabilities
Policy liabilities and accruals........................... $835.2 $862.9
Other liabilities......................................... 6.9 9.1
------ ------
Total liabilities........................................... $842.1 $872.0
====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Revenues
Premiums and other income................................. $ 52.1 $ 55.4 $ 58.3
Net investment income..................................... 53.8 53.3 53.4
Realized investment (loss) gain........................... (0.6) 0.1 1.3
------ ------ ------
Total revenues.............................................. 105.3 108.8 113.0
------ ------ ------
Benefits and expenses
Policy benefits........................................... 88.9 95.0 100.5
Policy acquisition expenses............................... 2.5 2.7 3.0
Other operating expenses.................................. 0.1 0.7 0.4
------ ------ ------
Total benefits and expenses................................. 91.5 98.4 103.9
------ ------ ------
Contribution from the Closed Block.......................... $ 13.8 $ 10.4 $ 9.1
====== ====== ======
</TABLE>
F-29
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------- ------- -------
<S> <C> <C> <C>
Cash flows
Cash flows from operating activities:
Contribution from the Closed Block........................ $ 13.8 $ 10.4 $ 9.1
Change in:
Deferred policy acquisition costs, net.................. 2.5 2.6 2.9
Premiums and other receivables.......................... -- 0.3 --
Policy liabilities and accruals......................... (13.1) (13.5) (11.6)
Accrued investment income............................... 0.1 - 0.2
Deferred taxes.......................................... -- 0.1 (5.1)
Other assets............................................ (8.3) 2.4 (2.9)
Expenses and taxes payable.............................. (2.9) (2.9) (2.0)
Other, net.............................................. 0.8 (0.1) (1.2)
------- ------- -------
Net cash used in operating activities..................... (7.1) (0.7) (10.6)
Cash flows from investing activities:
Sales, maturities and repayments of investments......... 139.0 83.6 161.6
Purchases of investments................................ (128.5) (106.5) (161.4)
Other, net.............................................. 9.8 7.9 11.4
------- ------- -------
Net cash provided by (used in) investing activities....... 20.3 (15.0) 11.6
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 13.2 (15.7) 1.0
Cash and cash equivalents, beginning of year................ 9.4 25.1 24.1
------- ------- -------
Cash and cash equivalents, end of year...................... $ 22.6 $ 9.4 $ 25.1
======= ======= =======
</TABLE>
There were no valuation allowances on mortgage loans in the Closed Block at
December 31, 1999, 1998 or 1997, respectively.
Many expenses related to Closed Block operations are charged to operations
outside the Closed Block; accordingly, the contribution from the Closed Block
does not represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside the Closed Block.
10. DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- ------ ------
<S> <C> <C>
Short-term
Commercial paper.......................................... $ -- $ 41.3
Borrowings under bank credit facility..................... -- 150.0
Repurchase agreements..................................... -- 30.0
------ ------
Total short-term debt....................................... $ -- $221.3
====== ======
</TABLE>
F-30
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAFLIC issues commercial paper primarily to manage imbalances between operating
cash flows and existing commitments. Commercial paper borrowing arrangements are
supported by a credit agreement. At December 31, 1999, there was no commercial
paper outstanding.
Effective December 4, 1998, the Company entered into a credit agreement that
expired on February 5, 1999. Borrowings under this agreement were unsecured and
incurred interest at a rate per annum equal to the eurodollar rate plus
applicable margin. Borrowings outstanding under this credit facility at
December 31, 1998 were $150.0 million. These borrowings were repaid in February
1999.
The company utilizes repurchase agreements to finance certain transactions and
had approximately $30 million in such agreements outstanding at December
31,1998. There were no repurchase agreements outstanding at December 31, 1999.
In 1999, there was no interest expense related to borrowings under the credit
agreement. Interest expense related to borrowings under the credit agreement was
approximately $0.7 million and $2.8 million in 1998 and 1997, respectively. All
interest expense is recorded in other operating expenses.
In October, 1995, AFC issued Senior Debentures with a face value of $200.0
million, pay interest at a rate of 7 5/8%, and mature on October 16, 2025. The
primary source of cash for repayment of the debt by AFC is dividends from FAFLIC
and Allmerica P&C.
11. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) on continuing operations in the consolidated statements of income is
shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- ------ ------ ------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $88.7 $ 74.6 $74.4
Deferred.................................................. 4.3 (15.4) 14.2
----- ------ -----
Total....................................................... $93.0 $ 59.2 $88.6
===== ====== =====
</TABLE>
The federal income taxes attributable to the consolidated results of continuing
operations are different from the amounts determined by multiplying income
before federal income taxes by the statutory federal income tax rate. The
sources of the difference and the tax effects of each were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- ------ ------
<S> <C> <C> <C>
Expected federal income tax expense on continuing
operations................................................ $133.9 $107.9 $122.9
Tax-exempt interest....................................... (24.2) (38.9) (37.9)
Dividend received deduction............................... -- (5.1) (3.2)
Changes in tax reserve estimates.......................... (8.7) 2.3 7.8
Tax credits............................................... (8.5) (8.5) (2.7)
Other, net................................................ 0.5 1.5 1.7
------ ------ ------
Federal income tax expense on continuing operations......... $ 93.0 $ 59.2 $ 88.6
====== ====== ======
</TABLE>
F-31
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred income tax (asset) liability represents the tax effects of
temporary differences attributable to the Company's consolidated federal tax
return group. Its components were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
AMT carryforwards......................................... $ -- $ (16.8)
Loss reserve discounting.................................. (283.5) (406.6)
Deferred acquisition costs................................ 355.7 345.8
Employee benefit plans.................................... (52.0) (45.3)
Investments, net.......................................... (19.5) 121.7
Bad debt reserve.......................................... -- (1.8)
Litigation reserve........................................ (6.0) (10.9)
Discontinued operations................................... (11.7) --
Other, net................................................ (1.1) (5.5)
------- -------
Deferred tax asset, net..................................... $ (18.1) $ (19.4)
======= =======
</TABLE>
Gross deferred income tax assets totaled $515.8 million and $486.9 millions at
December 31, 1999 and 1998, respectively. Gross deferred income tax liabilities
totaled $497.7 million and $467.5 million at December 31, 1999 and 1998,
respectively.
The Company believes, based on the 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. At December 31, 1999 there are no available
alternative minimum tax credit carryforwards.
The Company's federal income tax returns are routinely audited by the Internal
Revenue Services ("IRS"), and provisions are routinely made in the financial
statements in anticipation of the results of these audits. The IRS has examined
the FAFLIC/AFLIAC consolidated group's federal income tax returns through 1994.
The IRS has also examined the former Allmerica P&C consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the federal income tax returns for 1992,
1993 and 1994 for the FAFLIC/AFLIAC consolidated group. Also, certain
adjustments proposed by the IRS with respect to FAFLIC/AFLIAC's federal income
tax returns for 1982 and 1983 remain unresolved. If upheld, these adjustments
would result in additional payments; however, the Company will vigorously defend
its position with respect to these adjustments. In the Company's opinion,
adequate tax liabilities have 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.
12. PENSION PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple benefit plans to employees and agents of these affiliated
Companies, including retirement plans. The salaries of employees and agents
covered by these plans and the expenses of these plans are charged to the
affiliated Companies in accordance with an intercompany cost sharing agreement.
F-32
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FAFLIC provides retirement benefits to substantially all of its employees under
a defined benefit pension plan. This plan is based on a defined benefit cash
balance formula, whereby the Company annually provides an allocation to each
eligible employee based on a percentage of that employee's salary, similar to a
defined contribution plan arrangement. The 1999, 1998 and 1997 allocations were
based on 7.0% of each eligible employee's salary. In addition to the cash
balance allocation, certain transition group employees, who have met specified
age and service requirements as of December 31, 1994, are eligible for a
grandfathered benefit based primarily on the employees' years of service and
compensation during their highest five consecutive plan years of employment. The
Company's policy for the plans is to fund at least the minimum amount required
by the Employee Retirement Income Security Act of 1974.
Components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 19.3 $ 19.0 $ 19.9
Interest cost............................................... 26.5 25.5 23.5
Expected return on plan assets.............................. (38.9) (34.9) (31.2)
Recognized net actuarial loss............................... 0.4 0.4 0.1
Amortization of transition asset............................ (1.4) (1.8) (1.9)
Amortization of prior service cost.......................... (2.2) (1.7) (2.0)
------- ------- -------
Net periodic pension cost................................. $ 3.7 $ 6.5 $ 8.4
======= ======= =======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.7
million of the net periodic pension cost was allocated to the distributed
subsidiaries.
The following table summarizes the status of the plan. At December 31, 1999 and
1998 the plans' assets exceeded their projected benefit obligations.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligations:
Projected benefit obligation at beginning of year......... $ 414.2 $ 370.4
Service cost -- benefits earned during the year........... 19.3 19.0
Interest cost............................................. 26.5 25.5
Actuarial (gains) losses.................................. (44.4) 20.4
Benefits paid............................................. (22.9) (21.1)
------- -------
Projected benefit obligation at end of year............. 392.7 414.2
------- -------
</TABLE>
F-33
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year............ 441.6 395.5
Actual return on plan assets.............................. 51.9 67.2
Benefits paid............................................. (22.9) (21.1)
Fair value of plan assets at end of year................ 470.6 441.6
Funded status of the plan................................. 77.9 27.4
Unrecognized transition obligation........................ (21.6) (23.9)
Unamortized prior service cost............................ (12.0) (11.0)
Unrecognized net actuarial gains.......................... (101.6) (54.9)
------- -------
Net pension liability................................... $ (57.3) $ (62.4)
======= =======
</TABLE>
As a result of AFC's merger with Allmerica P&C in 1997, certain pension
liabilities were reduced to reflect their fair value as of the merger date.
These pension liabilities were reduced by $8.9 million and $10.3 million in 1999
and 1998, respectively, which reflects fair value, net of applicable
amortization.
Determination of the projected benefit obligations was based on a weighted
average discount rate of 7.75% and 6.5% in 1999 and 1998, respectively, and the
assumed long-term rate of return on plan assets was 9.0% in both 1999 and 1998.
The actuarial present value of the projected benefit obligations was determined
using assumed rates of increase in future compensation levels ranging from 5.0%
to 5.5%. Plan assets are invested primarily in various separate accounts and the
general account of FAFLIC. Plan assets also include 796,462 shares and 973,262
shares of AFC Common Stock at December 31, 1999 and 1998, respectively, with a
market value of $44.3 million and $56.3 million at December 31, 1999 and 1998,
respectively.
The Company has a defined contribution 401(k) plan for its employees, whereby
the Company matches employee elective 401(k) contributions, up to a maximum
percentage determined annually by the Board of Directors. During 1999, 1998 and
1997, the Company matched 50% of employees' contributions up to 6.0% of eligible
compensation. The total expense related to this plan was $5.9 million, $5.6
million and $3.3 million in 1999, 1998 and 1997, respectively. In 1999,
subsequent to the AFC corporate reorganization, approximately $1.4 million of
the 401(k) expense was allocated to the distributed subsidiaries. In addition to
this plan, the Company has a defined contribution plan for substantially all of
its agents. The plan expense in 1999, 1998 and 1997 was $3.1 million, $3.0
million and $2.8 million, respectively.
On January 1, 1998, substantially all of the defined benefit and defined
contribution 401(k) plans previously provided by the affiliated Companies were
merged with the existing benefit plans of FAFLIC. The merger of benefit plans
resulted in a $5.9 million change of interest adjustment to additional paid-in
capital during 1998. The change of interest adjustment arose from FAFLIC's
forgiveness of certain Allmerica P&C benefit plan liabilities attributable to
Allmerica P&C's minority interest.
13. OTHER POSTRETIREMENT BENEFIT PLANS
FAFLIC, as the common employer for all AFC Companies ("affiliated Companies"),
provides multiple postretirement medical and death benefit plans to employees,
agents and retirees of these affiliated Companies. The costs of these plans are
charged to the affiliated Companies in accordance with an intercompany cost
sharing agreement.
F-34
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Generally, employees become eligible at age 55 with at least 15 years of
service. Spousal coverage is generally provided for up to two years after death
of the retiree. Benefits include hospital, major medical, and a payment at death
equal to retirees' final compensation up to certain limits. Effective
January 1, 1996, the Company revised these benefits so as to establish limits on
future benefit payments and to restrict eligibility to current employees. The
medical plans have varying copayments and deductibles, depending on the plan.
These plans are unfunded.
The plans' funded status reconciled with amounts recognized in the Company's
Consolidated Balance Sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998
- ------------- -------- --------
<S> <C> <C>
Change in benefit obligation:
Accumulated postretirement benefit obligation at beginning
of year................................................... $ 84.0 $ 71.8
Service cost................................................ 2.9 3.1
Interest cost............................................... 4.6 5.1
Actuarial (gains) losses.................................... (21.2) 7.6
Benefits paid............................................... (3.5) (3.6)
------- -------
Accumulated postretirement benefit obligation at end of
year.................................................... 66.8 84.0
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status of the plan................................... (66.8) (84.0)
Unamortized prior service cost.............................. (9.8) (12.9)
Unrecognized net actuarial (gains) losses................... (13.8) 7.5
------- -------
Accumulated postretirement benefit costs.................. $ (90.4) $ (89.4)
======= =======
</TABLE>
The components of net periodic postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $ 2.9 $ 3.1 $ 3.0
Interest cost............................................... 4.6 5.1 4.6
Recognized net actuarial loss (gain)........................ 0.1 0.1 (0.1)
Amortization of prior service cost.......................... (2.3) (2.4) (2.7)
------ ------ ------
Net periodic postretirement benefit cost.................... $ 5.3 $ 5.9 $ 4.8
====== ====== ======
</TABLE>
In 1999, subsequent to the AFC corporate reorganization, approximately $1.1
million of the net periodic postretirement cost was allocated to the distributed
subsidiaries.
As a result of AFC's merger with Allmerica P&C in 1997, certain postretirement
liabilities were reduced to reflect their fair value as of the merger date.
These postretirement liabilities were reduced by $4.6 million and $5.4 million
in 1999 and 1998, respectively, which reflects fair value, net of applicable
amortization.
For purposes of measuring the accumulated postretirement benefit obligation at
December 31, 1999, health care costs were assumed to increase 6.0% in 2000,
declining thereafter until the ultimate rate of 5.5% is reached in 2001 and
remains at that level thereafter. The health care cost trend rate assumption has
a significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by
F-35
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
one percentage point in each year would increase the accumulated postretirement
benefit obligation at December 31, 1999 by $4.1 million, and the aggregate of
the service and interest cost components of net periodic postretirement benefit
expense for 1999 by $0.6 million. Conversely, decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation at December 31, 1999 by $3.6
million, and the aggregate of the service and interest cost components of net
periodic postretirement benefit expense for 1999 by $0.5 million.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 6.5% at December 31, 1999 and
1998, respectively. In addition, the actuarial present value of the accumulated
postretirement benefit obligation was determined using an assumed rate of
increase in future compensation levels of 5.5% for FAFLIC agents.
On January 1, 1998, substantially all of the postretirement medical and death
benefits plans previously provided by the affiliated Companies were merged with
the existing benefit plans of FAFLIC. The merger of benefit plans resulted in a
$3.8 million change of interest adjustment to additional paid-in capital during
1998. The change of interest adjustment arose from FAFLIC's forgiveness of
certain Allmerica P&C benefit plan liabilities attributable to Allmerica P&C's
minority interest.
14. DIVIDEND RESTRICTIONS
Massachusetts and Delaware have enacted laws governing the payment of dividends
to stockholders by insurers. These laws affect the dividend paying ability of
FAFLIC and AFLIAC, respectively.
Massachusetts' statute limits the dividends an insurer may pay in any twelve
month period, without the prior permission of the Commonwealth of Massachusetts
Insurance Commissioner, to the greater of (i) 10% of its statutory policyholder
surplus as of the preceding December 31 or (ii) the individual company's
statutory net gain from operations for the preceding calendar year (if such
insurer is a life company), or its net income for the preceding calendar year
(if such insurer is not a life company). In addition, under Massachusetts law,
no domestic insurer shall pay a dividend or make any distribution to its
shareholders from other than unassigned funds unless the Commissioner shall have
approved such dividend or distribution. During 1999 and 1997, no dividends were
declared by FAFLIC to AFC. During 1998, FAFLIC paid dividends of $50.0 million
to AFC. As of July 1, 1999, FAFLIC's ownership of Allmerica P&C, as well as
several non-insurance subsidiaries, was transferred from FAFLIC to AFC. Under an
agreement with the Commissioner, any dividend from FAFLIC to AFC for years 2000
and 2001 would require the prior approval of the Commissioner and may require
AFC to make additional capital contributions to FAFLIC.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an insurer,
whether or not in excess of the aforementioned threshold, from a source other
than statutory earned surplus would also require the prior approval of the
Delaware Commissioner of Insurance. No dividends were declared by AFLIAC to
FAFLIC during 1999, 1998 or 1997. During 2000, AFLIAC could pay dividends of
$34.3 million to FAFLIC without prior approval.
F-36
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
The Company offers Asset Accumulation financial products and services. Prior to
the AFC corporate reorganization, the Company offered financial products and
services in two major areas: Risk Management and Asset Accumulation. Within
these broad areas, the Company conducted business principally in three operating
segments. These segments were Risk Management, Allmerica Financial Services and
Allmerica Asset Management. In accordance with Statement No. 131, the separate
financial information of each segment is presented consistent with the way
results are regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. A summary of
the Company's reportable segments is included below.
In 1999, the Company reorganized its Property and Casualty business and
Corporate Risk Management Services operations within the Risk Management
segment. Under the new structure, the Risk Management segment manages its
business through five distribution channels identified as Hanover North, Hanover
South, Citizens Midwest, Allmerica Voluntary Benefits and Allmerica Specialty.
During the second quarter of 1999, the Company approved a plan to exit its group
life and health business, consisting of its EBS business, its AGU business and
its reinsurance pool business. Results of operations from this business,
relating to both the current and the prior periods, have been segregated and
reported as a component of discontinued operations in the Consolidated
Statements of Income. Operating results from this business were previously
reported in the Allmerica Voluntary Benefits and Allmerica Specialty
distribution channels. Prior to 1999, results of the group life and health
business were included in the Corporate Risk Management Services segment, while
all other Risk Management business was reflected in the Property and Casualty
segment.
The Risk Management segment's property and casualty business is offered
primarily through the Hanover North, Hanover South and Citizens Midwest
distribution channels utilizing the Company's independent agent network
primarily in the Northeast, Midwest and Southeast United States, maintaining a
strong regional focus. Allmerica Voluntary Benefits focuses on worksite
distribution, which offers discounted property and casualty products through
employer sponsored programs, and affinity group property and casualty business.
Allmerica Specialty offers special niche property and casualty products in
selected markets. On July 1, 1999, AFC made certain changes to its corporate
structure as discussed in Note 3. As a result, FAFLIC distributed its interest
in the property and casualty business after that date.
The Asset Accumulation group includes two segments: Allmerica Financial Services
and Allmerica Asset Management. The Allmerica Financial Services segment
includes variable annuities, variable universal life and traditional life
insurance products distributed via retail channels as well as group retirement
products, such as defined benefit and 401(k) plans and tax-sheltered annuities
distributed to institutions. Through its Allmerica Asset Management segment, the
Company offers its customers the option of investing in GICs such as the
traditional GIC, synthetic GIC and other funding agreements. Funding agreements
are investment contracts issued to institutional buyers, such as money market
funds, corporate cash management programs and securities lending collateral
programs, which typically have short maturities and periodic interest rate
resets based on an index such as LIBOR. This segment is also a Registered
Investment Advisor providing investment advisory services, primarily to
affiliates, and to other institutions, such as insurance companies and pension
plans. As a result of the aforementioned change in the AFC corporate structure,
FAFLIC distributed its ownership of certain investment advisory business as of
July 1, 1999.
In addition to the three operating segments, the Company has a Corporate
segment, which consists primarily of cash, investments, corporate debt, Capital
Securities and corporate overhead expenses. Corporate overhead
F-37
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses reflect costs not attributable to a particular segment, such as those
generated by certain officers and directors, Corporate Technology, Corporate
Finance, Human Resources and the Legal department.
Management evaluates the results of the aforementioned segments based on a
pre-tax and minority interest basis. Segment income is determined by adjusting
net income for net realized investment gains and losses, net gains and losses on
disposals of businesses, discontinued operations, extraordinary items, the
cumulative effect of accounting changes and certain other items which management
believes are not indicative of overall operating trends. While these items may
be significant components in understanding and assessing the Company's financial
performance, management believes that the presentation of segment income
enhances understanding of the Company's results of operations by highlighting
net income attributable to the normal, recurring operations of the business.
However, segment income should not be construed as a substitute for net income
determined in accordance with generally accepted accounting principles.
Summarized below is financial information with respect to business segments:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Segment revenues:
Risk Management........................................... $1,075.2 $2,220.8 $2,227.3
Asset Accumulation
Allmerica Financial Services............................ 797.0 721.2 713.9
Allmerica Asset Management.............................. 144.5 121.7 91.1
-------- -------- --------
Subtotal............................................ 941.5 842.9 805.0
-------- -------- --------
Corporate................................................. 0.4 2.3 4.7
Intersegment revenues..................................... (0.8) (7.6) (11.5)
-------- -------- --------
Total segment revenues including Closed Block........... 2,016.3 3,058.4 3,025.5
-------- -------- --------
Adjustment to segment revenues:
Adjustment for Closed Block........................... (92.1) (98.4) (102.6)
Change in mortality................................... -- -- (4.2)
Net realized gains.................................... 100.3 60.9 76.3
-------- -------- --------
Total revenues............................................ $2,024.5 $3,020.9 $2,995.0
======== ======== ========
</TABLE>
F-38
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
Segment income (loss) before income taxes and minority interest:
<S> <C> <C> <C>
Risk Management............................................. $ 85.1 $ 149.7 $ 174.2
Asset Accumulation
Allmerica Financial Services.............................. 207.1 169.0 134.6
Allmerica Asset Management................................ 21.3 23.7 18.4
-------- -------- --------
Subtotal.............................................. 228.4 192.7 153.0
-------- -------- --------
Corporate................................................... (38.6) (45.2) (44.6)
Segment income before income taxes and minority interest... 274.9 297.2 282.6
Adjustments to segment income:
Net realized investment gains, net of amortization........ 106.1 52.2 78.5
Sales practice litigation expense......................... -- (31.0) --
Gain from change in mortality assumptions................. -- -- 47.0
Loss on cession of disability income business............. -- -- (53.9)
Restructuring costs....................................... -- (9.0) --
Other items............................................... -- (0.8) (2.8)
-------- -------- --------
Income before taxes and minority interest................... $ 381.0 $ 308.6 $ 351.4
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1999 1998 1999 1998
- ------------- --------- --------- ------------ ------------
IDENTIFIABLE ASSETS DEFERRED ACQUISITION COSTS
<S> <C> <C> <C> <C>
Risk Management............................... $ 542.0 $ 6,216.8 $ 6.0 $ 167.5
Asset Accumulation
Allmerica Financial Services................ 23,410.7 19,407.3 1,213.1 993.1
Allmerica Asset Management.................. 1,381.1 1,810.9 0.4 0.6
--------- --------- --------- ---------
Subtotal................................ 24,791.8 21,218.2 1,213.5 993.7
Corporate................................... -- 29.6 -- --
--------- --------- --------- ---------
Total..................................... $25,333.8 $27,464.6 $ 1,219.5 $ 1,161.2
========= ========= ========= =========
</TABLE>
16. LEASE COMMITMENTS
Rental expenses for operating leases, including those related to the
discontinued operations of the Company, amounted to $22.2 million, $34.9 million
and $33.6 million in 1999, 1998 and 1997, respectively. These expenses relate
primarily to building leases of the Company. At December 31, 1999, future
minimum rental payments under non-cancelable operating leases were approximately
$39.9 million, payable as follows: 2000 - $14.1 million; 2001 -- $12.7 million;
2002 -- $8.1 million; 2003 -- $3.6 million, and $1.4 million thereafter. It is
expected that, in the normal course of business, leases that expire will be
renewed or replaced by leases on other property and equipment; thus, it is
anticipated that future minimum lease commitments will not be less than the
amounts shown for 2000.
F-39
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REINSURANCE
In the normal course of business, the Company seeks to reduce the losses that
may arise from catastrophes or other 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 of Financial
Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short
Duration and Long Duration Contracts.
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.
Effective January 1, 1999, Allmerica P&C entered into a whole account aggregate
excess of loss reinsurance agreement with a highly rated insurer (See Note 5).
Prior to the AFC corporate reorganization, the Company was subject to
concentration of risk with respect to this reinsurance agreement, which
represented 10% or more of the Company's reinsurance business. Net premiums
earned and losses and loss adjustment expenses ceded under this agreement in
1999 were $21.9 million and $35.0 million, respectively. In addition, the
Company is subject to concentration of risk with respect to reinsurance ceded to
various residual market mechanisms. As a condition to the ability to conduct
certain business in various states, the Company is required to participate in
various residual market mechanisms and pooling arrangements which provide
various insurance coverages to individuals or other entities that are otherwise
unable to purchase such coverage voluntarily provided by private insurers. These
market mechanisms and pooling arrangements include the Massachusetts
Commonwealth Automobile Reinsurers ("CAR"), the Maine Workers' Compensation
Residual Market Pool ("MWCRP") and the Michigan Catastrophic Claims Association
("MCCA"). Prior to the AFC corporate reorganization, both CAR and MCCA
represented 10% or more of the Company's reinsurance business. As a servicing
carrier in Massachusetts, the Company ceded a significant portion of its private
passenger and commercial automobile premiums to CAR. Net premiums earned and
losses and loss adjustment expenses ceded to CAR in 1999, 1998 and 1997 were
$20.4 million and $21.4 million, $34.3 million and $38.1 million, and $32.3
million and $28.2 million, respectively. The Company ceded to MCCA premiums
earned and losses and loss adjustment expenses in 1999, 1998 and 1997 of $1.8
million and $30.6 million, $3.7 million and $18.0 million, and $9.8 million and
$(0.8) million, respectively.
On June 2, 1998, the Company recorded a $124.2 million one-time reduction of its
direct and ceded written premiums as a result of a return of excess surplus from
MCCA. This transaction had no impact on the total net premiums recorded by the
Company in 1998.
Because the MCCA is supported by assessments permitted by statute, and all
amounts billed by the Company to CAR, MWCRP and MCCA have been paid when due,
the Company believes that it has no significant exposure to uncollectible
reinsurance balances.
F-40
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Life and accident and health insurance premiums:
Direct.................................................... $ 53.5 $ 51.4 $ 55.9
Assumed................................................... 0.7 0.7 0.6
Ceded..................................................... (50.0) (47.8) (29.1)
-------- -------- --------
Net premiums................................................ $ 4.2 $ 4.3 $ 27.4
======== ======== ========
Property and casualty premiums written:
Direct.................................................... $1,089.0 $1,970.4 $2,068.5
Assumed................................................... 27.3 58.8 103.1
Ceded..................................................... (135.4) (74.1) (179.8)
-------- -------- --------
Net premiums................................................ $ 980.9 $1,955.1 $1,991.8
======== ======== ========
Property and casualty premiums earned:
Direct.................................................... $1,047.3 $1,966.8 $2,046.1
Assumed................................................... 30.3 64.5 102.0
Ceded..................................................... (127.3) (66.1) (195.1)
-------- -------- --------
Net premiums................................................ $ 950.3 $1,965.2 $1,953.0
======== ======== ========
Life insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $ 391.9 $ 359.5 $ 397.4
Assumed................................................... 0.1 0.3 0.4
Ceded..................................................... (39.2) (49.5) (79.4)
-------- -------- --------
Net policy benefits, claims, losses and loss adjustment
expenses.................................................. $ 352.8 $ 310.3 $ 318.4
======== ======== ========
Property and casualty benefits, claims, losses and loss
adjustment expenses:
Direct.................................................... $ 805.6 $1,588.2 $1,464.9
Assumed................................................... 25.9 62.7 101.2
Ceded..................................................... (128.0) (158.2) (120.6)
-------- -------- --------
Net policy benefits, claims, losses, and loss adjustment
expenses.................................................. $ 703.5 $1,492.7 $1,445.5
======== ======== ========
</TABLE>
F-41
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. 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) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $1,161.2 $ 965.5 $ 822.7
Acquisition expenses deferred............................... 419.2 638.2 614.3
Amortized to expense during the year........................ (240.9) (449.6) (472.6)
Adjustment for discontinued operations...................... 3.4 ( 0.2) --
Adjustment to equity during the year........................ 39.3 7.3 (11.1)
Adjustment due to distribution of subsidiaries.............. (162.7) -- --
Adjustment for cession of disability income insurance....... -- -- (38.6)
Adjustment for revision of universal and variable universal
life insurance mortality assumptions...................... -- -- 50.8
-------- -------- --------
Balance at end of year...................................... $1,219.5 $1,161.2 $ 965.5
======== ======== ========
</TABLE>
At October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.8 million recapitalization of deferred policy acquisition costs.
19. LIABILITIES FOR OUTSTANDING CLAIMS, LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company regularly updates its estimates of liabilities for outstanding
claims, losses and loss adjustment expenses as new information becomes available
and further events occur which may impact the resolution of unsettled claims for
its property and casualty and its accident and health lines of business. 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 accident and health business was
$601.3 million and $568.0 million at December 31, 1999 and 1998, respectively.
Accident and health claim liabilities were re-estimated for all prior years and
were increased by $51.2 million and $14.6 million in 1999 and 1998,
respectively. The increase in 1999 resulted from the Company's reserve
strengthening primarily in the EBS and reinsurance pool business. The 1998
increase also resulted from the Company's reserve strengthening, primarily in
the assumed reinsurance and stop loss only business.
F-42
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a reconciliation of the beginning and ending
property and casualty reserve for unpaid losses and loss adjustment expenses
(LAE):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Reserve for losses and LAE, beginning of the year........... $2,597.3 $2,615.4 $2,744.1
Incurred losses and LAE, net of reinsurance recoverable:
Provision for insured events of the current year.......... 795.6 1,609.0 1,564.1
Decrease in provision for insured events of prior years... (96.1) (127.2) (127.9)
-------- -------- --------
Total incurred losses and LAE............................... 699.5 1,481.8 1,436.2
-------- -------- --------
Payments, net of reinsurance recoverable:
Losses and LAE attributable to insured events of current
year.................................................... 342.1 871.9 775.1
Losses and LAE attributable to insured events of prior
years................................................... 424.2 643.0 732.1
-------- -------- --------
Total payments 766.3 1,514.9 1,507.2
Change in reinsurance recoverable on unpaid losses.......... 44.3 15.0 (50.2)
Distribution of subsidiaries................................ (2,574.8) -- --
Other (1)................................................... -- -- (7.5)
-------- -------- --------
Reserve for losses and LAE, end of year..................... $ -- $2,597.3 $2,615.4
======== ======== ========
</TABLE>
(1) Includes purchase accounting adjustments.
As part of an ongoing process, the reserves have been re-estimated for all prior
accident years and were decreased by $96.1 million, $127.2 million and $127.9
million in 1999, 1998 and 1997, respectively, reflecting increased favorable
development on reserves for both losses and loss adjustment expenses.
Favorable development on prior years' loss reserves was $52.0 million, $58.9
million, and $87.2 million prior to the AFC corporate reorganization in 1999 and
for the years ended December 31, 1998 and 1997, respectively. Favorable
development on prior year's loss adjustment expense reserves was $44.1 million,
$68.3 million, and $40.7 million prior to the AFC corporate reorganization in
1999 and for the years ended December 31, 1998 and 1997, respectively. The
increase in favorable development 1998 is primarily attributable to claims
process improvement initiatives taken by the Company. The Company has lowered
claim settlement costs through increased utilization of in-house attorneys and
consolidation of claim offices.
This favorable development reflects the Company's reserving philosophy
consistently applied over these periods. Conditions and trends that have
affected development of the loss and LAE reserves in the past may not
necessarily occur in the future.
Due to the nature of the business written by the Risk Management segment, the
exposure to environmental liabilities is relatively small and therefore its
reserves are relatively small compared to other types of liabilities. Due to the
AFC corporate reorganization, the Company had no exposure for this item at
December 31, 1999. Loss and LAE reserves related to environmental damage and
toxic tort liability, included in the reserve for losses and LAE, were $49.9
million and $53.1 million, net of reinsurance of $14.2 million and $15.7 million
in 1998 and 1997, respectively. The Company does not specifically underwrite
policies that include this coverage, but as case law expands policy provisions
and insurers' liability beyond the intended coverage, the Company may be
required to defend such claims. The Company estimated its ultimate liability for
these claims based upon currently known facts, reasonable assumptions where the
facts are not known,
F-43
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current law and methodologies currently available. Although these claims are not
significant, their existence gives rise to uncertainty and is discussed because
of the possibility, however remote, that they may become significant. The
Company believes that, notwithstanding the evolution of case law expanding
liability in environmental claims, recorded reserves related to these claims are
adequate. In addition, the Company is not aware of any litigation or pending
claims that may result in additional material liabilities in excess of recorded
reserves. The environmental liability could be revised in the near term if the
estimates used in determining the liability are revised.
20. MINORITY INTEREST
As a result of the Company's divestiture of certain of its subsidiaries
including its 84.5% ownership of the outstanding shares of the common stock of
Allmerica P&C effective July 1, 1999, there is no minority interest reflected on
the Consolidated Balance Sheets as of December 31, 1999. In prior years, the
Company's interest in Allmerica P&C was represented by ownership of 70.0% and
65.8% of the outstanding shares of common stock at December 31, 1998 and 1997,
respectively. Earnings and shareholder's equity attributable to minority
shareholders are included in minority interest in the consolidated financial
statements through the period ended June 30, 1999 and for the years ended
December 31, 1998 and 1997.
21. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially recovered through a reduction in future premium taxes
in some states. The Company is not able to reasonably estimate the potential
effect on it of any such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries, including FAFLIC, 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, the plaintiffs voluntarily dismissed the Louisiana
suit and filed a substantially similar action in Federal District Court in
Worcester, Massachusetts. In early November 1998, the Company and the plaintiffs
entered into a settlement agreement. The court granted preliminary approval of
the settlement on December 4, 1998. On May 19, 1999, the court issued an order
certifying the class for settlement purposes and granting final approval of the
settlement agreement. FAFLIC recognized a $31.0 million pre-tax expense during
the third quarter of 1998 related to this litigation. Although the Company
believes that this expense reflects appropriate recognition of its obligation
under the settlement, this estimate assumes the availability of insurance
coverage for certain claims, and the estimate may be revised based on the amount
of reimbursement actually tendered by AFC's insurance carriers, and based on
changes in the Company's estimate of the ultimate cost of the benefits to be
provided to members of the class.
The Company has been named a defendant in various other legal proceedings
arising in the normal course of business. In the Company's opinion, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's consolidated financial statements.
However,
F-44
<PAGE>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
(A WHOLLY-OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 issue resulted from computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
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.
22. 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, postretirement benefit
costs are based on different assumptions and reflect a different method of
adoption, life insurance reserves are based on different assumptions and income
tax expense reflects only taxes paid or currently payable. In 1999, 49 out of 50
states have adopted the National Association of Insurance Commissioners proposed
Codification, which provides for uniform statutory accounting principles. These
principles are effective January 1, 2001. The Company is currently assessing the
impact that the adoption of Codification will have on its statutory results of
operations and financial position.
Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1999 1998 1997
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory Net Income (Combined)
Property and Casualty Companies........................... $322.6 $ 180.7 $ 190.3
Life and Health Companies................................. 239.0 86.4 191.2
Statutory Shareholder's Surplus (Combined)
Property and Casualty Companies (See Note 3).............. $-- $1,269.3 $1,279.6
Life and Health Companies................................. 590.1 1,164.1 1,221.3
</TABLE>
F-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of First Allmerica Financial Life Insurance Company
and the Contractowners of Separate Account KG of First Allmerica Financial Life
Insurance Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account KG of First Allmerica Financial Life Insurance
Company at December 31, 1999, the results of each of their operations and the
changes in each of their net assets for each of the periods indicated, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of First Allmerica Financial
Life Insurance Company; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 3, 2000
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SMALL SMALL CONTRARIAN
CAP VALUE CAP GROWTH VALUE
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 623,253 $ 760,026 $ 1,868,413
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 623,253 760,026 1,868,413
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 623,253 $ 760,026 $ 1,868,413
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 623,253 $ 760,026 $ 1,868,413
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 623,253 $ 760,026 $ 1,868,413
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 700,626 498,017 1,769,086
Net asset value per unit, December 31, 1999 ............................... $ 0.889567 $ 1.526104 $ 1.056146
<CAPTION>
INTERNATIONAL GROWTH VALUE+GROWTH
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 791,747 $ 1,977,099 $ 2,125,402
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - 2,010
------------- ------------- -------------
Total assets .......................................................... 791,747 1,977,099 2,127,412
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 791,747 $ 1,977,099 $ 2,127,412
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 791,747 $ 1,977,099 $ 2,127,412
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 791,747 $ 1,977,099 $ 2,127,412
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 544,811 1,323,440 1,627,347
Net asset value per unit, December 31, 1999 ............................... $ 1.453248 $ 1.493909 $ 1.307288
<CAPTION>
TOTAL
HORIZON 20+ RETURN HORIZON 10+
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 148,614 $ 3,513,684 $ 1,306,645
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - 7,102
------------- ------------- -------------
Total assets .......................................................... 148,614 3,513,684 1,313,747
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 148,614 $ 3,513,684 $ 1,313,747
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 148,614 $ 3,513,684 $ 1,313,747
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 148,614 $ 3,513,684 $ 1,313,747
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 126,277 2,695,999 1,102,382
Net asset value per unit, December 31, 1999 ............................... $ 1.176885 $ 1.303296 $ 1.191734
</TABLE>
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, 1999
<TABLE>
<CAPTION>
INVESTMENT
HORIZON 5 HIGH YIELD GRADE BOND
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 217,677 $ 2,819,698 $ 657,286
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... 6,277 - 6,589
------------- ------------- -------------
Total assets .......................................................... 223,954 2,819,698 663,875
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 223,954 $ 2,819,698 $ 663,875
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 223,954 $ 2,819,698 $ 663,875
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 223,954 $2,819,698 $ 663,875
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 196,739 2,786,332 643,242
Net asset value per unit, December 31, 1999 ............................... $ 1.138338 $ 1.011975 $ 1.032076
<CAPTION>
GOVERNMENT MONEY GLOBAL
SECURITIES MARKET INCOME
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 732,281 $ 2,482,718 $ 56,877
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - 5,851 -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 732,281 2,488,569 56,877
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 732,281 $ 2,488,569 $ 56,877
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 732,281 $ 2,488,569 $ 56,877
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 732,281 $ 2,488,569 $ 56,877
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 696,099 2,321,614 54,931
Net asset value per unit, December 31, 1999 ............................... $ 1.051978 $ 1.071913 $ 1.035444
<CAPTION>
DREMAN DREMAN
BLUE FINANCIAL HIGH
CHIP SERVICES RETURN EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 4,421,402 $ 286,632 $ 2,031,960
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 4,421,402 286,632 2,031,960
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 4,421,402 $ 286,632 $ 2,031,960
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 4,421,402 $ 286,632 $ 2,031,960
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - -
------------- ------------- -------------
$ 4,421,402 $ 286,632 $ 2,031,960
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 2,885,397 271,685 2,011,587
Net asset value per unit, December 31, 1999 ............................... $ 1.532337 $ 1.055018 $ 1.010128
</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, 1999
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH GLOBAL AGGRESSIVE
AND INCOME BLUE CHIP GROWTH
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 229,049 $ 393,350 $ 164,236
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 229,049 393,350 164,236
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 229,049 $ 393,350 $ 164,236
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 229,049 $ 393,350 $ 161,464
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - - 2,772
------------- ------------- -------------
$ 229,049 $ 393,350 $ 164,236
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 196,468 302,138 118,504
Net asset value per unit, December 31, 1999 ............................... $ 1.165829 $ 1.301886 $ 1.385911
<CAPTION>
KVS FOCUSED
TECHNOLOGY INDEX LARGE CAP
GROWTH 500 GROWTH
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 1,103,672 $ 65,135 $ 2,562
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - -
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 1,103,672 65,135 2,562
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 1,103,672 $ 65,135 $ 2,562
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ 1,103,672 $ 62,954 $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... - 2,181 2,562
------------- ------------- -------------
$ 1,103,672 $ 65,135 $ 2,562
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 626,902 59,733 2,000
Net asset value per unit, December 31, 1999 ............................... $ 1.760518 $ 1.090438 $ 1.280944
<CAPTION>
KVS KVS SCUDDER
GROWTH GROWTH VLIF
OPPORTUNITIES AND INCOME INTERNATIONAL
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ..................... $ 2,323 $ 2,293 $ -
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..... - - 547,396
Investments in shares of The Alger American Fund .......................... - - -
Investments in shares of Dreyfus Investment Portfolios .................... - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ....................................................... - - -
Investments in shares of Janus Aspen Series ............................... - - -
Dividend receivable ....................................................... - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ....................................................... - - -
------------- ------------- -------------
Total assets .......................................................... 2,323 2,293 547,396
LIABILITIES: - - -
------------- ------------- -------------
Net assets ............................................................ $ 2,323 $ 2,293 $ 547,396
============= ============= =============
Net asset distribution by category:
Variable annuity contracts .............................................. $ - $ - $ 547,396
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................... 2,323 2,293 -
------------- ------------- -------------
$ 2,323 $ 2,293 $ 547,396
============= ============= =============
Units outstanding, December 31, 1999 ...................................... 2,000 2,000 326,803
Net asset value per unit, December 31, 1999 ............................... $ 1.161527 $ 1.146631 $ 1.675000
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SCUDDER SCUDDER SCUDDER ALGER
VLIF VLIF VLIF AMERICAN
GLOBAL CAPITAL GROWTH LEVERAGED
DISCOVERY GROWTH AND INCOME ALLCAP
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ................... $ - $ - $ - $ -
Investments in shares of Scudder Variable Life Investment Fund (VLIF) .. 80,932 1,324,314 898,882
Investments in shares of The Alger American Fund ........................ - - - 29,181
Investments in shares of Dreyfus Investment Portfolios .................. - - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ..................................................... - - - -
Investments in shares of Janus Aspen Series ............................. - - - -
Dividend receivable ..................................................... - - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ..................................................... - - - -
----------- ----------- ----------- -----------
Total assets ....................................................... 80,932 1,324,314 898,882 29,181
LIABILITIES: ............................................................ - - - -
----------- ----------- ----------- -----------
Net assets .......................................................... $ 80,932 $ 1,324,314 $ 898,882 $ 29,181
=========== =========== =========== ===========
Net asset distribution by category:
Variable annuity contracts ............................................ $ 80,932 $ 1,324,314 $ 898,882 $ 26,788
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................. - - - 2,393
----------- ----------- ----------- -----------
$ 80,932 $ 1,324,314 $ 898,882 $ 29,181
=========== =========== =========== ===========
Units outstanding, December 31, 1999 .................................... 57,326 847,618 779,396 24,384
Net asset value per unit, December 31, 1999 ............................. $ 1.411782 $ 1.562395 $ 1.153305 $ 1.196733
<CAPTION>
DREYFUS JANUS
ALGER DREYFUS SOCIALLY JANUS ASPEN
AMERICAN MIDCAP RESPONSIBLE ASPEN GROWTH
BALANCED STOCK GROWTH GROWTH AND INCOME
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Kemper Variable Series (KVS) ................... $ - $ - $ - $ - $ -
Investments in shares of Scudder Variable Life Investment Fund (VLIF) ..
Investments in shares of The Alger American Fund ........................ 2,116 - - - -
Investments in shares of Dreyfus Investment Portfolios .................. - 4,375 - - -
Investment in shares of The Dreyfus Socially Responsible
Growth Fund, Inc. ..................................................... - - 2,345 - -
Investments in shares of Janus Aspen Series ............................. - - - 2,455 2,813
Dividend receivable ..................................................... - - - - -
Receivable from First Allmerica Financial Life Insurance
Company (Sponsor) ..................................................... - - - - -
--------- --------- --------- --------- ---------
Total assets ....................................................... 2,116 4,375 2,345 2,455 2,813
LIABILITIES: ............................................................ - - - - -
--------- --------- --------- --------- ---------
Net assets .......................................................... $ 2,116 $ 4,375 $ 2,345 $ 2,455 $2,813
========= ========= ========= ========= =========
Net asset distribution by category:
Variable annuity contracts ............................................ $ - $ 2,155 $ - $ - $ -
Value of investment by First Allmerica Financial Life Insurance
Company (Sponsor) .................................................. 2,116 2,220 2,345 2,455 2,813
--------- --------- --------- --------- ---------
$ 2,116 $ 4,375 $ 2,345 $ 2,455 $ 2,813
========= ========= ========= ========= =========
Units outstanding, December 31, 1999 .................................... 2,000 3,940 2,000 2,000 2,000
Net asset value per unit, December 31, 1999 ............................. $1.058063 $1.110152 $1.172578 $1.227452 $1.406722
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SMALL SMALL CONTRARIAN
CAP VALUE CAP GROWTH VALUE INTERNATIONAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends .................................................. $ 5,884 $ - $ 41,954 $ 5,096
------------- ------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ............................ 8,315 4,814 31,029 6,520
Administrative expense fees ................................ 997 577 3,724 782
------------- ------------- ------------- -------------
Total expenses ........................................... 9,312 5,391 34,753 7,302
------------- ------------- ------------- -------------
Net investment income (loss) ............................. (3,428) (5,391) 7,201 (2,206)
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ......... - - 139,847 54,787
Net realized gain (loss) from sales of investments ......... (8,705) 4,981 22,078 732
------------- ------------- ------------- -------------
Net realized gain (loss) ................................. (8,705) 4,981 161,925 55,519
Net unrealized gain (loss) ................................. 9,767 158,028 (455,682) 176,692
------------- ------------- ------------- -------------
Net realized and unrealized gain (loss) .................. 1,062 163,009 (293,757) 232,211
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from operations .... $ (2,366) $ 157,618 $ (286,556) $ 230,005
============= ============= ============= =============
<CAPTION>
TOTAL
GROWTH VALUE+GROWTH HORIZON 20+ RETURN HORIZON 10+
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................ $ - $ 8,337 $ 701 $ 56,894 $ 19,602
------------ ------------ ------------ ------------ ------------
EXPENSES:
Mortality and expense risk fees .......................... 13,237 19,405 1,206 30,509 13,734
Administrative expense fees .............................. 1,589 2,329 144 3,662 1,648
------------ ------------ ------------ ------------ ------------
Total expenses ......................................... 14,826 21,734 1,350 34,171 15,382
------------ ------------ ------------ ------------ ------------
Net investment income (loss) ........................... (14,826) (13,397) (649) 22,723 4,220
------------ ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ....... - 29,181 350 94,824 -
Net realized gain (loss) from sales of investments ....... 17,517 39,354 523 13,757 3,632
------------ ------------ ------------ ------------ ------------
Net realized gain (loss) ............................... 17,517 68,535 873 108,581 3,632
Net unrealized gain (loss) ............................... 415,869 199,664 7,415 207,037 66,525
------------ ------------ ------------ ------------ ------------
Net realized and unrealized gain (loss) ................ 433,386 268,199 8,288 315,618 70,157
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from operations .. $ 418,560 $ 254,802 $ 7,639 $ 338,341 $ 74,377
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INVESTMENT GOVERNMENT
HORIZON 5 HIGH YIELD GRADE BOND SECURITIES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................................... $ 9,972 $ 232,881 $ 14,742 $ 49,369
---------- ---------- ---------- ----------
EXPENSES:
Mortality and expense risk fees ......................... 5,631 34,325 7,437 11,365
Administrative expense fees ............................. 676 4,119 892 1,363
---------- ---------- ---------- ----------
Total expenses ........................................ 6,307 38,444 8,329 12,728
---------- ---------- ---------- ----------
Net investment income (loss) .......................... 3,665 194,437 6,413 36,641
---------- ---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ...... - - 4,914 -
Net realized gain (loss) from sales of investments ...... 26,258 (30,516) (1,524) (16,841)
---------- ---------- ---------- ----------
Net realized gain (loss) .............................. 26,258 (30,516) 3,390 (16,841)
Net unrealized gain (loss) .............................. (21,664) (156,114) (29,236) (25,985)
---------- ---------- ---------- ----------
Net realized and unrealized gain (loss) ............... 4,594 (186,630) (25,846) (42,826)
---------- ---------- ---------- ----------
Net increase (decrease) in net assets from operations.. $ 8,259 $ 7,807 $ (19,433) $ (6,185)
========== ========== ========== ==========
<CAPTION>
DREMAN DREMAN
MONEY GLOBAL BLUE FINANCIAL HIGH
MARKET INCOME CHIP SERVICES RETURN EQUITY
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ............................................... $ 65,507 $ 1,785 $ 9,927 $ 703 $ 12,224
------------ ------------ ------------ ------------ -------------
EXPENSES:
Mortality and expense risk fees ......................... 17,054 610 31,732 2,560 20,851
Administrative expense fees ............................. 2,046 74 3,808 308 2,502
------------ ------------ ------------ ------------ -------------
Total expenses ........................................ 19,100 684 35,540 2,868 23,353
------------ ------------ ------------ ------------ -------------
Net investment income (loss) .......................... 46,407 1,101 (25,613) (2,165) (11,129)
------------ ------------ ------------ ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ...... - 893 - - 12,224
Net realized gain (loss) from sales of investments ...... - (432) 33,064 (1,279) (68,411)
------------ ------------ ------------ ------------ -------------
Net realized gain (loss) .............................. - 461 33,064 (1,279) (56,187)
Net unrealized gain (loss) .............................. - (5,155) 622,042 (23,698) (254,638)
------------ ------------ ------------ ------------ -------------
Net realized and unrealized gain (loss) ............... - (4,694) 655,106 (24,977) (310,825)
------------ ------------ ------------ ------------ -------------
Net increase (decrease) in net assets from operations . $ 46,407 $ (3,593) $ 629,493 $ (27,142) $ (321,954)
============ ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INTERNATIONAL
GROWTH GLOBAL AGGRESSIVE TECHNOLOGY
AND INCOME BLUE CHIP GROWTH(a) GROWTH(a)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends .............................................. $ 75 $ 153 $ - $ -
------------- ------------- ------------- -------------
EXPENSES:
Mortality and expense risk fees ........................ 1,412 1,889 143 1,702
Administrative expense fees ............................ 169 227 18 205
------------- ------------- ------------- -------------
Total expenses ....................................... 1,581 2,116 161 1,907
------------- ------------- ------------- -------------
Net investment income (loss) ......................... (1,506) (1,963) (161) (1,907)
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ..... - - - -
Net realized gain (loss) from sales of investments ..... 560 736 (2) 831
------------- ------------- ------------- -------------
Net realized gain (loss) ............................. 560 736 (2) 831
Net unrealized gain (loss) ............................. 28,004 56,976 9,997 179,517
------------- ------------- ------------- -------------
Net realized and unrealized gain (loss) .............. 28,564 57,712 9,995 180,348
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from operations. $ 27,058 $ 55,749 $ 9,834 $ 178,441
============= ============= ============= =============
<CAPTION>
KVS FOCUSED KVS KVS SCUDDER
INDEX LARGE CAP GROWTH GROWTH VLIF
500(b) GROWTH(c) OPPORTUNITIES(c) AND INCOME(c) INTERNATIONAL
-------- ------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends .............................................. $ - $ - $ - $ - $ 450
-------- ------------- ---------------- -------------- -------------
EXPENSES:
Mortality and expense risk fees ........................ 63 5 5 5 4,415
Administrative expense fees ............................ 8 - - - 529
-------- ------------- ---------------- -------------- -------------
Total expenses ....................................... 71 5 5 5 4,944
-------- ------------- ---------------- -------------- -------------
Net investment income (loss) ......................... (71) (5) (5) (5) (4,494)
-------- ------------- ---------------- -------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ..... - - - - 33,560
Net realized gain (loss) from sales of investments ..... 2 - - - 17,422
-------- ------------- ---------------- -------------- -------------
Net realized gain (loss) ............................. 2 - - - 50,982
Net unrealized gain (loss) ............................. 3,242 567 328 298 128,373
-------- ------------- ---------------- -------------- -------------
Net realized and unrealized gain (loss) .............. 3,244 567 328 298 179,355
-------- ------------- ---------------- -------------- -------------
Net increase (decrease) in net assets from operations. $ 3,173 $ 562 $ 323 $ 293 $ 174,861
======== ============= ================ ============== =============
</TABLE>
(a) For the Period 5/3/99 to 12/31/99.
(b) For the Period 9/1/99 to 12/31/99.
(c) For the Period 10/29/99 to 12/31/99.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
SCUDDER SCUDDER SCUDDER ALGER
VLIF VLIF VLIF AMERICAN
GLOBAL CAPITAL GROWTH LEVERAGED
DISCOVERY(d) GROWTH AND INCOME ALLCAP(e)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................ $ - $ 2,102 $ 9,234 $ -
------------ ------------ ------------ ------------
EXPENSES:
Mortality and expense risk fees .......................... 81 11,039 12,010 17
Administrative expense fees .............................. 10 1,325 1,441 2
------------ ------------ ------------ ------------
Total expenses ......................................... 91 12,364 13,451 19
------------ ------------ ------------ ------------
Net investment income (loss) ........................... (91) (10,262) (4,217) (19)
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ....... - 97,276 60,106 -
Net realized gain (loss) from sales of investments ....... 48 (22,082) (5,910) -
------------ ------------ ------------ ------------
Net realized gain (loss) ............................... 48 75,194 54,196 -
Net unrealized gain (loss) ............................... 9,807 217,533 (26,737) 2,200
------------ ------------ ------------ ------------
Net realized and unrealized gain (loss) ................ 9,855 292,727 27,459 2,200
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from operations .. $ 9,764 $ 282,465 $ 23,242 $ 2,181
============ ============ ============ ============
<CAPTION>
DREYFUS JANUS
ALGER DREYFUS SOCIALLY JANUS ASPEN
AMERICAN MIDCAP RESPONSIBLE ASPEN GROWTH AND
BALANCED(e) STOCK(f) GROWTH(f) GROWTH(f) INCOME(f)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ................................................ $ - $ 11 $ - $ 2 $ 4
----------- ----------- ----------- ----------- -----------
EXPENSES:
Mortality and expense risk fees .......................... 3 8 7 8 8
Administrative expense fees .............................. 1 1 1 - 1
----------- ----------- ----------- ----------- -----------
Total expenses ......................................... 4 9 8 8 9
----------- ----------- ----------- ----------- -----------
Net investment income (loss) ........................... (4) 2 (8) (6) (5)
----------- ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain distributions from portfolio sponsor ....... - - 78 - -
Net realized gain (loss) from sales of investments ....... - - 1 - 1
----------- ----------- ----------- ----------- -----------
Net realized gain (loss) ............................... - - 79 - 1
Net unrealized gain (loss) ............................... 120 373 274 461 817
----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain (loss) ................ 120 373 353 461 818
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets from operations .. $ 116 $ 375 $ 345 $ 455 $ 813
=========== =========== =========== =========== ===========
</TABLE>
(d) For the Period 10/20/99 to 12/31/99.
(e) For the Period 11/15/99 to 12/31/99.
(f) For the Period 9/21/99 to 12/31/99.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP VALUE SMALL CAP GROWTH CONTRARIAN VALUE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------- ---------------------- ------------------------
1999 1998 1999 1998 1999 1998
--------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................ $ (3,428) $ (3,617) $ (5,391) $ (1,842) $ 7,201 $ (11,079)
Net realized gain (loss) ................................ (8,705) (317) 4,981 11,151 161,925 (12,271)
Net unrealized gain (loss) .............................. 9,767 6,083 158,028 20,343 (455,682) 242,325
--------- --------- ---------- --------- ---------- ----------
Net increase (decrease) in net assets from operations ... (2,366) 2,149 157,618 29,652 (286,556) 218,975
--------- --------- ---------- --------- ---------- ----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................... 111,981 504,022 79,438 192,942 689,040 2,012,025
Withdrawals ............................................. (35,409) (29,292) (38,807) (13,874) (88,141) (36,322)
Contract benefits ....................................... - - - - (836,736) -
Contract charges ........................................ (111) (8) (113) (22) (268) (41)
Transfers between sub-accounts (including fixed account),
net ................................................... (106,701) 17,713 205,468 (22,808) (167,925) (306,540)
Other transfers from (to) the General Account ........... 35,582 73,421 90,024 62,671 275,846 218,266
Net increase (decrease) in investment by Sponsor ........ - - - - - -
--------- --------- ---------- --------- ---------- ----------
Net increase (decrease) in net assets from contract
transactions .......................................... 5,342 565,856 336,010 218,909 (128,184) 1,887,388
--------- --------- ---------- --------- ---------- ----------
Net increase (decrease) in net assets ................... 2,976 568,005 493,628 248,561 (414,740) 2,106,363
NET ASSETS:
Beginning of year ....................................... 620,277 52,272 266,398 17,837 2,283,153 176,790
--------- --------- ---------- --------- ---------- ----------
End of year ............................................. $ 623,253 $ 620,277 $ 760,026 $ 266,398 $1,868,413 $2,283,153
========= ========= ========== ========= ========== ==========
<CAPTION>
INTERNATIONAL GROWTH
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------- -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................ $ (2,206) $ (1,074) $ (14,826) $ (2,851)
Net realized gain (loss) ................................ 55,519 3,422 17,517 25,340
Net unrealized gain (loss) .............................. 176,692 12,745 415,869 28,637
--------- --------- --------- ---------
Net increase (decrease) in net assets from operations ... 230,005 15,093 418,560 51,126
--------- --------- --------- ---------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................... 78,812 155,112 770,632 383,758
Withdrawals ............................................. (17,652) (494) (69,516) (951)
Contract benefits ....................................... - - - -
Contract charges ........................................ (118) (12) (204) (27)
Transfers between sub-accounts (including fixed account),
net ................................................... 23,076 35,312 241,173 12,998
Other transfers from (to) the General Account ........... 95,887 132,350 51,237 102,267
Net increase (decrease) in investment by Sponsor ........ - - - -
--------- --------- --------- ---------
Net increase (decrease) in net assets from contract
transactions .......................................... 180,005 322,268 993,322 498,045
--------- --------- --------- ---------
Net increase (decrease) in net assets ................... 410,010 337,361 1,411,882 549,171
NET ASSETS:
Beginning of year ....................................... 381,737 44,376 565,217 16,046
--------- --------- --------- ---------
End of year ............................................. $ 791,747 $ 381,737 $1,977,099 $ 565,217
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-9
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VALUE+GROWTH HORIZON 20+ TOTAL RETURN
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------- ------------------ -----------------------
1999 1998 1999 1998 1999 1998
----------- ----------- --------- -------- ----------- -----------
S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) .......................... $ (13,397) $ (7,482) $ (649) $ (238) $ 22,723 $ 3,525
Net realized gain (loss) .............................. 68,535 (823) 873 281 108,581 51,283
Net unrealized gain (loss) ............................ 199,664 117,696 7,415 1,029 207,037 58,881
----------- ----------- --------- -------- ----------- -----------
Net increase (decrease) in net assets from operations.. 254,802 109,391 7,639 1,072 338,341 113,689
----------- ----------- --------- -------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................. 879,654 966,340 115,706 31,236 1,474,233 827,904
Withdrawals ........................................... (91,231) (59,651) (32,291) (1,556) (61,107) (16,986)
Contract benefits ..................................... - - - - (1,880) (27,116)
Contract charges ...................................... (276) (14) (19) (8) (650) (20)
Transfers between sub-accounts (including fixed account),
net ................................................. (260,599) (37,468) 19,408 22 104,549 156,599
Other transfers from (to) the General Account ......... 115,033 131,568 480 2,073 253,177 310,042
Net increase (decrease) in investment by Sponsor ...... - - - - - -
----------- ----------- --------- -------- ----------- -----------
Net increase (decrease) in net assets from contract
transactions ........................................ 642,581 1,000,775 103,284 31,767 1,768,322 1,250,423
----------- ----------- --------- -------- ----------- -----------
Net increase (decrease) in net assets ................. 897,383 1,110,166 110,923 32,839 2,106,663 1,364,112
NET ASSETS:
Beginning of year ..................................... 1,230,029 119,863 37,691 4,852 1,407,021 42,909
----------- ----------- --------- -------- ----------- -----------
End of year ........................................... $2,127,412 $1,230,029 $148,614 $37,691 $3,513,684 $1,407,021
=========== =========== ========= ======== =========== ===========
<CAPTION>
HORIZON 10+ HORIZON 5 HIGH YIELD
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------- ------------------- -----------------------
1999 1998 1999 1998 1999 1998
----------- --------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) .......................... $ 4,220 $ (3,751) $ 3,665 $ (3,342) $ 194,437 $ 32,999
Net realized gain (loss) .............................. 3,632 1,209 26,258 2,697 (30,516) (7,391)
Net unrealized gain (loss) ............................ 66,525 47,609 (21,664) 34,357 (156,114) (28,889)
----------- --------- --------- --------- ----------- -----------
Net increase (decrease) in net assets from operations.. 74,377 45,067 8,259 33,712 7,807 (3,281)
----------- --------- --------- --------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................. 373,882 687,794 50,541 543,947 786,669 1,509,922
Withdrawals ........................................... (19,906) (4,562) (55,369) (56,060) (204,805) (37,859)
Contract benefits ..................................... - - (120,103) - (1,610) -
Contract charges ...................................... (261) - (100) - (391) (24)
Transfers between sub-accounts (including fixed account),
net ................................................. (25,772) 108,163 (416,941) 17,017 (180,000) 233,044
Other transfers from (to) the General Account ......... 31,748 21,659 49,688 86,685 281,114 353,604
Net increase (decrease) in investment by Sponsor ...... - - - - - -
----------- --------- --------- --------- ----------- -----------
Net increase (decrease) in net assets from contract
transactions ........................................ 359,691 813,054 (492,284) 591,589 680,977 2,058,687
----------- --------- --------- --------- ----------- -----------
Net increase (decrease) in net assets ................. 434,068 858,121 (484,025) 625,301 688,784 2,055,406
NET ASSETS:
Beginning of year ..................................... 879,679 21,558 707,979 82,678 2,130,914 75,508
----------- --------- --------- --------- ----------- -----------
End of year ........................................... $1,313,747 $879,679 $223,954 $707,979 $2,819,698 $2,130,914
=========== ========= ========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-10
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
INVESTMENT GRADE BOND GOVERNMENT SECURITIES MONEY MARKET
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
--------------------- ---------------------- -----------------------
1999 1998 1999 1998 1999 1998
---------- --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................. $ 6,413 $ (1,076) $ 36,641 $ (391) $ 46,407 $ 5,695
Net realized gain (loss) ................................. 3,390 1,043 (16,841) 443 - -
Net unrealized gain (loss) ............................... (29,236) 9,800 (25,985) 5,941 - -
---------- --------- ---------- ----------- ----------- ----------
Net increase (decrease) in net assets from operations .... (19,433) 9,767 (6,185) 5,993 46,407 5,695
---------- --------- ---------- ----------- ----------- ----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................... 152,556 275,959 379,983 538,138 2,398,464 1,832,810
Withdrawals .............................................. (17,222) (3,684) (53,774) (25,456) (148,057) -
Contract benefits ........................................ (1,697) - - - - -
Contract charges ......................................... (60) - (19) - (197) (14)
Transfers between sub-accounts (including fixed account),
net .................................................... (15,443) (69,316) (711,359) 474,416 (627,678) (894,926)
Other transfers from (to) the General Account ............ 133,721 197,935 95,161 14,580 18,615 (147,931)
Net increase (decrease) in investment by Sponsor ......... - - - - - -
---------- --------- ---------- ----------- ----------- ----------
Net increase (decrease) in net assets from contract
transactions ........................................... 251,855 400,894 (290,008) 1,001,678 1,641,147 789,939
---------- --------- ---------- ----------- ----------- ----------
Net increase (decrease) in net assets .................... 232,422 410,661 (296,193) 1,007,671 1,687,554 795,634
NET ASSETS:
Beginning of year ........................................ 431,453 20,792 1,028,474 20,803 801,015 5,381
---------- --------- ---------- ----------- ----------- ----------
End of year .............................................. $663,875 $431,453 $ 732,281 $1,028,474 $2,488,569 $ 801,015
========== ========= ========== =========== =========== ==========
<CAPTION>
GLOBAL INCOME BLUE CHIP
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
----------------- ------------------------
1999 1998 1999 1998
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................. $1,101 $ (9) $ (25,613) $ (4,182)
Net realized gain (loss) ................................. 461 179 33,064 1,277
Net unrealized gain (loss) ............................... (5,155) 1,671 622,042 81,902
-------- -------- ----------- -----------
Net increase (decrease) in net assets from operations .... (3,593) 1,841 629,493 78,997
-------- -------- ----------- -----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................... 29,255 13,781 1,634,546 826,872
Withdrawals .............................................. (3,615) (1,341) (149,180) (13,980)
Contract benefits ........................................ - - (75,405) -
Contract charges ......................................... (13) - (463) (17)
Transfers between sub-accounts (including fixed account),
net .................................................... 2,629 626 604,741 33,427
Other transfers from (to) the General Account ............ 2,669 3,917 622,297 182,261
Net increase (decrease) in investment by Sponsor ......... - (21) - (21)
-------- -------- ----------- -----------
Net increase (decrease) in net assets from contract
transactions ........................................... 30,925 16,962 2,636,536 1,028,542
-------- -------- ----------- -----------
Net increase (decrease) in net assets .................... 27,332 18,803 3,266,029 1,107,539
NET ASSETS:
Beginning of year ........................................ 29,545 10,742 1,155,373 47,834
-------- -------- ----------- -----------
End of year .............................................. $56,877 $29,545 $4,421,402 $1,155,373
======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-11
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DREMAN FINANCIAL SERVICES DREMAN HIGH RETURN EQUITY
YEAR ENDED PERIOD YEAR ENDED PERIOD
DECEMBER 31, FROM 10/27/98* DECEMBER 31, FROM 10/12/98*
1999 TO 12/31/98 1999 TO 12/31/98
------------ ------------ -------------- --------------
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income (loss) ............................. $ (2,165) $ (109) $ (11,129) $ (716)
Net realized gain (loss) ................................. (1,279) 3 (56,187) 2
Net unrealized gain (loss) ............................... (23,698) 2,598 (254,638) 4,406
------------ ------------ -------------- --------------
Net increase (decrease) in net assets from operations .... (27,142) 2,492 (321,954) 3,692
------------ ------------ -------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................... 226,378 45,869 2,038,113 425,097
Withdrawals .............................................. (28,407) - (100,259) (2,428)
Contract benefits ........................................ - - - -
Contract charges ......................................... - - (54) -
Transfers between sub-accounts (including fixed account),
net .................................................... 48,505 5,200 (200,918) 22,544
Other transfers from (to) the General Account ............ 9,540 4,197 98,132 69,995
Net increase (decrease) in investment by Sponsor ......... - - - -
------------ ------------ -------------- --------------
Net increase (decrease) in net assets from contract
transactions ........................................... 256,016 55,266 1,835,014 515,208
------------ ------------ -------------- --------------
Net increase (decrease) in net assets .................... 228,874 57,758 1,513,060 518,900
NET ASSETS:
Beginning of year ........................................ 57,758 - 518,900 -
------------ ------------ -------------- --------------
End of year .............................................. $ 286,632 $ 57,758 $ 2,031,960 $ 518,900
============ ============ ============== ==============
<CAPTION>
AGGRESSIVE
INTERNATIONAL GROWTH AND INCOME GLOBAL BLUE CHIP GROWTH
YEAR ENDED PERIOD YEAR ENDED PERIOD PERIOD
DECEMBER 31, FROM 12/9/98* DECEMBER 31, FROM 11/17/98* FROM 5/3/99*
1999 TO 12/31/98 1999 TO 12/31/98 TO 12/31/99
------------ ----------- ------------- ------------- -----------
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
<S> <C> <C> <C> <C> <C>
Net investment income (loss) ............................. $ (1,506) $ (4) $ (1,963) $ (57) $ (161)
Net realized gain (loss) ................................. 560 - 736 54 (2)
Net unrealized gain (loss) ............................... 28,004 186 56,976 1,613 9,997
------------ ----------- ------------- ------------- ----------
Net increase (decrease) in net assets from operations .... 27,058 182 55,749 1,610 9,834
------------ ----------- ------------- ------------- ----------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................... 201,416 5,000 239,429 52,985 -
Withdrawals .............................................. (7,821) - (12,239) (2,349) (316)
Contract benefits ........................................ - - - - -
Contract charges ......................................... - - - - -
Transfers between sub-accounts (including fixed account),
net .................................................... 3,044 - 43,068 - 152,518
Other transfers from (to) the General Account ............ 170 - 15,097 - 200
Net increase (decrease) in investment by Sponsor ......... - - - - 2,000
------------ ----------- ------------- ------------- ----------
Net increase (decrease) in net assets from contract
transactions ........................................... 196,809 5,000 285,355 50,636 154,402
------------ ----------- ------------- ------------- ----------
Net increase (decrease) in net assets .................... 223,867 5,182 341,104 52,246 164,236
NET ASSETS:
Beginning of year ........................................ 5,182 - 52,246 - -
------------ ----------- ------------- ------------- ----------
End of year .............................................. $ 229,049 $ 5,182 $ 393,350 $ 52,246 $ 164,236
============ =========== ============= ============= ==========
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-12
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
KVS FOCUSED KVS
TECHNOLOGY LARGE CAP GROWTH
GROWTH INDEX 500 GROWTH OPPORTUNITIES
PERIOD PERIOD PERIOD PERIOD
FROM 5/3/99* FROM 9/1/99* FROM 10/29/99* FROM 10/29/99*
TO 12/31/99 TO 12/31/99 TO 12/31/99 TO 12/31/99
----------- ------------ -------------- ----------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ........................... $ (1,907) $ (71) $ (5) $ (5)
Net realized gain (loss) ............................... 831 2 - -
Net unrealized gain (loss) ............................. 179,517 3,242 567 328
----------- ------------ -------------- ----------------
Net increase (decrease) in net assets from operations .. 178,441 3,173 562 323
----------- ------------ -------------- ----------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................. 131,870 45,705 - -
Withdrawals ............................................ (2,052) - - -
Contract benefits ...................................... - - - -
Contract charges ....................................... (29) - - -
Transfers between sub-accounts (including fixed account),
net .................................................. 784,978 14,257 - -
Other transfers from (to) the General Account .......... 10,662 - - -
Net increase (decrease) in investment by Sponsor ....... (198) 2,000 2,000 2,000
----------- ------------ -------------- ----------------
Net increase (decrease) in net assets from contract
transactions ......................................... 925,231 61,962 2,000 2,000
----------- ------------ -------------- ----------------
Net increase (decrease) in net assets .................. 1,103,672 65,135 2,562 2,323
NET ASSETS:
Beginning of year ...................................... - - - -
----------- ------------ -------------- ----------------
End of year ............................................ $1,103,672 $ 65,135 $ 2,562 $ 2,323
=========== ============ ============== ================
<CAPTION>
KVS
GROWTH SCUDDER
AND INCOME VLIF INTERNATIONAL
PERIOD YEAR ENDED PERIOD
FROM 10/29/99* DECEMBER 31, FROM 8/28//98*
TO 12/31/99 1999 TO 12/31/98
--------------- ------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ........................... $ (5) $ (4,494) $ (908)
Net realized gain (loss) ............................... - 50,982 10
Net unrealized gain (loss) ............................. 298 128,373 19,056
--------------- ------------- --------------
Net increase (decrease) in net assets from operations .. 293 174,861 18,158
--------------- ------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments .................................. - 201,898 199,090
Withdrawals ............................................ - (12,459) -
Contract benefits ...................................... - - -
Contract charges ....................................... - (5) -
Transfers between sub-accounts (including fixed account),
net .................................................. - (38,480) 3,333
Other transfers from (to) the General Account .......... - 925 75
Net increase (decrease) in investment by Sponsor ....... 2,000 - -
--------------- ------------- --------------
Net increase (decrease) in net assets from contract
transactions ......................................... 2,000 151,879 202,498
--------------- ------------- --------------
Net increase (decrease) in net assets .................. 2,293 326,740 220,656
NET ASSETS:
Beginning of year ...................................... - 220,656 -
--------------- ------------- --------------
End of year ............................................ $ 2,293 $ 547,396 $ 220,656
=============== ============= ==============
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-13
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SCUDDER SCUDDER
VLIF GLOBAL DISCOVERY VLIF CAPITAL GROWTH
PERIOD YEAR ENDED PERIOD
FROM 10/20/99* DECEMBER 31, FROM 10/28/98*
TO 12/31/99 1999 TO 12/31/98
--------------------- ---------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (91) $ (10,262) $ (114)
Net realized gain (loss) ......................................... 48 75,194 5
Net unrealized gain (loss) ....................................... 9,807 217,533 8,620
--------------------- ---------------- --------------
Net increase (decrease) in net assets from operations ............ 9,764 282,465 8,511
--------------------- ---------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 6,758 933,097 8,587
Withdrawals ...................................................... (1,683) (33,995) -
Contract benefits ................................................ - (319,362) -
Contract charges ................................................. - (39) -
Transfers between sub-accounts (including fixed account), net .... 66,104 282,687 141,955
Other transfers from (to) the General Account .................... (11) 12,153 8,255
Net increase (decrease) in investment by Sponsor ................. - - -
--------------------- ---------------- --------------
Net increase (decrease) in net assets from contract transactions.. 71,168 874,541 158,797
--------------------- ---------------- --------------
Net increase (decrease) in net assets ............................ 80,932 1,157,006 167,308
NET ASSETS:
Beginning of year ................................................ - 167,308 -
--------------------- ---------------- --------------
End of year ...................................................... $ 80,932 $ 1,324,314 $ 167,308
===================== ================ ==============
<CAPTION>
ALGER
AMERICAN
SCUDDER LEVERAGED
VLIF GROWTH AND INCOME ALLCAP
YEAR ENDED PERIOD PERIOD
DECEMBER 31, FROM 8/28/98* FROM 11/15/99*
1999 TO 12/31/98 TO 12/31/99
-------------- --------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ..................................... $ (4,217) $ 340 $ (19)
Net realized gain (loss) ......................................... 54,196 251 -
Net unrealized gain (loss) ....................................... (26,737) 29,857 2,200
-------------- --------------- --------------
Net increase (decrease) in net assets from operations ............ 23,242 30,448 2,181
-------------- --------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ............................................ 618,467 355,959 15,000
Withdrawals ...................................................... (19,793) (3,012) -
Contract benefits ................................................ (325,631) - -
Contract charges ................................................. (29) - -
Transfers between sub-accounts (including fixed account), net .... 143,612 68,692 10,000
Other transfers from (to) the General Account .................... 5,838 1,089 -
Net increase (decrease) in investment by Sponsor ................. - - 2,000
-------------- --------------- --------------
Net increase (decrease) in net assets from contract transactions.. 422,464 422,728 27,000
-------------- --------------- --------------
Net increase (decrease) in net assets ............................ 445,706 453,176 29,181
NET ASSETS:
Beginning of year ................................................ 453,176 - -
-------------- --------------- --------------
End of year ...................................................... $ 898,882 $ 453,176 $ 29,181
============== =============== ==============
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-14
<PAGE>
SEPARATE ACCOUNT KG
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DREYFUS
ALGER DREYFUS SOCIALLY
AMERICAN MIDCAP RESPONSIBLE
BALANCED STOCK GROWTH
PERIOD PERIOD PERIOD
FROM 11/15/99* FROM 9/21/99* FROM 9/21/99*
TO 12/31/99 TO 12/31/99 TO 12/31/99
---------------- ----------------- --------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................ $ (4) $ 2 $ (8)
Net realized gain (loss) ................................ - - 79
Net unrealized gain (loss) .............................. 120 373 274
---------------- ----------------- --------------
Net increase (decrease) in net assets from operations ... 116 375 345
---------------- ----------------- --------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................... - - -
Withdrawals ............................................. - - -
Contract benefits ....................................... - - -
Contract charges ........................................ - - -
Transfers between sub-accounts (including fixed account),
net ................................................... - 2,000 -
Other transfers from (to) the General Account ........... - - -
Net increase (decrease) in investment by Sponsor ........ 2,000 2,000 2,000
---------------- ----------------- --------------
Net increase (decrease) in net assets from contract
transactions .......................................... 2,000 4,000 2,000
---------------- ----------------- --------------
Net increase (decrease) in net assets ................... 2,116 4,375 2,345
NET ASSETS:
Beginning of year ....................................... - - -
---------------- ----------------- --------------
End of year ............................................. $ 2,116 $ 4,375 $ 2,345
================ ================= ==============
<CAPTION>
JANUS
JANUS ASPEN
ASPEN GROWTH
GROWTH AND INCOME
PERIOD PERIOD
FROM 9/21/99* FROM 9/21/99*
TO 12/31/99 TO 12/31/99
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) ............................ $ (6) $ (5)
Net realized gain (loss) ................................ - 1
Net unrealized gain (loss) .............................. 461 817
------------- -------------
Net increase (decrease) in net assets from operations ... 455 813
------------- -------------
FROM CONTRACT TRANSACTIONS:
Net purchase payments ................................... - -
Withdrawals ............................................. - -
Contract benefits ....................................... - -
Contract charges ........................................ - -
Transfers between sub-accounts (including fixed account),
net ................................................... - -
Other transfers from (to) the General Account ........... - -
Net increase (decrease) in investment by Sponsor ........ 2,000 2,000
------------- -------------
Net increase (decrease) in net assets from contract
transactions .......................................... 2,000 2,000
------------- -------------
Net increase (decrease) in net assets ................... 2,455 2,813
NET ASSETS:
Beginning of year ....................................... - -
------------- -------------
End of year ............................................. $ 2,455 $ 2,813
============= =============
</TABLE>
* Date of initial investment
The accompanying notes are an integral part of these financial statements.
SA-15
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Separate Account KG is a separate investment account of First Allmerica
Financial Life Insurance Company (the Company), established on November 14, 1997
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 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 thirty-six Sub-Accounts under the variable annuity contracts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
Kemper Variable Series (KVS) or Scudder Variable Life Investment Fund (Scudder
VLIF) managed by Scudder Kemper Investments, Inc. (Scudder Kemper); or of The
Alger American Fund (Alger) managed by Fred Alger Management, Inc.; or of
Dreyfus Investment Portfolios or Dreyfus Socially Responsible Growth Fund, Inc.
(Dreyfus) managed by The Dreyfus Corporation; or of Janus Aspen Series (Janus)
managed by Janus Capital. KVS, Scudder VLIF, Alger, Dreyfus and Janus (the
Funds) are open-end, management investment companies registered under the 1940
Act.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS - Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Realized gains and losses
on securities sold are determined using the average cost method. Dividends and
capital gain distributions are recorded on the ex-dividend date and are
reinvested in additional shares of the respective investment portfolio of the
Funds at net asset value.
FEDERAL INCOME TAXES - The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code (the Code) and files a
consolidated federal income tax return. 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-16
<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, 1999 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 ........................... 574,459 $ 606,822 $ 1.085
Small Cap Growth .......................... 286,375 581,295 2.654
Contrarian Value .......................... 1,271,246 2,076,316 1.470
International ............................. 369,047 601,617 2.145
Growth .................................... 487,654 1,532,548 4.054
Value+Growth .............................. 1,121,324 1,806,979 1.895
Horizon 20+ ............................... 92,057 140,252 1.614
Total Return .............................. 1,218,992 3,247,143 2.882
Horizon 10+ ............................... 883,489 1,192,148 1.479
Horizon 5 ................................. 163,181 203,476 1.334
High Yield ................................ 2,459,783 3,004,257 1.146
Investment Grade Bond ..................... 596,865 676,683 1.101
Government Securities ..................... 633,149 752,276 1.157
Money Market .............................. 2,482,718 2,482,718 1.000
Global Income ............................. 57,676 60,398 0.986
Blue Chip ................................. 2,817,956 3,716,435 1.569
Dreman Financial Services ................. 310,128 307,732 0.924
Dreman High Return Equity ................. 2,266,674 2,282,192 0.896
International Growth and Income ........... 221,421 200,859 1.034
Global Blue Chip .......................... 317,894 334,761 1.237
Aggressive Growth ......................... 117,403 154,239 1.399
Technology Growth ......................... 621,090 924,155 1.777
Index 500 ................................. 59,455 61,893 1.096
KVS Focused Large Cap Growth .............. 1,995 1,995 1.284
KVS Growth Opportunities .................. 1,995 1,995 1.164
KVS Growth And Income ..................... 1,995 1,995 1.149
Scudder VLIF International ................ 26,912 399,967 20.340
Scudder VLIF Global Discovery ............. 6,141 71,125 13.180
Scudder VLIF Capital Growth ............... 45,462 1,098,162 29.130
Scudder VLIF Growth and Income ............ 82,015 895,762 10.960
Alger American Leveraged AllCap ........... 503 26,981 57.970
Alger American Balanced ................... 136 1,996 15.570
Dreyfus MidCap Stock ...................... 326 4,002 13.440
Dreyfus Socially Responsible Growth ....... 60 2,071 39.070
Janus Aspen Growth ........................ 73 1,994 33.650
Janus Aspen Growth and Income ............. 135 1,997 20.770
</TABLE>
SA-17
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and monthly 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 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), an indirect
wholly-owned subsidiary of the Company, 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.
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
--------------------------------------- ----------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Small Cap Value
Issuance of Units .............. 304,992 $ 266,234 758,617 $ 658,357
Redemption of Units ............ (311,102) (260,892) (104,007) (92,501)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... (6,110) $ 5,342 654,610 $ 565,856
================== ================== ================== ==================
Small Cap Growth
Issuance of Units .............. 384,932 $ 468,374 272,058 $ 277,017
Redemption of Units ............ (118,527) (132,364) (58,550) (58,108)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... 266,405 $ 336,010 213,508 $ 218,909
================== ================== ================== ==================
Contrarian Value
Issuance of Units .............. 1,147,300 $ 1,371,820 2,153,322 $ 2,315,657
Redemption of Units ............ (1,292,060) (1,500,004) (413,770) (428,269)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... (144,760) $ (128,184) 1,739,552 $ 1,887,388
================== ================== ================== ==================
International
Issuance of Units .............. 204,952 $ 220,373 334,236 $ 326,967
Redemption of Units ............ (37,537) (40,368) (4,440) (4,699)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... 167,415 $ 180,005 329,796 $ 322,268
================== ================== ================== ==================
Growth
Issuance of Units .............. 947,293 $ 1,153,132 497,684 $ 500,582
Redemption of Units ............ (135,402) (159,810) (2,620) (2,537)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ...... 811,891 $ 993,322 495,064 $ 498,045
================== ================== ================== ==================
SA-18
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
---------------------------------------- ----------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Value+Growth
Issuance of Units ........................ 950,774 $ 1,118,008 1,088,327 $ 1,127,426
Redemption of Units ...................... (404,388) (475,427) (132,203) (126,651)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 546,386 $ 642,581 956,124 $ 1,000,775
================== ================== ================== ==================
Horizon 20+
Issuance of Units ........................ 131,313 $ 146,933 32,532 $ 34,708
Redemption of Units ...................... (39,537) (43,649) (2,983) (2,941)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 91,776 $ 103,284 29,549 $ 31,767
================== ================== ================== ==================
Total Return
Issuance of Units ........................ 1,854,219 $ 2,226,128 1,317,040 $ 1,403,752
Redemption of Units ...................... (380,366) (457,806) (137,214) (153,329)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 1,473,853 $ 1,768,322 1,179,826 $ 1,250,423
================== ================== ================== ==================
Horizon 10+
Issuance of Units ........................ 373,065 $ 419,354 773,419 $ 818,896
Redemption of Units ...................... (59,521) (59,663) (5,805) (5,842)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 313,544 $ 359,691 767,614 $ 813,054
================== ================== ================== ==================
Horizon 5
Issuance of Units ........................ 96,565 $ 106,841 648,542 $ 682,429
Redemption of Units ...................... (542,871) (599,125) (86,777) (90,840)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ (446,306) $ (492,284) 561,765 $ 591,589
================== ================== ================== ==================
High Yield
Issuance of Units ........................ 1,225,811 $ 1,247,608 2,309,193 $ 2,324,603
Redemption of Units ...................... (560,369) (566,631) (263,493) (265,916)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 665,442 $ 680,977 2,045,700 $ 2,058,687
================== ================== ================== ==================
Investment Grade Bond
Issuance of Units ........................ 296,332 $ 310,727 457,537 $ 477,324
Redemption of Units ...................... (56,790) (58,872) (74,545) (76,430)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 239,542 $ 251,855 382,992 $ 400,894
================== ================== ================== ==================
Government Securities
Issuance of Units ........................ 474,053 $ 500,907 1,005,478 $ 1,060,460
Redemption of Units ...................... (748,526) (790,915) (55,627) (58,782)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ (274,473) $ (290,008) 949,851 $ 1,001,678
================== ================== ================== ==================
Money Market
Issuance of Units ........................ 2,717,852 $ 2,798,037 1,817,832 $ 1,862,887
Redemption of Units ...................... (1,168,698) (1,156,890) (1,050,752) (1,072,948)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 1,549,154 $ 1,641,147 767,080 $ 789,939
================== ================== ================== ==================
SA-19
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
---------------------------------------- ----------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Global Income
Issuance of Units ........................ 37,329 $ 40,305 17,964 $ 19,083
Redemption of Units ...................... (8,886) (9,380) (2,017) (2,121)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 28,443 $ 30,925 15,947 $ 16,962
================== ================== ================== ==================
Blue Chip
Issuance of Units ........................ 2,286,891 $ 3,092,028 923,571 $ 1,071,111
Redemption of Units ...................... (332,560) (455,492) (35,781) (42,569)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 1,954,331 $ 2,636,536 887,790 $ 1,028,542
================== ================== ================== ==================
Dreman Financial Services
Issuance of Units ........................ 246,976 $ 284,711 51,272 $ 55,286
Redemption of Units ...................... (26,543) (28,695) (20) (20)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 220,433 $ 256,016 51,252 $ 55,266
================== ================== ================== ==================
Dreman High Return Equity
Issuance of Units ........................ 2,101,063 $ 2,386,987 452,184 $ 517,505
Redemption of Units ...................... (539,470) (551,973) (2,190) (2,297)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 1,561,593 $ 1,835,014 449,994 $ 515,208
================== ================== ================== ==================
International Growth and Income
Issuance of Units ........................ 198,699 $ 204,660 5,020 $ 5,020
Redemption of Units ...................... (7,231) (7,851) (20) (20)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 191,468 $ 196,809 5,000 $ 5,000
================== ================== ================== ==================
Global Blue Chip
Issuance of Units ........................ 262,638 $ 297,569 52,450 $ 53,005
Redemption of Units ...................... (10,637) (12,214) (2,313) (2,369)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 252,001 $ 285,355 50,137 $ 50,636
================== ================== ================== ==================
Aggressive Growth
Issuance of Units ........................ 118,751 $ 154,718 - $ -
Redemption of Units ...................... (247) (316) - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 118,504 $ 154,402 - $ -
================== ================== ================== ==================
Technology Growth
Issuance of Units ........................ 638,687 $ 939,973 - $ -
Redemption of Units ...................... (11,785) (14,742) - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 626,902 $ 925,231 - $ -
================== ================== ================== ==================
Index 500
Issuance of Units ........................ 59,733 $ 61,962 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 59,733 $ 61,962 - $ -
================== ================== ================== ==================
SA-20
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
---------------------------------------- ----------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
KVS Focused Large Cap Growth
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
KVS Growth Opportunities
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
KVS Growth and Income
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
Scudder VLIF International
Issuance of Units ........................ 208,707 $ 260,672 239,298 $ 244,606
Redemption of Units ...................... (82,607) (108,793) (38,595) (42,108)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 126,100 $ 151,879 200,703 $ 202,498
================== ================== ================== ==================
Scudder VLIF Global Discovery
Issuance of Units ........................ 58,939 $ 72,862 - $ -
Redemption of Units ...................... (1,613) (1,694) - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 57,326 $ 71,168 - $ -
================== ================== ================== ==================
Scudder VLIF Capital Growth
Issuance of Units ........................ 1,001,274 $ 1,239,486 142,810 $ 158,817
Redemption of Units ...................... (296,446) (364,945) (20) (20)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 704,828 $ 874,541 142,790 $ 158,797
================== ================== ================== ==================
Scudder VLIF Growth and Income
Issuance of Units ........................ 889,131 $ 1,014,730 469,381 $ 486,819
Redemption of Units ...................... (520,734) (592,266) (58,382) (64,091)
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 368,397 $ 422,464 410,999 $ 422,728
================== ================== ================== ==================
Alger American Leveraged AllCap
Issuance of Units ........................ 24,384 $ 27,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 24,384 $ 27,000 - $ -
================== ================== ================== ==================
Alger American Balanced
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
SA-21
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<CAPTION>
PERIOD ENDED DECEMBER 31,
1999 1998
---------------------------------------- ---------------------------------------
UNITS AMOUNT UNITS AMOUNT
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Dreyfus MidCap Stock
Issuance of Units ........................ 3,941 $ 4,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 3,941 $ 4,000 - $ -
================== ================== ================== ==================
Dreyfus Socially Responsible Growth
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
Janus Aspen Growth
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
Janus Aspen Growth and Income
Issuance of Units ........................ 2,000 $ 2,000 - $ -
Redemption of Units ...................... - - - -
------------------ ------------------ ------------------ ------------------
Net increase (decrease) ................ 2,000 $ 2,000 - $ -
================== ================== ================== ==================
</TABLE>
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.
SA-22
<PAGE>
SEPARATE ACCOUNT KG
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1999 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
------------- --------------
<S> <C> <C>
Small Cap Value ...................... $ 261,617 $ 259,703
Small Cap Growth ..................... 451,663 121,044
Contrarian Value ..................... 1,806,575 1,787,711
International ........................ 269,933 37,347
Growth ............................... 1,101,979 123,483
Value+Growth ......................... 1,101,161 444,806
Horizon 20+ .......................... 144,808 41,823
Total Return ......................... 2,290,121 404,252
Horizon 10+ .......................... 433,663 76,854
Horizon 5 ............................ 106,964 601,860
High Yield ........................... 1,404,682 529,268
Investment Grade Bond ................ 312,010 55,417
Government Securities ................ 505,848 759,215
Money Market ......................... 2,707,035 1,023,633
Global Income ........................ 41,152 8,233
Blue Chip ............................ 2,939,029 328,106
Dreman Financial Services ............ 284,897 31,046
Dreman High Return Equity ............ 2,359,662 523,553
International Growth and Income ...... 204,262 8,959
Global Blue Chip ..................... 295,410 12,018
Aggressive Growth .................... 154,670 429
Technology Growth .................... 930,410 7,086
Index 500 ............................ 61,954 63
KVS Focused Large Cap Growth ......... 2,000 5
KVS Growth Opportunities ............. 2,000 5
KVS Growth And Income ................ 2,000 5
Scudder VLIF International ........... 289,623 108,678
Scudder VLIF Global Discovery ........ 72,833 1,756
Scudder VLIF Capital Growth .......... 1,326,658 365,103
Scudder VLIF Growth and Income ....... 1,072,996 594,643
Alger American Leveraged AllCap ...... 27,000 19
Alger American Balanced .............. 2,000 4
Dreyfus MidCap Stock ................. 4,011 9
Dreyfus Socially Responsible Growth .. 2,078 8
Janus Aspen Growth ................... 2,002 8
Janus Aspen Growth and Income ........ 2,004 9
------------- -----------
$22,976,710 $8,256,161
============= ===========
</TABLE>
SA-23
<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 First Allmerica Financial Life Insurance
Company
Financial Statements for Separate Account KG of First Allmerica
Financial Life Insurance Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment
of Registrant dated June 13, 1996 was previously filed
on August 9, 1996 in Registrant's Initial Registration
Statement, and is incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the Registrant NOT
pursuant to a trust indenture or other such
instrument.
EXHIBIT 3 (a) Wholesaling Agreement was previously filed on
August 9, 1996 in Registrant's Initial
Registration Statement, and is incorporated by
reference herein.
(b) Underwriting and Administrative Services Agreement
was previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
(c) Sales Agreements with Commission Schedule were
previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and are
incorporated by reference herein.
(d) General Agent's Agreement was previously filed on
April 30, 1998 in Post-Effective Amendment No. 2,
and is incorporated by reference herein.
(e) Career Agent Agreement was previously filed on
April 30, 1998 in Post-Effective Amendment No. 2,
and is incorporated by reference herein.
(f) Registered Representative's Agreement was
previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
(g) Form of Indemnification Agreement with Scudder
Kemper was previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
EXHIBIT 4 Policy Form was previously filed on August 9, 1996
in Initial Registration Statement, and is
incorporated by reference herein.
<PAGE>
EXHIBIT 5 Application Form was previously filed on August 9,
1996 in Initial Registration Statement, 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 in
Post-Effective Amendment No. 2, and are
incorporated by reference herein.
(b) Form of Scudder Services Agreement was previously
filed on April 30, 1998 in Post-Effective
Amendment No. 2, and is incorporated by reference
herein.
(c) Directors' Power of Attorney is filed herewith.
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 Schedule for Computation of Performance Quotations is
filed herewith.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Amendment to Kemper Participation Agreement is
filed herewith. Participation Agreement with
Kemper was previously filed on November 6, 1996 in
Pre-Effective Amendment No. 1, and is incorporated
by reference herein.
(b) Form of Participation Agreement with Scudder
Kemper was previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
(c) Participation Agreement with Dreyfus was
previously filed on June 23, 1999 in
Post-Effective Amendment No. 2 (Registration
Statement Nos. 333-63089/811-7769) and is
incorporated by reference herein.
(d) Participation Agreement with Alger is filed
herewith.
(d) Participation Agreement with Warburg Pincus is
filed herewith.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and Officers
is:
440 Lincoln Street
Worcester, Massachusetts 01653
<PAGE>
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 and Vice President Secretary (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998) of
Vice President and First Allmerica
Corporate Controller
Mark R. Colborn Director (since 2000) and Vice President (since 1992) of First
Director and Vice President Allmerica
Mary Eldridge Secretary (since 1999) of Allmerica Financial; Secretary (since
Secretary 1999) of Allmerica Investments, Inc.; and Secretary (since 1999) of
Allmerica Financial Investment Management Services, Inc.
J. Kendall Huber Director, Vice President and General Counsel of First Allmerica
Director, Vice President and (since 2000); Vice President (1999) of Promos Hotel Corporation;
General Counsel Vice President & Deputy General Counsel (1998-1999) of Legg Mason,
Inc.; Vice President and Deputy General Counsel (1995-1998) of USF&G
Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice
Director, Vice President and President (since 1991) of First Allmerica; Vice President (since
Chief Investment Officer 1998) of Allmerica Financial Investment Management Services, Inc.;
and President (since 1995) and Director (since 1996) of Allmerica Asset
Management, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director 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
Mark C. McGivney Vice President (since 1997) and Treasurer (since 2000) of First
Vice President and Treasurer Allmerica; Associate, Investment Banking (1996-1997) of Merrill
Lynch & Co.; Associate, Investment Banking (1995) of Salomon
Brothers, Inc.; Treasurer (since 2000) of Allmerica Investments,
Inc., Allmerica Asset Management, Inc. and Allmerica Financial
Investment Management Services, Inc.
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of
Director, President and Chief First Allmerica
Executive Officer
Edward J. Parry, III Director and Chief Financial Officer (since 1996), Vice President
Director, Vice President, (since 1993), and Treasurer (1993-2000) of First Allmerica
Chief Financial Officer
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First
Director and Vice President Allmerica; President (since 1995) of Allmerica Financial Life
<PAGE>
Insurance and Annuity Company; Director (since 1990) of Allmerica
Investments, Inc.; and Director and President (since 1998) of
Allmerica Financial Investment Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica;
Director and Vice President Director (since 1998) of The Hanover Insurance Company; Chief
Executive Officer (1996 to 1998) of Travelers Property & Casualty;
Senior Vice President (1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) 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.
</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% 100% 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial Investments Investments Investments Investments Investments
| Inc. Management Investment Services Insurance Insurance Insurance Insurance Insurance
| Company, Inc. Management Insurance Agency Inc. Agency of Agency Inc. Agency Inc. Agency Inc.
| Services, Inc. Agency, Inc. of Alabama Florida Inc. of Georgia of Kentucky of Mississippi
|
|Massachusetts Massachusetts Massachusetts Massachusetts Alabama Florida Georgia Kentucky Mississippi
|
________________________________________________________________
| | | |
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>
FIRST ALLMERICA FINANCIAL LIFE INSURANCE 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 Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
<PAGE>
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 Investments Insurance Agency Inc. 200 Southbridge Parkway Insurance Agency
of Alabama Suite 400
Birmingham, AL 35209
Allmerica Investments Insurance Agency of 14211 Commerce Way Insurance Agency
Florida, Inc. Miami Lakes, FL 33016
Allmerica Investment Insurance Agency Inc. 1455 Lincoln Parkway Insurance Agency
of Georgia Suite 300
Atlanta, GA 30346
Allmerica Investment Insurance Agency Inc. Barkley Bldg-Suite 105 Insurance Agency
of Kentucky 12700 Shelbyville Road
Louisiana, KY 40423
Allmerica Investments Insurance Agency Inc. 631 Lakeland East Drive Insurance Agency
of Mississippi Flowood, MS 39208
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
<PAGE>
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
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
<PAGE>
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
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 29, 2000, there were 124 Contract holders of qualified
Contracts and 364 Contract holders of non-qualified Contracts.
ITEM 28. INDEMNIFICATION
Article VIII of the Bylaws of First Allmerica Financial Life Insurance
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, Separate Account SPL-D,
Separate Account IMO, 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.
<PAGE>
- 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>
Margaret L. Abbott Vice President
Emil J. Aberizk, Jr Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Michael J. Brodeur Vice President Operations
Mark R. Colborn Vice President
Claudia J. Eckels Vice President
Mary M. Eldridge Secretary/Clerk
Philip L. Heffernan Vice President
J. Kendall Huber Director
Mark C. McGivney Treasurer
William F. Monroe, Jr. President, Director and Chief Executive Officer
David J. Mueller Vice President, Chief Financial Officer, Financial Operations
Principal and Controller
Stephen Parker Vice President and Director
Richard M. Reilly Director and Chairman of the Board
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 1999. 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
<PAGE>
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) The Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure
that the audited financial statements in the registration statement
are never more than 16 months old for so long as payments under the
variable annuity contracts may be accepted.
(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.
(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 First Allmerica Financial Life Insurance
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the 1940
Act with respect to withdrawal restrictions under the Texas Optional Retirement
Program ("Program") and (b) relying on the "no-action" letter (Ref. No. IP-6-88)
issued on November 28, 1988 to the American Council of Life Insurance, in
applying the withdrawal restrictions of Internal Revenue Code Section
403(b)(11). Registrant has taken the following steps in reliance on the letter:
1. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in the
prospectus of each registration statement used in connection with the
offer of the Company's variable contracts.
2. Appropriate disclosures regarding the redemption restrictions imposed
by the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring the
redemption restrictions imposed by the Program and by Section
403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's understanding of
(I) the restrictions on redemption imposed by the Program and by
Section 403(b)(11) and (ii) the investment alternatives available
under
<PAGE>
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 3rd day of April,
2000.
SEPARATE ACCOUNT KG OF
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Mary Eldridge
--------------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller April 3, 2000
- ---------------------------
Warren E. Barnes
Edward J. Parry* Director, Vice President and Chief Financial Officer
- ---------------------------
Richard M. Reilly* Director and Vice President
- ---------------------------
John F. O'Brien* Director, President and Chief Executive Officer
- ---------------------------
Bruce C. Anderson* Director and Vice President
- ---------------------------
Mark R. Colborn* Director and Vice President
- ---------------------------
John P. Kavanaugh* Director, Vice President and Chief Investment Officer
- ---------------------------
J. Kendall Huber* Director, Vice President and General Counsel
- ---------------------------
J. Barry May* Director
- ---------------------------
James R. Mcauliffe* Director
- ---------------------------
Robert P. Restrepo, Jr.* Director and Vice President
- ---------------------------
Eric A. Simonsen* Director and Vice President
- ---------------------------
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 2, 2000 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ---------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-10285)
<PAGE>
EXHIBIT TABLE
Exhibit 8(c) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 13 Schedule for Computation of Performance Quotations
Exhibit 15(a) Amendment to Kemper Participation Agreement
Exhibit 15(d) Participation Agreement with Alger
Exhibit 15(e) Participation Agreement with Warburg Pincus
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
J. Kendall Huber, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each
of them singly, our true and lawful attorneys, with full power to them and each
of them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by First Allmerica Financial Life Insurance
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, President and Chief Executive 4/2/2000
- ------------------------------------- Officer --------
John F. O'Brien
/s/ Bruce C. Anderson Director and Vice President 4/2/2000
- ------------------------------------- --------
Bruce C. Anderson
/s/ Mark R. Colborn Director and Vice President 4/2/2000
- ------------------------------------- --------
Mark R. Colborn
/s/ John P. Kavanaugh Director, Vice President and 4/2/2000
- ------------------------------------- Chief Investment Officer --------
John P. Kavanaugh
/s/ J. Kendall Huber Director, Vice President and 4/2/2000
- ------------------------------------- General Counsel --------
J. Kendall Huber
/s/ J. Barry May Director 4/2/2000
- ------------------------------------- --------
J. Barry May
/s/ James R. McAuliffe Director 4/2/2000
- ------------------------------------- --------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, and Chief Financial 4/2/2000
- ------------------------------------- Officer --------
Edward J. Parry, III
/s/ Richard M. Reilly Director and Vice President 4/2/2000
- ------------------------------------- --------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director and Vice President 4/2/2000
- ------------------------------------- --------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 4/2/2000
- ------------------------------------- --------
Eric A. Simonsen
</TABLE>
<PAGE>
April 14, 2000
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
RE: SEPARATE ACCOUNT KG OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
FILE NO.'S: 333-10285 AND 811-7769
Gentlemen:
In my capacity as Assistant Vice President and Counsel of First Allmerica
Financial Life Insurance 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 Massachusetts 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 many 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 this
Post-Effective Amendment to the Registration Statement for Separate Account KG
on Form N-4 filed under the Securities Act of 1933 and amendment under the
Investment Company Act of 1940.
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. 6 to the Registration
Statement of Separate Account KG of First Allmerica Financial Life Insurance
Company on Form N-4 of our report dated February 1, 2000, relating to the
financial statements of First Allmerica Financial Life Insurance Company, and
our report dated April 3, 2000, relating to the financial statements of Separate
Account KG of First Allmerica Financial Life Insurance 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
April 24, 2000
<PAGE>
<TABLE>
<CAPTION>
KEMPER ELITE - FAFLIC Since Inception of Underlying Sub-Account
1 Year Without Contract
<S> <C> <C>
Kemper Aggressive Growth N/A
Kemper Technology Growth N/A
Kemper Dreman Financial Services 1.055018/1.126951-1 = -6.38%
Kemper Small Cap Growth 1.526104/1.150188-1 = 32.68%
Kemper Small Cap Value 0.889567/0.877664-1 = 1.36%
Kemper Dreman High Return Equity 1.010128/1.153125-1 = -12.40%
Kemper International 1.453248/1.011500-1 = 43.67%
Kemper International Growth and Income 1.165829/1.036313-1 = 12.50%
Kemper Global Blue Chip 1.301886/1.042072-1 = 24.93%
Kemper Growth 1.493909/1.104913-1 = 35.21%
Kemper Contrarian Value 1.056146/1.192966-1 = -11.47%
Kemper Blue Chip 1.532337/1.240913-1 = 23.48%
Kemper Value+Growth 1.307288/1.137903-1 = 14.89%
Kemper Index 500 N/A
Kemper Horizon 20+ 1.176885/1.092464-1 = 7.73%
Kemper Total Return 1.303296/1.151271-1 = 13.20%
Kemper Horizon 10+ 1.191734/1.115158-1 = 6.87%
Kemper High Yield 1.011975/1.004726-1 = 0.72%
Kemper Horizon 5 1.138338/1.10098-1 = 3.39%
Kemper Global Income 1.035444/1.115394-1 = -7.17%
Kemper Investment Grade Bond 1.032076/1.068746-1 = -3.43%
Kemper Government Securities 1.051978/1.059658-1 = -0.72%
Kemper Money Market 1.071913/1.036966-1 = 3.37%
Scudder VLIF International 1.675000/1.099414-1 = 52.35%
Scudder VLIF Global Discovery N/A
Scudder VLIF Capital Growth 1.562395/1.171706-1 = 33.34%
Scudder VLIF Growth and Income 1.153305/1.102621-1 = 4.60%
KVS Focused Large Cap Growth N/A
KVS Growth Opportunities N/A
KVS Growth and Income N/A
Alger American Balanced N/A
Alger American Leveraged AllCap N/A
Dreyfus MidCap Stock N/A
Dreyfus Socially Responsible Growth N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Since Inception of Underlying Sub-Account
5 Years Without Contract
<S> <C>
Kemper Aggressive Growth N/A
Kemper Technology Growth N/A
Kemper Dreman Financial Services N/A
Kemper Small Cap Growth N/A
Kemper Small Cap Value N/A
Kemper Dreman High Return Equity N/A
Kemper International N/A
Kemper International Growth and Income N/A
Kemper Global Blue Chip N/A
Kemper Growth N/A
Kemper Contrarian Value N/A
Kemper Blue Chip N/A
Kemper Value+Growth N/A
Kemper Index 500 N/A
Kemper Horizon 20+ N/A
Kemper Total Return N/A
Kemper Horizon 10+ N/A
Kemper High Yield N/A
Kemper Horizon 5 N/A
Kemper Global Income N/A
Kemper Investment Grade Bond N/A
Kemper Government Securities N/A
Kemper Money Market N/A
Scudder VLIF International N/A
Scudder VLIF Global Discovery N/A
Scudder VLIF Capital Growth N/A
Scudder VLIF Growth and Income N/A
KVS Focused Large Cap Growth N/A
KVS Growth Opportunities N/A
KVS Growth and Income N/A
Alger American Balanced N/A
Alger American Leveraged AllCap N/A
Dreyfus MidCap Stock N/A
Dreyfus Socially Responsible Growth N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Since Inception of Underlying Sub-Account
10 Years or Since Inception Without Contract
<S> <C> <C>
Kemper Aggressive Growth 1.385911/1-1 = 38.59%
Kemper Technology Growth 1.760518/1-1 = 76.05%
Kemper Dreman Financial Services (1.055018/1)^(365/430)-1 = 4.65%
Kemper Small Cap Growth (1.526104/1)^(365/806)-1 = 21.10%
Kemper Small Cap Value (0.889567/1)^(365/773)-1 = -5.38%
Kemper Dreman High Return Equity (1.010128/1)^(365/445)-1 = 0.83%
Kemper International (1.453248/1)^(365/806)-1 = 18.44%
Kemper International Growth and Income (1.165829/1)^(365/387)-1 = 15.57%
Kemper Global Blue Chip (1.301886/1)^(365/409)-1 = 26.55%
Kemper Growth (1.493909/1)^(365/806)-1 = 19.93%
Kemper Contrarian Value (1.056146/1)^(365/808)-1 = 2.50%
Kemper Blue Chip (1.532337/1)^(365/974)-1 = 17.34%
Kemper Value+Growth (1.307288/1)^(365/808)-1 = 12.87%
Kemper Index 500 1.090438/1-1 = 9.04%
Kemper Horizon 20+ (1.176885/1)^(365/806)-1 = 7.65%
Kemper Total Return (1.303296/1)^(365/774)-1 = 13.31%
Kemper Horizon 10+ (1.191734/1)^(365/766)-1 = 8.72%
Kemper High Yield (1.011975/1)^(365/806)-1 = 0.54%
Kemper Horizon 5 (1.138338/1)^(365/781)-1 = 6.24%
Kemper Global Income (1.035444/1)^(365/974)-1 = 1.31%
Kemper Investment Grade Bond (1.032076/1)^(365/750)-1 = 1.55%
Kemper Government Securities (1.051978/1)^(365/750)-1 = 2.50%
Kemper Money Market (1.071913/1)^(365/732)-1 = 3.52%
Scudder VLIF International (1.675000/1)^(365/488)-1 = 47.08%
Scudder VLIF Global Discovery 1.411782/1-1 = 41.18%
Scudder VLIF Capital Growth (1.562395/1)^(365/429)-1 = 46.18%
Scudder VLIF Growth and Income (1.153305/1)^(365/488)-1 = 11.26%
KVS Focused Large Cap Growth 1.280944/1-1 = 28.09%
KVS Growth Opportunities 1.161527/1-1 16.15%
KVS Growth and Income 1.146631/1-1 14.66%
Alger American Balanced 1.058063/1-1 = 5.81%
Alger American Leveraged AllCap 1.196733/1-1 = 19.67%
Dreyfus MidCap Stock 1.110152/1-1 = 11.02%
Dreyfus Socially Responsible Growth 1.172578/1-1 = 17.26%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KEMPER ELITE - FAFLIC Since Inception of Underlying Sub-Account
1 Year With Contract
<S> <C> <C>
Kemper Aggressive Growth N/A
Kemper Technology Growth N/A
Kemper Dreman Financial Services (1.055018-(0.07*0.896765))/1.126951-0.0002-1 = -11.97%
Kemper Small Cap Growth (1.526104-(0.07*1.150188))/1.150188-0.0021-1 = 25.47%
Kemper Small Cap Value (0.889567-(0.07*0.756132))/0.877664-0.0022-1 = -4.89%
Kemper Dreman High Return Equity (1.010128-(0.07*0.858609))/1.153125-0.0003-1 = -17.64%
Kemper International (1.453248-(0.07*1.0115))/1.0115-0.0019-1 = 36.48%
Kemper International Growth and Income (1.165829-(0.07*0.990955))/1.036313-0.00009-1 = 5.80%
Kemper Global Blue Chip (1.301886-(0.07*1.042072))/1.042072-0.00007-1 = 17.93%
Kemper Growth (1.493909-(0.07*1.104913))/1.104913-0.0021-1 = 28.00%
Kemper Contrarian Value (1.056146-(0.07*0.897724))/1.192966-0.0032-1 = -17.06%
Kemper Blue Chip (1.532337-(0.07*1.240913))/1.240913-0.0033-1 = 16.15%
Kemper Value+Growth (1.307288-(0.07*1.111195))/1.137903-0.0028-1 = 7.77%
Kemper Index 500 N/A
Kemper Horizon 20+ (1.176885-(0.07*1.000352))/1.092464-0.0004-1 = 1.28%
Kemper Total Return (1.303296-(0.07*1.107802))/1.151271-0.0035-1 = 6.12%
Kemper Horizon 10+ (1.191734-(0.07*1.012974))/1.115158-0.0008-1 = 0.43%
Kemper High Yield (1.011975-(0.07*0.860179))/1.004726-0.0031-1 = -5.58%
Kemper Horizon 5 (1.138338-(0.07*0.967587))/1.10098-0.0006-1 = -2.82%
Kemper Global Income (1.035444-(0.07*0.880127))/1.115394-0.0003-1 = -12.72%
Kemper Investment Grade Bond (1.032076-(0.07*0.877265))/1.068746-0.0009-1 = -9.27%
Kemper Government Securities (1.051978-(0.07*0.894181))/1.059658-0.0006-1 = -6.69%
Kemper Money Market (1.071913-(0.07*0.911126))/1.036966-0.0004-1 = -2.82%
Scudder VLIF International (1.675-(0.07*1.099414))/1.099414-0.00001-1 = 45.35%
Scudder VLIF Global Discovery N/A
Scudder VLIF Capital Growth (1.562395-(0.07*1.171706))/1.171706-0.00008-1 = 26.34%
Scudder VLIF Growth and Income (1.153305-(0.07*0.980309))/1.102621-0.0001-1 = -1.64%
KVS Focused Large Cap Growth N/A
KVS Growth Opportunities N/A
KVS Growth and Income N/A
Alger American Balanced N/A
Alger American Leveraged AllCap N/A
Dreyfus MidCap Stock N/A
Dreyfus Socially Responsible Growth N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Since Inception of Underlying Sub-Account
5 Years With Contract
<S> <C>
Kemper Aggressive Growth N/A
Kemper Technology Growth N/A
Kemper Dreman Financial Services N/A
Kemper Small Cap Growth N/A
Kemper Small Cap Value N/A
Kemper Dreman High Return Equity N/A
Kemper International N/A
Kemper International Growth and Income N/A
Kemper Global Blue Chip N/A
Kemper Growth N/A
Kemper Contrarian Value N/A
Kemper Blue Chip N/A
Kemper Value+Growth N/A
Kemper Index 500 N/A
Kemper Horizon 20+ N/A
Kemper Total Return N/A
Kemper Horizon 10+ N/A
Kemper High Yield N/A
Kemper Horizon 5 N/A
Kemper Global Income N/A
Kemper Investment Grade Bond N/A
Kemper Government Securities N/A
Kemper Money Market N/A
Scudder VLIF International N/A
Scudder VLIF Global Discovery N/A
Scudder VLIF Capital Growth N/A
Scudder VLIF Growth and Income N/A
KVS Focused Large Cap Growth N/A
KVS Growth Opportunities N/A
KVS Growth and Income N/A
Alger American Balanced N/A
Alger American Leveraged AllCap N/A
Dreyfus MidCap Stock N/A
Dreyfus Socially Responsible Growth N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Since Inception of Underlying Sub-Account
10 Years or Since Inception With Contract
<S> <C> <C>
Kemper Aggressive Growth (1.385911-(0.07*1))/1-0.00006-1 = 31.59%
Kemper Technology Growth (1.760518-(0.07*1))/1-0.00006-1 = 69.05%
Kemper Dreman Financial Services ((1.055018-(0.06*0.896765))/1)^(365/430)-0.0002-1 = 0.08%
Kemper Small Cap Growth ((1.526104-(0.05*1))/1)^(365/806)-0.0034-1 18.94%
Kemper Small Cap Value ((0.889567-(0.05*0.756132))/1)^(365/773)-0.0036-1 = -7.66%
Kemper Dreman High Return Equity ((1.010128-(0.06*0.858609))/1)^(365/445)-0.0004-1 = -3.45%
Kemper International ((1.453248-(0.05*1))/1)^(365/806)-0.0028-1 = 16.30%
Kemper International Growth and Income ((1.165829-(0.06*0.990955))/1)^(365/387)-0.00008-1 = 10.00%
Kemper Global Blue Chip ((1.301886-(0.06*1))/1)^(365/409)-0.0001-1 = 21.32%
Kemper Growth ((1.493909-(0.05*1))/1)^(365/806)-0.003-1 = 17.80%
Kemper Contrarian Value ((1.056146-(0.05*0.897724))/1)^(365/808)-0.0044-1 = 0.07%
Kemper Blue Chip ((1.532337-(0.05*1))/1)^(365/974)-0.0032-1 = 15.57%
Kemper Value+Growth ((1.307288-(0.05*1))/1)^(365/808)-0.0044-1 = 10.46%
Kemper Index 500 (1.090438-(0.07*0.926872))/1-0.000001-1 = 2.56%
Kemper Horizon 20+ ((1.176885-(0.05*1))/1)^(365/806)-0.0006-1 = 5.50%
Kemper Total Return ((1.303296-(0.05*1))/1)^(365/774)-0.005-1 = 10.73%
Kemper Horizon 10+ ((1.191734-(0.05*1))/1)^(365/766)-0.0011-1 = 6.41%
Kemper High Yield ((1.011975-(0.05*0.860179))/1)^(365/806)-0.0045-1 = -1.87%
Kemper Horizon 5 ((1.138338-(0.05*0.967587))/1)^(365/781)-0.0008-1 = 4.03%
Kemper Global Income ((1.035444-(0.05*0.880127))/1)^(365/974)-0.0003-1 = -0.35%
Kemper Investment Grade Bond ((1.032076-(0.05*0.877265))/1)^(365/750)-0.0013-1 = -0.71%
Kemper Government Securities ((1.051978-(0.05*0.894181))/1)^(365/750)-0.0009-1 = 0.26%
Kemper Money Market ((1.071913-(0.05*0.911126))/1)^(365/732)-0.0006-1 = 1.25%
Scudder VLIF International ((1.675-(0.06*1))/1)^(365/488)-0.0001-1 = 43.11%
Scudder VLIF Global Discovery (1.411782-(0.07*1))/1-0.00001-1 = 34.18%
Scudder VLIF Capital Growth ((1.562395-(0.06*1))/1)^(365/429)-0.0001-1 = 41.38%
Scudder VLIF Growth and Income ((1.153305-(0.06*0.980309))/1)^(365/488)-0.0002-1 = 6.97%
KVS Focused Large Cap Growth (1.280944-(0.07*1))/1-0.00004-1 = 21.09%
KVS Growth Opportunities (1.161527-(0.07*0.987298))/1-0.00004-1 = 9.24%
KVS Growth and Income (1.146631-(0.07*0.974636))/1-0.00004-1 = 7.84%
Alger American Balanced (1.058063-(0.07*0.899354))/1-0.00004-1 = -0.49%
Alger American Leveraged AllCap (1.196733-(0.07*1))/1-0.00004-1 = 12.67%
Dreyfus MidCap Stock (1.110152-(0.07*0.943629))/1-0.00004-1 = 4.41%
Dreyfus Socially Responsible Growth (1.172578-(0.07*0.996691))/1-0.00005-1 = 10.28%
</TABLE>
<PAGE>
SUPPLEMENT TO PARTICIPATION AGREEMENT
DATED AS OF NOVEMBER 5, 1996
(AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME)
AMONG
KEMPER VARIABLE SERIES (FORMERLY INVESTORS FUND SERIES)
SCUDDER KEMPER INVESTMENTS, INC. (FORMERLY ZURICH
KEMPER INVESTMENTS, INC.)
KEMPER DISTRIBUTORS, INC. (FORMERLY ZURICH
KEMPER DISTRIBUTORS, INC.)
AND
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
The parties hereto agree that Schedule A to the Participation Agreement is
amended to read in its entirety as follows:
SCHEDULE A
NAME OF SEPARATE ACCOUNT AND DATE
ESTABLISHED BY BOARD OF DIRECTORS
Separate Account KG (6/13/96)
Separate Account KGC (6/13/96)
CONTRACTS FUNDED
BY SEPARATE ACCOUNT
Kemper Gateway Elite
Kemper Gateway Custom
Kemper Gateway Advisor
Kemper Gateway Plus (pending state approval)
1
<PAGE>
DESIGNATED PORTFOLIOS
Kemper Money Market Portfolio
Kemper Total Return Portfolio
Kemper High Yield Portfolio
Kemper Growth Portfolio
Kemper Government Securities Portfolio
Kemper International Portfolio
Kemper Small Cap Growth Portfolio
Kemper Investment Grade Bond Portfolio
Kemper Contrarian Value Portfolio
Kemper Small Cap Value Portfolio
Kemper Value+Growth Portfolio
Kemper Horizon 20+ Portfolio
Kemper Horizon 10+ Portfolio
Kemper Horizon 5 Portfolio
Kemper Blue Chip Portfolio
Kemper Global Income Portfolio
Kemper-Dreman High Return Equity Portfolio (effective 5/1/00, KVS Dreman High
Return Equity Portfolio)
Kemper-Dreman Financial Services Portfolio (effective 5/1/00, KVS Dreman
Financial Services Portfolio)
Kemper Global Blue Chip Portfolio
Kemper International Growth and Income Portfolio
Kemper Technology Growth Portfolio
Kemper Aggressive Growth Portfolio
Kemper Index 500 Portfolio (effective 5/1/00, KVS Index 500 Portfolio)
KVS Focused Large Cap Growth Portfolio
KVS Growth Opportunities Portfolio+
KVS Growth And Income Portfolio+
- ----------------------
* Additional Designated Portfolios may be added at the request of the Fund,
Adviser and Underwriter and with the consent of the Company, which consent will
not be unreasonably withheld.
+ Not currently offered as part of the Kemper Gateway Adviser contract. It
is anticipated that these Portfolios will be offered as a part of that contract
on or about 5/1/00.
2
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Supplement to be
executed in its name and on its behalf by its duly authorized representative as
of February 1, 2000.
COMPANY First Allmerica Financial Life Insurance Company
By: /s/ Richard M. Reilly______________
Title: Vice President
FUND Kemper Variable Series
By: /s/ Philip J. Collora
Title: Vice President
ADVISER Scudder Kemper Investments, Inc.
By: /s/ C. Perry Moore
Title: Senior Vice President
UNDERWRITER Kemper Distributors, Inc.
By: /s/ James L. Greenawalt
Title: President
3
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 22nd day of October, 1999, by and among The
Alger American Fund (the "Trust"), an open-end management investment company
organized as a Massachusetts business trust, First Allmerica Financial Life
Insurance Company, a life insurance company organized as a corporation under the
laws of the State of Massachusetts, (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");
<PAGE>
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised;
WHEREAS, the Company desires to use shares of the Portfolios indicated on
Schedule A as investment vehicles for the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1. For purposes of this Article I, the Company shall be the Trust's agent
for the receipt from each account of purchase orders and requests for
redemption pursuant to the Contracts relating to each Portfolio, provided
that the Company notifies the Trust of such purchase orders and requests
for redemption by 9:30 a.m. Eastern time on the next following Business
Day, as defined in Section 1.3.
1.2. The Trust shall make shares of the Portfolios available to the Accounts
at the net asset value next computed after receipt of a purchase order by
the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust describing
Portfolio purchase procedures. The Company will transmit orders from time
to time to the Trust for the purchase and redemption of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the
offering of shares of any Portfolio if such action is required by law or
by regulatory authorities having jurisdiction or if, in the sole
discretion of the Trustees acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, such action
is deemed in the best interests of the shareholders of such Portfolio.
1.3. The Company shall pay for the purchase of shares of a Portfolio on behalf
of an Account with federal funds to be transmitted by wire to the Trust,
with the reasonable expectation of receipt by the Trust by 2:00 p.m.
Eastern time on the next Business Day after the Trust (or its agent)
receives the purchase order. Upon receipt by the Trust of the federal
funds so wired, such funds shall cease to be the responsibility of the
Company and shall become the responsibility of the Trust for this
purpose. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the Commission.
1.4. The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the
net asset value next computed after receipt by the Trust (or its agent)
of the request for redemption, as established in
2
<PAGE>
accordance with the provisions of the then current prospectus of the
Trust describing Portfolio redemption procedures. The Trust shall make
payment for such shares in the manner established from time to time by
the Trust. Proceeds of redemption with respect to a Portfolio will
normally be paid to the Company for an Account in federal funds
transmitted by wire to the Company by order of the Trust with the
reasonable expectation of receipt by the Company by 2:00 p.m. Eastern
time on the next Business Day after the receipt by the Trust (or its
agent) of the request for redemption. Such payment may be delayed if, for
example, the Portfolio's cash position so requires or if extraordinary
market conditions exist, but in no event shall payment be delayed for a
greater period than is permitted by the 1940 Act. The Trust reserves the
right to suspend the right of redemption, consistent with Section 22(e)
of the 1940 Act and any rules thereunder.
1.5. Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of
the Trust's Portfolios under Section 1.4 on any Business Day may be
netted against one another for the purpose of determining the amount of
any wire transfer.
1.6. Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Accounts. Portfolio Shares purchased from the Trust will be recorded in
the appropriate title for each Account or the appropriate subaccount of
each Account.
1.7. The Trust shall furnish, on or before the ex-dividend date, notice to the
Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to
receive all such income dividends and capital gain distributions as are
payable on a Portfolio's shares in additional shares of that Portfolio.
The Trust shall notify the Company of the number of shares so issued as
payment of such dividends and distributions.
1.8. The Trust shall calculate the net asset value of each Portfolio on each
Business Day, as defined in Section 1.3. The Trust shall make the net
asset value per share for each Portfolio available to the Company or its
designated agent on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best
efforts to make such net asset value per share available to the Company
by 6:30 p.m. Eastern time each Business Day.
1.9. The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their segregated asset accounts, to
the Fund Sponsor or its affiliates and to such other entities as may be
permitted by Section 817(h) of the Code, the regulations hereunder, or
judicial or administrative interpretations thereof. No shares of any
Portfolio will be sold directly to the general public. The Company agrees
that it will use Trust shares only for the purposes of funding the
Contracts through the Accounts listed in Schedule A, as amended from time
to time.
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1.10. The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding materially to those contained in
Section 2.9 and Article IV of this Agreement.
ARTICLE II.
OBLIGATIONS OF THE PARTIES
2.1. The Trust shall prepare and be responsible for filing with the Commission
and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional
information of the Trust. The Trust shall bear the costs of registration
and qualification of shares of the Portfolios, preparation and filing of
the documents listed in this Section 2.1 and all taxes to which an issuer
is subject on the issuance and transfer of its shares.
2.2. The Company shall distribute such prospectuses, proxy statements and
periodic reports of the Trust to the Contract owners as required to be
distributed to such Contract owners under applicable federal or state
law.
2.3. The Trust shall provide such documentation (including a final copy of the
Trust's prospectus as set in type or in camera-ready copy) and other
assistance as is reasonably necessary in order for the Company to print
together in one document the current prospectus for the Contracts issued
by the Company and the current prospectus for the Trust. The Trust shall
bear the expense of printing copies of its current prospectus that will
be distributed to existing Contract owners, and the Company shall bear
the expense of printing copies of the Trust's prospectus that are used in
connection with offering the Contracts issued by the Company.
2.4. The Trust and the Distributor shall provide (1) at the Trust's expense,
one copy of the Trust's current Statement of Additional Information
("SAI") to the Company and to any Contract owner who requests such SAI,
(2) at the Company's expense, such additional copies of the Trust's
current SAI as the Company shall reasonably request and that the Company
shall require in accordance with applicable law in connection with
offering the Contracts issued by the Company.
2.5. The Trust, at its expense, shall provide the Company with copies of its
proxy material, periodic reports to shareholders and other communications
to shareholders in such quantity as the Company shall reasonably require
for purposes of distributing to Contract owners.The Trust shall bear any
costs associated with the distribution of its proxy materials to existing
shareholders. The Trust, at the Company's expense, shall provide the
Company with copies of its periodic reports to shareholders and other
communications to shareholders in such quantity as the Company shall
reasonably request for use in
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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 Accounts or
both.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1. The Company represents and warrants that it is an insurance company duly
organized and in good standing under the laws of the State of Delaware
and that it has legally and validly established each Account as a
segregated asset account under such law as of the date set forth in
Schedule A, and that Allmerica Investments, Inc., the principal
underwriter for the Contracts, is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member in good standing of the
National Association of Securities Dealers, Inc.
3.2. The Company represents and warrants that it has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act
and cause each Account to remain so registered to serve as a segregated
asset account for the Contracts, unless an exemption from registration is
available.
3.3. The Company represents and warrants that the Contracts will be registered
under the 1933 Act unless an exemption from registration is available
prior to any issuance or sale of the Contracts; the Contracts will be
issued and sold in compliance in all material respects with all
applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance law suitability
requirements.
3.4. The Trust represents and warrants that it is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and the
rules and regulations thereunder.
3.5. The Trust and the Distributor represent and warrant that the Portfolio
shares offered and sold pursuant to this Agreement will be registered
under the 1933 Act and sold in accordance with all applicable federal and
state laws, and the Trust shall be registered under the 1940 Act prior to
and at the time of any issuance or sale of such shares. The Trust shall
amend its registration statement under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of
its shares. The Trust shall register and qualify its shares for sale in
accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6. The Trust represents and warrants that the investments of each Portfolio
will comply with the diversification requirements for variable annuity,
endowment or life insurance contracts set forth in Section 817(h) of the
Internal Revenue Code of 1986, as amended
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(the "Code"), and the rules and regulations thereunder, including without
limitation Treasury Regulation 1.817-5, and will notify the Company
immediately upon having a reasonable basis for believing any Portfolio
has ceased to comply or might not so comply and will immediately take all
reasonable steps to adequately diversify the Portfolio to achieve
compliance within the grace period afforded by Regulation 1.817-5.
3.7. The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it
will make every effort to maintain such qualification and will notify the
Company immediately upon having a reasonable basis for believing it has
ceased to so qualify or might not so qualify in the future.
3.8. The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less than
the minimum coverage required by Rule 17g-1 or other applicable
regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3.9. The Distributor represents that it is duly organized and validly existing
under the laws of the State of Delaware and that it is registered, and
will remain registered, during the term of this Agreement, as a
broker-dealer under the Securities Exchange Act of 1934 and is a member
in good standing of the National Association of Securities Dealers, Inc.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1. The parties acknowledge that a Portfolio's shares may be made available
for investment to other Participating Insurance Companies. In such event,
the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of
all Participating Insurance Companies. A material irreconcilable conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or any
similar action by insurance, tax, or securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Portfolio are being
managed; (e) a difference in voting instructions given by variable
annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination
by the Trustees that a material irreconcilable conflict exists and of the
implications thereof.
4.2. The Company agrees to report promptly any potential or existing conflicts
of which it is
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aware to the Trustees. The Company will assist the Trustees in carrying
out their responsibilities under the Shared Funding Exemptive Order by
providing the Trustees with all information reasonably necessary for and
requested by the Trustees to consider any issues raised including, but
not limited to, information as to a decision by the Company to disregard
Contract owner voting instructions. All communications from the Company
to the Trustees may be made in care of the Trust.
4.3. If it is determined by a majority of the Trustees, or a majority of the
disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of contract owners, the Company shall, in
cooperation with other Participating Insurance Companies whose contract
owners are also affected, at its own expense and to the extent reasonably
practicable (as determined by the Trustees) take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict,
which steps could include: (a) withdrawing the assets allocable to some
or all of the Accounts from the Trust or any Portfolio and reinvesting
such assets in a different investment medium, including (but not limited
to) another Portfolio of the Trust, or submitting the question of whether
or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering
to the affected Contract owners the option of making such a change; and
(b) establishing a new registered management investment company or
managed separate account.
4.4. If a material irreconcilable conflict arises because of a decision by the
Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the
Company may be required, at the Trust's election, to withdraw the
affected Account's investment in the Trust and terminate this Agreement
with respect to such Account; provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Any such withdrawal and termination must take
place within six (6) months after the Trust gives written notice that
this provision is being implemented. Until the end of such six (6) month
period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw
the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the
Trustees inform the Company in writing that the Trust has determined that
such decision has created a material irreconcilable conflict; provided,
however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested Trustees. Until the
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end of such six (6) month period, the Trust shall continue to accept and
implement orders by the Company for the purchase and redemption of shares
of the Trust.
4.6. For purposes of Section 4.3 through 4.6 of this Agreement, a majority of
the disinterested Trustees shall determine whether any proposed action
adequately remedies any material irreconcilable conflict, but in no event
will the Trust be required to establish a new funding medium for any
Contract. The Company shall not be required to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
material irreconcilable conflict. In the event that the Trustees
determine that any proposed action does not adequately remedy any
material irreconcilable conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six
(6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.
4.7. The Company shall at least annually submit to the Trustees such reports,
materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared
Funding Exemptive Order, and said reports, materials and data shall be
submitted more frequently if reasonably deemed appropriate by the
Trustees.
4.8. If and to the extent that Rule 6e-3(T) is amended, or Rule 6e-3 is
adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared
Funding Exemptive Order, then the Trust and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with Rule 6e-3(T), as amended, or Rule 6e-3, as
adopted, to the extent such rules are applicable.
ARTICLE V.
INDEMNIFICATION
5.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold
harmless the Distributor, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the Trust
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 5.1) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Company, which consent shall
not be unreasonably withheld) or expenses (including the reasonable costs
of investigating or defending any alleged loss, claim, damage, liability
or expense and reasonable legal counsel fees incurred in
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connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common
law or otherwise, insofar as such Losses are related to the sale or
acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the
Company on behalf of the Contracts or Accounts (or any amendment
or supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of or
are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Company by or on behalf of the Trust
for use in Company Documents or otherwise for use in connection
with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived from Trust Documents as defined in Section 5.2(a)) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as
defined in Section 5.2(a) or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately
derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Company; or
(f) arise out of or result from the provision by the Company to the
Trust of insufficient or incorrect information regarding the
purchase or sale of shares of any Portfolio, or the failure of the
Company to provide such information on a timely basis.
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5.2. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor agrees to indemnify
and hold harmless the Company and each of its directors, officers,
employees, and agents and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for the purposes of this Section 5.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Distributor, which consent
shall not be unreasonably withheld) or expenses (including the reasonable
costs of investigating or defending any alleged loss, claim, damage,
liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common
law or otherwise, insofar as such Losses are related to the sale or
acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement or prospectus for the Trust (or any
amendment or supplement thereto) (collectively, "Trust Documents"
for the purposes of this Article V), or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Distributor or the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for
use in connection with the sale of the Contracts or Trust shares;
or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived form Company Documents) or wrongful conduct of the
Distributor or persons under its control, with respect to the sale
or acquisition of the Contracts or Portfolio shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Trust; or
(d) arise out of or result from any failure by the Distributor or the
Trust to provide the services or furnish the materials required
under the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor or the
Trust in this Agreement or arise out of or
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result from any other material breach of this Agreement by the
Distributor or the Trust.
5.3. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any Losses incurred or assessed against an Indemnified
Party that arise from such Indemnified Party's willful misfeasance, bad
faith or negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement.
5.4. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any claim made against an Indemnified party unless such
Indemnified Party shall have notified the other party in writing within a
reasonable time after the summons, or other first written notification,
giving information of the nature of the claim shall have been served upon
or otherwise received by such Indemnified Party (or after such
Indemnified Party shall have received notice of service upon or other
notification to any designated agent), but failure to notify the party
against whom indemnification is sought of any such claim shall not
relieve that party from any liability which it may have to the
Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5. In case any such action is brought against an Indemnified Party, the
indemnifying party shall be entitled to participate, at its own expense,
in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably
satisfactory to the party named in the action. After notice from the
indemnifying party to the Indemnified Party of an election to assume such
defense, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the indemnifying party will not be
liable to the Indemnified Party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
ARTICLE VI.
TERMINATION
6.1. This Agreement shall terminate:
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(a) at the option of any party upon 60 days advance written notice to
the other parties, unless a shorter time is agreed to by the
parties;
(b) at the option of the Trust or the Distributor if the Contracts
issued by the Company cease to qualify as annuity contracts or
life insurance contracts, as applicable, under the Code or if the
Contracts are not registered, issued or sold in accordance with
applicable state and/or federal law; or
(c) at the option of any party upon a determination by a majority of
the Trustees of the Trust, or a majority of its disinterested
Trustees, that a material irreconcilable conflict exists; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust or the Distributor by the NASD, the
SEC, or any state securities or insurance department or any other
regulatory body regarding the Trust's or the Distributor's duties
under this Agreement or related to the sale of Trust shares or the
operation of the Trust; or
(e) at the option of the Company if the Trust or a Portfolio fails to
meet the diversification requirements specified in Section 3.6
hereof; or
(f) at the option of the Company if shares of the Series are not
reasonably available to meet the requirements of the Variable
Contracts issued by the Company, as determined by the Company, and
upon prompt notice by the Company to the other parties; or
(g) at the option of the Company in the event any of the shares of the
Portfolio are not registered, issued or sold in accordance with
applicable state and/or federal law, or such law precludes the use
of such shares as the underlying investment media of the Variable
Contracts issued or to be issued by the Company; or
(h) at the option of the Company, if the Portfolio fails to qualify as
a Regulated Investment Company under Subchapter M of the Code; or
(i) at the option of the Distributor if it shall determine in its sole
judgment exercised in good faith, that the Company and/or its
affiliated companies has suffered a
material adverse change in its business, operations, financial condition
or prospects since the date of this Agreement or is the subject of
material adverse publicity.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares
of any Portfolio and redeem
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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:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, MA 01653
Attn: Richard M. Reilly, Vice President
ARTICLE VIII.
MISCELLANEOUS
8.1. The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2. This Agreement may be executed in two or more counterparts, each of which
taken together shall constitute one and the same instrument.
8.3. If any provision of this Agreement shall be held or made invalid by a
court decision,
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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 Agreement, treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto, and shall not disclose
such confidential information without the written consent of the affected
party unless such information has become publicly available.
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.
16
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Fred Alger & Company, Incorporated
By: /s/ Gregory S. Duch
------------------------------------------
Name: Gregory S. Duch
Title: Executive Vice President
The Alger American Fund
By: /s/ Gregory S. Duch
------------------------------------------
Name: Gregory S. Duch
Title: Treasurer
First Allmerica Financial Life Insurance Company
By: /s/ Richard M. Reilly
------------------------------------------
Name: Richard M. Reilly
Title: Vice President
SCHEDULE A
The Alger American Fund
17
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Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American Income and Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Balanced Portfolio
Alger American MidCap Growth Portfolio
The Accounts:
Separate Account KG
Separate Account KGC
FUVUL Separate Account of First Allmerica
Financial Life Insurance Company
Separate Account VA-K(Delaware)
18
<PAGE>
PARTICIPATION AGREEMENT
BY AND AMONG
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AND
WARBURG, PINCUS TRUST
AND
CREDIT SUISSE ASSET MANAGEMENT, LLC
AND
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC.
THIS AGREEMENT, made and entered into this 1st day of May, 2000 by and
among First Allmerica Financial Life Insurance Company organized under the laws
of the Commonwealth of Massachusetts (the "Company"), on its own behalf and on
behalf of each separate account of the Company named in Schedule 1 to this
Agreement as may be amended from time to time (each account referred to as the
"Account"), Warburg, Pincus Trust, an open-end management investment company and
business trust organized under the laws of the Commonwealth of Massachusetts
(the "Fund"); Credit Suisse Asset Management, LLC a limited liability company
organized under the laws of the Commonwealth of Massachusetts (the "Adviser");
and Credit Suisse Asset Management Securities, Inc., a corporation organized
under the laws of the State of New York (f/k/a Counsellors Securities
Inc.)("CSAMSI").
WHEREAS, the Fund engages in business as an open-end management
investment company and was established for the purpose of serving as the
investment vehicle for separate accounts established for variable life insurance
contracts and variable annuity contracts to be offered by insurance companies
that have entered into participation agreements similar to this Agreement (the
"Participating Insurance Companies"), and
WHEREAS, beneficial interests in the Fund are divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Fund has received an order from the Securities and
Exchange Commission (the "SEC") granting Participating Insurance Companies and
variable annuity separate accounts and variable life insurance separate accounts
relief from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the
Investment Company Act of 1940, as amended (the "1940 Act"), and Rules
6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit
shares of the Fund to be sold to and held by variable annuity separate accounts
and variable life insurance separate accounts of both affiliated and
unaffiliated Participating Insurance Companies and qualified pension and
retirement plans outside of the separate account context (the "Mixed and Shared
Funding Exemptive Order"). The parties to this Agreement agree that the
conditions or undertakings specified in the Mixed and Shared Funding Exemptive
Order and that may be imposed on the Company, the Fund, the Adviser and/or
CSAMSI by virtue of the receipt of such order by the SEC will be incorporated
herein by reference, and such parties agree to comply with such conditions and
undertakings to the extent applicable to each such party; and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (the "1933 Act"); and
<PAGE>
WHEREAS, the Company has registered or will register certain variable
annuity or variable life contracts (the "Contracts") under the 1933 Act; and
WHEREAS, the Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company under the insurance laws of Delaware, to set aside and invest assets
attributable to the Contracts; and
WHEREAS, the Company has registered the Account as a unit investment
trust under the 1940 Act; and
WHEREAS, CSAMSI, the Fund's distributor, is registered as a
broker-dealer with the SEC under the Securities Exchange Act of 1934 (the "1934
Act") and is a member in good standing of the National Association of Securities
Dealers, Inc. (the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Portfolios named in
Schedule 2, as such schedule may be amended from time to time (the "Designated
Portfolios"), on behalf of the Account to fund the Contracts, and the Fund is
authorized to sell such shares to unit investment trusts such as the Account at
net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund, the Adviser and CSAMSI agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund agrees to sell to the Company those shares of the Designated
Portfolios that each Account orders, executing such orders on a daily basis at
the net asset value next computed after receipt and acceptance by the Fund or
its designee of the order for the shares of the Fund. For purposes of this
Section 1.1, the Company will be the designee of the Fund for receipt of such
orders from each Account and receipt by such designee will constitute receipt by
the Fund; provided that the Fund receives notice of such order by 9:30 a.m.
Eastern Time on the next following Business Day ("T+1"). "Business Day" will
mean any day on which the New York Stock Exchange, Inc. (the "NYSE") is open for
trading and on which the Fund calculates its net asset value pursuant to the
rules of the SEC.
1.2. The Company will pay for Fund shares on T+1 in each case that an order to
purchase Fund shares is made in accordance with Section 1.1 above. Payment will
be in federal funds transmitted by wire. This wire transfer will be initiated by
12:00 p.m. Eastern Time.
1.3. The Fund agrees to make shares of the Designated Portfolios available
indefinitely for purchase at the applicable net asset value per share by
Participating Insurance Companies and their separate accounts on those days on
which the Fund calculates its Designated Portfolio net asset value pursuant to
rules of the SEC and the Fund shall use reasonable efforts to calculate such net
asset value on each day the NYSE is open for trading; provided, however, that
the Fund, the Adviser or CSAMSI 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
2
<PAGE>
law or by regulatory authorities having jurisdiction or is, in its or their sole
discretion acting in good faith, in the best interests of the shareholders of
such Portfolio.
1.4. On each Business Day on which the Fund calculates its net asset value,
the Company will aggregate and calculate the net purchase or redemption orders
for each Account maintained by the Fund in which contract owner assets are
invested. Net orders will only reflect orders that the Company has received
prior to the close of regular trading on the NYSE currently 4:00 p.m., Eastern
Time) on that Business Day. Orders that the Company has received after the close
of regular trading on the NYSE will be treated as though received on the next
Business Day. Each communication of orders by the Company will constitute a
representation that such orders were received by it prior to the close of
regular trading on the NYSE on the Business Day on which the purchase or
redemption order is priced in accordance with Rule 22c-1 under the 1940 Act.
Other procedures relating to the handling of orders will be in accordance with
the prospectus and statement of information of the relevant Designated Portfolio
or with oral or written instructions that CSAMSI or the Fund will forward to the
Company from time to time.
1.5. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts, qualified pension
and retirement plans or such other persons as are permitted under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), and regulations promulgated thereunder, the sale to which will
not impair the tax treatment currently afforded the Contracts. No shares of any
Portfolio will be sold to the general public except as set forth in this Section
1.5.
1.6. The Fund agrees to redeem for cash, upon the Company's request, any full
or fractional shares of the Fund held by the Company, executing such requests on
a daily basis at the net asset value next computed after receipt and acceptance
by the Fund or its designee of the request for redemption. For purposes of this
Section 1.6, the Company will be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee will
constitute receipt by the Fund, provided the Fund receives notice of request for
redemption by 9:30 a.m. Eastern Time on the next following Business Day. Payment
will be in federal funds transmitted by wire to the Company's account as
designated by the Company in writing from time to time, on the same Business Day
the Fund receives notice of the redemption order from the Company. The Fund
reserves the right to delay payment of redemption proceeds, but in no event may
such payment be delayed longer than the period permitted by the 1940 Act. The
Fund will not bear any responsibility whatsoever for the proper disbursement or
crediting of redemption proceeds; the Company alone will be responsible for such
action. If notification of redemption is received after 10:00 a.m. Eastern Time,
payment for redeemed shares will be made on the next following Business Day.
1.7. The Company agrees to purchase and redeem the shares of the Designated
Portfolios offered by the then current prospectus of the Fund in accordance with
the provisions of such prospectus.
1.8. Issuance and transfer of the Fund's shares will be by book entry only.
Stock certificates will not be issued to the Company or any Account. Purchase
and redemption orders for Fund shares will be recorded in an appropriate title
for each Account or the appropriate subaccount of each Account.
3
<PAGE>
1.9. The Fund will furnish same day notice (by telecopier, followed by written
confirmation) to the Company of the declaration of any income, dividends or
capital gain distributions payable on each Designated Portfolio's shares. The
Company hereby elects to receive all such dividends and distributions as are
payable on the Designated Portfolio shares in the form of additional shares of
that Designated Portfolio. The Fund will notify the Company of the number of
shares so issued as payment of such dividends and distributions. The Company
reserves the right to revoke this election upon reasonable prior notice to the
Fund and to receive all such dividends and distributions in cash.
1.10. The Fund will make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and will use its
best efforts to make such net asset value per share available by 6:00 p.m.,
Eastern Time, but in no event later than 7:00 p.m., Eastern Time, each Business
Day.
1.11. In the event adjustments are required to correct any error in the
computation of the net asset value of the Fund's shares, the Fund or CSAMSI will
notify the Company as soon as practicable after discovering the need for those
adjustments that result in an aggregate reimbursement of $150 or more to any one
Account maintained by a Designated Portfolio unless notified otherwise by the
Company (or, if lesser, results in an adjustment of $10 or more to each
contractowner's account). Any such notice will state for each day for which an
error occurred the incorrect price, the correct price and, to the extent
communicated to the Fund's shareholders, the reason for the price change. The
Company may send this notice or a derivation thereof (so long as such derivation
is approved in advance by CSAMSI or the Adviser) to contractowners whose
accounts are affected by the price change. The parties will negotiate in good
faith to develop a reasonable method for effecting such adjustments.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act and that the Contracts will be issued and sold in
compliance with all applicable federal and state laws, including state insurance
suitability requirements. The Company further represents and warrants that it is
an insurance company duly organized and in good standing under applicable law
and that it has legally and validly established each Account as a separate
account under applicable state law and has registered the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts, and that it will maintain such
registration for so long as any Contracts are outstanding. The Company will
amend the registration statement under the 1933 Act for the Contracts and the
registration statement under the 1940 Act for the Account from time to time as
required in order to effect the continuous offering of the Contracts or as may
otherwise be required by applicable law. The Company will register and qualify
the Contracts for sale in accordance with the securities laws of the various
states only if and to the extent deemed necessary by the Company.
2.2. The Company represents that the Contracts are currently and at the time
of issuance will be treated as annuity contracts under applicable provisions of
the Internal Revenue Code, and that it will make every effort to maintain such
treatment and that it will notify the Fund and the Adviser immediately upon
having a reasonable basis for believing that the Contracts have ceased to be so
treated or that they might not be so treated in the future.
4
<PAGE>
2.3. The Company represents and warrants that it will not purchase shares of
the Designated Portfolios with assets derived from tax-qualified retirement
plans except, indirectly, through Contracts purchased in connection with such
plans.
2.4. The Fund represents and warrants that Fund shares of the Designated
Portfolios sold pursuant to this Agreement will be registered under the 1933 Act
and duly authorized for issuance in accordance with applicable law and that the
Fund is and will remain registered under the 1940 Act for as long as such shares
of the Designated Portfolios are outstanding. The Fund will amend the
registration statement for its shares under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of its
shares or as may otherwise be required by applicable law. The Fund will register
and qualify the shares of the Designated Portfolios for sale in accordance with
the laws of the various states only if and to the extent deemed advisable by the
Fund.
2.5. The Fund represents that each Designated Portfolio is currently qualified
as a Regulated Investment Company under Subchapter M of the Internal Revenue
Code and that it will make every effort to maintain such qualification (under
Subchapter M or any successor or similar provision) and that it will notify the
Company immediately upon having a reasonable basis for believing that a
Designated Portfolio has ceased to so qualify or that it might not so qualify in
the future.
2.6. The Fund represents and warrants that in performing the services
described in this Agreement, the Fund will comply with all applicable laws,
rules and regulations. The Fund makes no representation as to whether any aspect
of its operations (including, but not limited to, fees and expenses and
investment policies, objectives and restrictions) complies with the insurance
laws and regulations of any state. The Fund and CSAMSI agree that upon request
they will use their best efforts to furnish the information required by state
insurance laws so that the Company can obtain the authority needed to issue the
Contracts in the various states.
2.7. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it
reserves the right to make such payments in the future. To the extent that it
decides to finance distribution expenses pursuant to Rule 12b-1 the Fund
undertakes to have its Fund Board formulate and approve any plan under Rule
12b-1 to finance distribution expenses in accordance with the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly existing
under the laws of The Commonwealth of Massachusetts and that it does and will
comply in all material respects with applicable provisions of the 1940 Act.
2.9. CSAMSI represents and warrants that it will distribute the Fund shares of
the Designated Portfolios in accordance with all applicable federal and state
securities laws including, without limitation, the 1933 Act, the 1934 Act and
the 1940 Act.
5
<PAGE>
2.10. CSAMSI represents and warrants that it is and will remain duly registered
under all applicable federal and state securities laws and that it will perform
its obligations for the Fund in accordance in all material respects with any
applicable state and federal securities laws.
2.11. The Fund represents and warrants that all of its trustees, officers,
employees, and other individuals/entities having access to the funds and/or
securities of the Fund are and continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund in an amount not
less than the minimal coverage as required currently by Rule 17g-(1) of the 1940
Act or related provisions as may be promulgated from time to time. The aforesaid
bond includes coverage for larceny and embezzlement and is issued by a reputable
bonding company. CSAMSI and the Fund's investment advisers represent and warrant
that they are and continue to be at all times covered by policies similar to the
aforesaid bond.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; VOTING
3.1. The Fund or CSAMSI will provide the Company, at the Fund's or its
affiliate's expense, with as many copies of the current Fund prospectus for the
Designated Portfolios as the Company may reasonably request for distribution, at
the Company's expense, to prospective contractowners and applicants. The Fund or
CSAMSI will provide, at the Fund's or its affiliate's expense, as many copies of
said prospectus as necessary for distribution, at the expense of the Fund or an
affiliate thereof, to existing contract owners. The Fund or CSAMSI will provide
the copies of said prospectus to the Company or to its mailing agent. If
requested by the Company, the Fund or CSAMSI will provide such documentation,
including a computer diskette of the Company's specification or a final copy of
a current prospectus set in type at the Fund's or its affiliate's expense, and
such other assistance as is reasonably necessary in order for the Company at
least annually (or more frequently if the Fund prospectus is amended more
frequently) to have the Fund's prospectus, the prospectus for the Contracts and
the prospectuses of other mutual funds in which assets attributable to the
Contracts may be invested printed together in one document (the "Multifund
Prospectus"), in which case the Fund or its affiliate will bear its reasonable
share of expenses as described above, allocated based on the proportionate
number of pages of the Fund's and other fund's respective portions of the
document.
3.2. The Fund or CSAMSI will provide the Company, at the Fund's or its
affiliate's expense, with as many copies of the statement of additional
information as the Company may reasonably request for distribution, at the
Company's expense, to prospective contractowners and applicants. The Fund or
CSAMSI will provide, at the Fund's or its affiliate's expense, as many copies of
said statement of additional information as necessary for distribution, at the
expense of the Fund or an affiliate thereof, to any existing contract owner who
requests such statement or whenever state or federal law otherwise requires that
such statement be provided. The Fund or CSAMSI will provide the copies of said
statement of additional information to the Company or to its mailing agent.
3.3. To the extent that the Fund or CSAMSI desires to change (whether by
revision or supplement) any of the information contained in any form of Fund
prospectus or statement of additional information provided to the Company for
inclusion in a Multifund Prospectus, the Company agrees to make such changes
within a reasonable period of time after receipt of a request to make such
change from the Fund or CSAMSI, subject
6
<PAGE>
to the following limitation. To the extent that the Fund is legally required to
make a change to a Fund prospectus or statement of additional information
provided to the Company for inclusion in a Multifund Prospectus, the Company
agrees to make any such change as soon as possible following receipt of the form
of revised prospectus and/or statement of additional information or supplement,
as applicable, but in no event later than five days following receipt. To the
extent that the Fund is required by law to cease selling shares of a Designated
Portfolio, the Company agrees to cease offering shares of the Designated
Portfolio until the Fund or CSAMSI notifies the Company otherwise.
3.4. The Fund or CSAMSI, at the Fund's or its affiliate's expense, will
provide the Company or its mailing agent with copies of its proxy material, if
any, reports to shareholders and other communications to shareholders in such
quantity as the Company will reasonably require. The Company will distribute
this proxy material, reports and other communications to existing contract
owners and tabulate the votes. The Fund shall bear the cost of printing,
duplicating, and mailing its proxy material to contract owners. The Fund shall
not be responsible for the costs of any proxy solicitations other than proxies
sponsored by the Fund.
3.5. If and to the extent required by law the Company will:
(a) solicit voting instructions from contractowners;
(b) vote the shares of the Designated Portfolios held in the Account
in accordance with instructions received from contractowners; and
(c) vote shares of the Designated Portfolios held in the Account for
which no timely instructions have been received, as well as shares it owns, in
the same proportion as shares of such Designated Portfolio for which
instructions have been received from the Company's contractowners;
so long as and to the extent that the SEC continues to interpret the
1940 Act to require pass-through voting privileges for variable contractowners.
Except as set forth above, the Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Company will be responsible for assuring that each of its separate
accounts participating in the Fund calculates voting privileges in a manner
consistent with all legal requirements, including the Mixed and Shared Funding
Exemptive Order.
3.6. The Fund will comply with all provisions of the 1940 Act requiring voting
by shareholders, and in particular, the Fund either will provide for annual
meetings (except insofar as the SEC may interpret Section 16 of the 1940 Act not
to require such meetings) or, as the Fund currently intends, will comply with
Section 16(c) of the 1940 Act (although the Fund is not one of the trusts
described in Section 16(c) of that Act) as well as with Sections 16(a) and, if
and when applicable, 16(b). Further, the Fund will act in accordance with the
SEC's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the SEC may promulgate
with respect thereto.
7
<PAGE>
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. CSAMSI will provide the Company on a timely basis with investment
performance information for each Designated Portfolio in which the Company
maintains an Account, including total return for the preceding calendar month
and calendar quarter, the calendar year to date, and the prior one-year,
five-year, and ten year (or life of the Designated Portfolio) periods. The
Company may, based on the SEC mandated information supplied by CSAMSI, prepare
communications for contractowners ("Contractowner Materials"). The Company will
provide copies of all Contractowner Materials concurrently with their first use
for CSAMSI's internal recordkeeping purposes. It is understood that neither
CSAMSI nor any Designated Portfolio will be responsible for errors or omissions
in, or the content of, Contractowner Materials except to the extent that the
error or omission resulted from information provided by or on behalf of CSAMSI
or the Designated Portfolio. Any printed information that is furnished to the
Company pursuant to this Agreement other than each Designated Portfolio's
prospectus or statement of additional information (or information supplemental
thereto), periodic reports and proxy solicitation materials is CSAMSI's sole
responsibility and not the responsibility of any Designated Portfolio or the
Fund. The Company agrees that the Portfolios, the shareholders of the Portfolios
and the officers and governing Board of the Fund will have no liability or
responsibility to the Company in these respects.
4.2. The Company will not give any information or make any representations or
statements on behalf of the Fund or concerning the Fund in connection with the
sale of the Contracts other than the information or representations contained in
the registration statement, prospectus or statement of additional information
for Fund shares, as such registration statement, prospectus and statement of
additional information may be amended or supplemented from time to time, or in
reports or proxy statements for the Fund, or in published reports for the Fund
which are in the public domain or approved by the Fund or CSAMSI for
distribution, or in sales literature or other material provided by the Fund, the
Adviser or by CSAMSI, except with permission of CSAMSI. The Company will
furnish, or will cause to be furnished, to the Fund, the Adviser or CSAMSI, each
piece of sales literature or other promotional material in which the Company or
its Account is named, at least ten (10) business days prior to its use. No such
sales literature or other promotional material which requires the permission of
CSAMSI prior to use will be used if CSAMSI reasonably objects to such use within
five (5) business days after receipt.
Nothing in this Section 4.2 will be construed as preventing the Company
or its employees or agents from giving advice on investment in the Fund.
4.3. The Fund, the Adviser and CSAMSI will not give any information or make
any representations or statements on behalf of the Company or concerning the
Company, each Account, or the Contracts other than the information or
representations contained in a registration statement, prospectus or statement
of additional information for the Contracts, as such registration statement,
prospectus and statement of additional information may be amended or
supplemented from time to time, or in published reports for each Account or the
Contracts which are in the public domain or approved by the Company for
distribution to contractowners, or in sales literature or other material
provided by the Company, except with permission of the Company. The Company
agrees to respond to any request for approval on a prompt and timely basis. The
Fund, the Adviser or CSAMSI will furnish, or will cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company or its Account is
8
<PAGE>
named at least fifteen (15) business days prior to its use. No such material
will be used if the Company reasonably objects to such use within five (5)
business days after receipt of such material.
4.4. The Fund will provide to the Company at least one complete copy of all
registration statements, prospectuses, statements of additions information,
reports and other material filing that relates to the Fund or its shares,
promptly after the filing of such document with the SEC, the NASD or other
regulatory authority.
4.5. The Company will provide to the Fund at least one complete copy of all
registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the SEC,
the NASD or other regulatory authority.
4.6. For purposes of this Article IV, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements (such as
material published, or designed for use in, a newspaper, magazine, or other
periodical, radio, television, telephone or tape recording, videotape display,
signs or billboards, motion pictures, or other public media (e.g., on-line
networks such as the Internet or other electronic messages)), sales literature
(i.e., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisements sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospectuses,
statements of additional information, shareholder reports, proxy materials and
any other material constituting sales literature or advertising under the NASD
rules, the 1933 Act or the 1940 Act.
4.7. The Fund and CSAMSI hereby consent to the Company's use of the names
Warburg, Pincus Trust Post-Venture Capital Portfolio, or other Designated
Portfolio, and Warburg, Pincus Counsellors, Inc. in connection with the
marketing of the Contracts, subject to the terms of Sections 4.1 and 4.2 of this
Agreement. Such consent will continue only as long as any Contracts are invested
in the relevant Designated Portfolio.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund, the Adviser and CSAMSI will pay no fee or other compensation to
the Company (other than as set forth in the administrative services letter
agreement between CSAMSI and the Company) except if the Fund or any Designated
Portfolio adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act
to finance distribution expenses, then, subject to obtaining any required
exemptive orders or other regulatory approvals, the Fund may make payments to
the Company or to the underwriter for the Contracts if and in such amounts
agreed to by the Fund in writing.
5.2. All expenses incident to performance by the Fund of this Agreement will
be paid by the Fund to the extent permitted by law. The Fund will bear the
expenses for the cost of registration and qualification of the Fund's shares;
preparation and filing of the Fund's prospectus, statement of additional
information and registration statement, proxy materials and reports; setting in
type and printing the Fund's prospectus; setting
9
<PAGE>
in type and printing proxy materials and reports by it to contractowners
(including the costs of printing a Fund prospectus that contains an annual
report); the preparation of all statements and notices required by any federal
or state law; all taxes on the issuance or transfer of the Fund's shares; any
expenses permitted to be paid or assumed by the Fund pursuant to a plan, if any,
under Rule 12b-1 under the 1940 Act; and all other expenses set forth in Article
III of this Agreement.
ARTICLE VI. DIVERSIFICATION
6.1. The Adviser will ensure that the Fund will at all times invest money from
the Contracts in such a manner as to ensure that the Contracts will be treated
as variable annuity contracts under the Internal Revenue Code and the
regulations issued thereunder. Without limiting the scope of the foregoing, the
Fund will comply with Section 817(h) of the Internal Revenue Code and Treasury
Regulation 1.817-5, as amended from time to time, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulation. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps: (a) to notify the Company of such breach; and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Treasury Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board of Trustees of the Fund (the "Fund Board") will monitor the
Fund for the existence of any irreconcilable material conflict among the
interests of the contractowners of all separate accounts investing in the Fund.
An irreconcilable material conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by
Participating Insurance Companies or by variable annuity and variable life
insurance contractowners; or (f) a decision by an insurer to disregard the
voting instructions of contractowners. The Fund Board will promptly inform the
Company if it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of which it
is aware to the Fund Board. The Company agrees to assist the Fund Board in
carrying out its responsibilities, as delineated in the Mixed and Shared Funding
Exemptive Order, by providing the Fund Board with all information reasonably
necessary for the Fund Board to consider any issues raised. This includes, but
is not limited to, an obligation by the Company to inform the Fund Board
whenever contractowner voting instructions are to be disregarded. The Company's
responsibilities hereunder will be carried out with a view only to the interest
of contractowners.
7.3. If it is determined by a majority of the Fund Board, or a majority of its
disinterested trustees, that an irreconcilable material conflict exists, the
Company will, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested trustees), take whatever steps are
necessary to remedy or eliminate the irreconcilable material conflict, up to and
including: (a) withdrawing the assets
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allocable to some or all of the Accounts from the Fund or any Designated
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund, or submitting the
question whether such segregation should be implemented to a vote of all
affected contractowners and, as appropriate, segregating the assets of any
appropriate group (i.e., variable annuity contractowners or variable life
insurance contractowners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected contractowners
the option of making such a change; and (b) establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by the
Company to disregard contractowner voting instructions, and the Company's
judgment represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
subaccount of the Account's investment in the Fund and terminate this Agreement
with respect to such subaccount; provided, however, that such withdrawal and
termination will be limited to the extent required by the foregoing
irreconcilable material conflict as determined by a majority of the
disinterested trustees of the Fund Board. No charge or penalty will be imposed
as a result of such withdrawal.
7.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with the
majority of other state insurance regulators, then the Company will withdraw the
affected subaccount of the Account's investment in the Fund and terminate this
Agreement with respect to such subaccount; provided, however, that such
withdrawal and termination will be limited to the extent required by the
foregoing irreconcilable material conflict as determined by a majority of the
disinterested directors of the Fund Board. No charge or penalty will be imposed
as a result of such withdrawal.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of
the disinterested members of the Fund Board will determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Fund or the Adviser (or any other investment adviser to the Fund) be
required to establish a new funding medium for the Contracts. The Company will
not be required by Section 7.3 to establish a new funding medium for the
Contracts if an offer to do so has been declined by vote of a majority of
contractowners materially affected by the irreconcilable material conflict.
7.7. The Company will at least annually submit to the Fund Board such reports,
materials or data as the Fund Board may reasonably request so that the Fund
Board may fully carry out the duties imposed upon it as delineated in the Mixed
and Shared Funding Exemptive Order, and said reports, materials and data will be
submitted more frequently if deemed appropriate by the Fund Board.
7.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Mixed and Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Mixed and Shared Funding
Exemptive Order, then: (a) the Fund and/or the Participating Insurance
Companies, as appropriate, will take such steps as may be necessary to comply
with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement will
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continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
(a) The Company agrees to indemnify and hold harmless the Fund, the
Adviser, CSAMSI, and each person, if any, who controls or is associated with the
Fund, the Adviser or CSAMSI within the meaning of such terms under the federal
securities laws and any director, trustee, officer, partner, employee or agent
of the foregoing (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, expenses, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including reasonable legal and other expenses), to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements:
(1) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the registration
statement, prospectus or statement of additional information for the Contracts
or contained in the Contracts or sales literature or other promotional material
for the Contracts (or any amendment or supplement to any of the foregoing),
including any prospectuses or statements of additional information of the Fund
to which the Company has made any changes to the information provided to the
Company or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated or necessary to make such
statements not misleading in light of the circumstances in which they were made;
provided that this agreement to indemnify will not apply as to any Indemnified
Party if such statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company by the Fund, the Adviser or CSAMSI for use in the registration
statement, prospectus or statement of additional information for the Contracts
or in the Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund shares;
or
(2) arise out of or as a result of statements or
representations by or on behalf of the Company or wrongful conduct of the
Company or persons under its control, with respect to the sale or distribution
of the Contracts or Fund shares (other than statements or representations
contained in the Fund registration statement, Fund prospectus, Fund statement of
additional information, sales literature or other promotional material of the
Fund not supplied by the Company or persons under its control); or
(3) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the Fund registration statement,
prospectus, statement of additional information or sales literature or other
promotional material of the Fund (or amendment or supplement) or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make such statements not misleading in light of the
circumstances in which they were made, if such a statement or omission was made
in reliance upon and in conformity with information furnished to the Fund by or
on behalf of the Company or persons under its control; or
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(4) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of this Agreement; or
(5) arise out of any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or result
from any other material breach by the Company of this Agreement, including, but
not limited to, a failure to comply with the provisions of Section 3.3;
except to the extent provided in Sections 8.1(b) and 8.3 hereof.
This indemnification will be in addition to any liability that the Company
otherwise may have.
(b) No party will be entitled to indemnification under Section 8.1(a)
to the extent such loss, claim, damage, liability or litigation is due to the
willful misfeasance, bad faith, or gross negligence in the performance of such
party's duties under this Agreement, or by reason of such party's reckless
disregard of its obligations or duties under this Agreement by the party seeking
indemnification.
(c) The Indemnified Parties promptly will notify the Company of the
commencement of any litigation, proceedings, complaints or actions by regulatory
authorities against them in connection with the issuance or sale of the Fund
shares or the Contracts or the operation of the Fund.
8.2. INDEMNIFICATION BY THE ADVISER, THE FUND AND CSAMSI
(a) The Adviser, the Fund and CSAMSI, in each case solely to the
extent relating to such party's responsibilities hereunder, agree to indemnify
and hold harmless the Company and each person, if any, who controls or is
associated with the Company within the meaning of such terms under the federal
securities laws and any director, trustee, officer, partner, employee or agent
of the foregoing (collectively, the "Indemnified Parties" for purposes of this
Section 8.2) against any and all losses, claims, expenses, damages, liabilities
(including amounts paid in settlement with the written consent of the Adviser)
or litigation (including reasonable legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements:
(1) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the registration
statement, prospectus or statement of additional information for the Fund or
sales literature or other promotional material of the Fund (or any amendment or
supplement to any of the foregoing) or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated or necessary to make such statements not misleading in light of the
circumstances in which they were made (in each case substantially as transmitted
to the Company by the Fund or CSAMSI), provided that this agreement to indemnify
will not apply as to any Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon and in conformity with
information furnished to the Adviser, CSAMSI or the Fund by or on behalf of the
Company for use in the registration statement, prospectus or statement of
additional information for the Fund or in sales literature of the Fund (or any
amendment or supplement thereto) or otherwise for use in connection with the
sale of the Contracts or Fund shares; or
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(2) arise out of or as a result of statements or
representations or wrongful conduct of the Adviser, the Fund or CSAMSI or
persons under the control of the Adviser, the Fund or CSAMSI respectively, with
respect to the sale of the Fund shares (other than statements or representations
contained in a registration statement, prospectus, statement of additional
information, sales literature or other promotional material covering the
Contracts not supplied by CSAMSI or persons under its control); or
(3) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement, prospectus,
statement of additional information or sales literature or other promotional
material covering the Contracts (or any amendment or supplement thereto), or the
omission or alleged omission to state therein a material fact required to be
stated or necessary to make such statement or statements not misleading in light
of the circumstances in which they were made, if such statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company by the Adviser, the Fund or CSAMSI or persons under the control of
the Adviser, the Fund or CSAMSI; or
(4) arise as a result of any failure by the Fund, the Adviser
or CSAMSI to provide the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional or in good faith or
otherwise, to comply with the diversification requirements and procedures
related thereto specified in Article VI of this Agreement); or
(5) arise out of or result from any material breach of any
representation and/or warranty made by the Adviser, the Fund or CSAMSI in this
Agreement, or arise out of or result from any other material breach of this
Agreement by the Adviser the Fund or CSAMSI;
except to the extent provided in Sections 8.2(b) and 8.3 hereof.
These indemnifications will be in addition to any liability that the Fund,
Adviser or CSAMSI otherwise may have.
(b) No party will be entitled to indemnification under Section 8.2(a)
to the extent such loss, claim, damage, liability or litigation is due to the
willful misfeasance, bad faith, or gross negligence in the performance of such
party's duties under this Agreement, or by reason of such party's reckless
disregard of its obligations or duties under this Agreement by the party seeking
indemnification.
(c) The Indemnified Parties will promptly notify the Adviser, the Fund
and CSAMSI of the commencement of any litigation, proceedings, complaints or
actions by regulatory authorities against them in connection with the issuance
or sale of the Contracts or the operation of the account.
8.3. INDEMNIFICATION PROCEDURE
Any person obligated to provide indemnification under this Article VIII
("Indemnifying Party" for the purpose of this Section 8.3) will not be liable
under the indemnification provisions of this Article VIII with respect to any
claim made against a party entitled to indemnification under this Article VIII
("Indemnified Party" for the purpose of this Section 8.3) unless such
Indemnified Party will have notified the Indemnifying Party in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim will have been served upon such
Indemnified Party (or after
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such party will have received notice of such service on any designated agent),
but failure to notify the Indemnifying Party of any such claim will not relieve
the Indemnifying Party from any liability which it may have to the Indemnified
Party against whom such action is brought otherwise than on account of the
indemnification provision of this Article VIII, except to the extent that the
failure to notify results in the failure of actual notice to the Indemnifying
Party and such Indemnifying Party is damaged solely as a result of failure to
give such notice. In case any such action is brought against the Indemnified
Party, the Indemnifying Party will be entitled to participate, at its own
expense, in the defense thereof. The Indemnifying Party also will be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Indemnifying Party to the Indemnified Party of the
Indemnifying Party's election to assume the defense thereof, the Indemnified
Party will bear the fees and expenses of any additional counsel retained by it,
and the Indemnifying Party will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation, unless: (a) the Indemnifying Party and the Indemnified Party
will have mutually agreed to the retention of such counsel; or (b) the named
parties to any such proceeding (including any impleaded parties) include both
the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The Indemnifying Party will not be liable for
any settlement of any proceeding effected without its written consent but if
settled with such consent or if there is a final judgment for the plaintiff, the
Indemnifying Party agrees to indemnify the Indemnified Party from and against
any loss or liability by reason of such settlement or judgment. A successor by
law of the parties to this Agreement will be entitled to the benefits of the
indemnification contained in this Article VIII. The indemnification provisions
contained in this Article VIII will survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement will be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York.
9.2. This Agreement will be subject to the provisions of the 1933 Act, the
1934 Act and the 1940 Act, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including, but not limited to, the Mixed and Shared Funding Exemptive
Order) and the terms hereof will be interpreted and construed in accordance
therewith.
ARTICLE X. TERMINATION
10.1. This Agreement will terminate:
(a) at the option of any party, with or without cause, with respect to
some or all of the Designated Portfolios, upon ninety (90) days' advance written
notice to the other parties; or
(b) at the option of the Company, upon receipt of the Company's
written notice by the other parties, with respect to any Designated Portfolio if
shares of the Designated Portfolio are not reasonably available to meet the
requirements of the Contracts as determined in good faith by the Company; or
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(c) at the option of the Company, upon receipt of the Company's
written notice by the other parties, with respect to any Designated Portfolio in
the event any of the Designated Portfolio's shares are not registered, issued or
sold in accordance with applicable state and/or Federal law or such law
precludes the use of such shares as the underlying investment media of the
Contracts issued or to be issued by Company; or
(d) at the option of the Fund, upon receipt of the Fund's written
notice by the other parties, upon institution of formal proceedings against the
Company by the NASD, the SEC, the insurance commission of any state or any other
regulatory body regarding the Company's duties under this Agreement or related
to the sale of the Contracts, the administration of the Contracts, the operation
of the Account, or the purchase of the Fund shares, provided that the Fund
determines in its sole judgment, exercised in good faith, that any such
proceeding would have a material adverse effect on the Company's ability to
perform its obligations under this Agreement; or
(e) at the option of the Company, upon receipt of the Company's
written notice by the other parties, upon institution of formal proceedings
against the Fund, Adviser or CSAMSI by the NASD, the SEC, or any state
securities or insurance department or any other regulatory body, provided that
the Company determines in its sole judgment, exercised in good faith, that any
such proceeding would have a material adverse effect on the Fund's, Adviser's or
CSAMSI's ability to perform its obligations under this Agreement; or
(f) at the option of the Company, upon receipt of the Company's
written notice by the other parties, with respect to any Designated Portfolio if
the Designated Portfolio ceases to qualify as a Regulated Investment Company
under Subchapter M of the Internal Revenue Code, or under any successor or
similar provision, or if the Company reasonably and in good faith believes that
the Designated Portfolio may fail to so qualify; or
(g) at the option of the Company, upon receipt of the Company's
written notice by the other parties, with respect to any Designated Portfolio if
the Designated Portfolio fails to meet the diversification requirements
specified in Article VI hereof or if the Company reasonably and in good faith
believes the Designated Portfolio may fail to meet such requirements; or
(h) at the option of any party to this Agreement, upon written notice
to the other parties, upon another party's material breach of any provision of
this Agreement which material breach is not cured within thirty (30) days of
said notice; or
(i) at the option of the Company, if the Company determines in its
sole judgment exercised in good faith, that either the Fund, the Adviser or
CSAMSI has suffered a material adverse change in its business, operations or
financial condition since the date of this Agreement or is the subject of
material adverse publicity which is likely to have a material adverse impact
upon the business and operations of the Company, such termination to be
effective sixty (60) days' after receipt by the other parties of written notice
of the election to terminate; or
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(j) at the option of the Fund or CSAMSI, if the Fund or CSAMSI
respectively, determines in its sole judgment exercised in good faith, that the
Company has suffered a material adverse change in its business, operations or
financial condition since the date of this Agreement or is the subject of
material adverse publicity which is likely to have a material adverse impact
upon the business and operations of the Fund or the Adviser, such termination to
be effective sixty (60) days' after receipt by the other parties of written
notice of the election to terminate; or
(k) at the option of the Company or the Fund upon receipt of any
necessary regulatory approvals and/or the vote of the contractowners having an
interest in the Account (or any subaccount) to substitute the shares of another
investment company for the corresponding Designated Portfolio shares of the Fund
in accordance with the terms of the Contracts for which those Designated
Portfolio shares had been selected to serve as the underlying investment media.
The Company will give sixty (60) days' prior written notice to the Fund of the
date of any proposed vote or other action taken to replace the Fund's shares; or
(l) at the option of the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of the disinterested Fund Board
members, that an irreconcilable material conflict exists among the interests of:
(1) all contract owners of variable insurance products of all separate accounts;
or (2) the interests of the Participating Insurance Companies investing in the
Fund as set forth in Article VII of this Agreement; or
(m) at the option of the Fund in the event any of the Contracts are
not issued or sold in accordance with applicable federal and/or state law.
Termination will be effective immediately upon such occurrence without notice.
10.2. NOTICE REQUIREMENT
Except as specified in Section 10.1(m), no termination of this Agreement
will be effective unless and until the party terminating this Agreement gives
prior written notice to all other parties of its intent to terminate, which
notice will set forth the basis for the termination.
10.3. EFFECT OF TERMINATION
In the event of any termination of this Agreement other than pursuant to
subsection (d), (j), (l) or (m) of Section 10.1, the Fund and CSAMSI will, at
the option of the Company, continue to make available additional shares of the
Fund pursuant to the terms and conditions of this Agreement, for all Contracts
in effect on the effective date of termination of this Agreement (hereinafter
referred to as "Existing Contracts.") . Specifically, without limitation, the
owners of the Existing Contracts will be permitted to reallocate investments in
the Designated Portfolios (as in effect on such date), redeem investments in the
Designated Portfolios and/or invest in the Designated Portfolios upon the making
of additional purchase payments under the Existing Contracts.
10.4. SURVIVING PROVISIONS
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Notwithstanding any termination of this Agreement, each party's
obligations under Article VIII to indemnify other parties will survive and not
be affected by any termination of this Agreement. In addition, each party's
obligations under Section 12.6 will survive and not be affected by any
termination of this Agreement. Finally, with respect to Existing Contracts, all
provisions of this Agreement also will survive and not be affected by any
termination of this Agreement.
ARTICLE XI. NOTICES
11.1. Any notice will be deemed duly given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other parties.
If to the Company: If to the Fund, the Adviser
First Allmerica Financial Life Insurance and/or CSAMSI:
Company 466 Lexington Avenue
440 Lincoln Street 12th Floor
Worcester, MA 01653 New York, NY 10017
Attn: Richard M. Reilly, Vice President Attn: Legal Dept.
ARTICLE XII. MISCELLANEOUS
12.1. The Fund, the Adviser and CSAMSI acknowledge that the identities of the
customers of the Company or any of its affiliates (collectively the "Company
Protected Parties" for purposes of this Section 12.1), information maintained
regarding those customers, and all computer programs and procedures or other
information developed or used by the Company Protected Parties or any of their
employees or agents in connection with the Company's performance of its duties
under this Agreement are the valuable property of the Company Protected Parties.
The Fund, the Adviser and CSAMSI agree that if they come into possession of any
list or compilation of the identities of or other information about the Company
Protected Parties' customers, or any other information or property of the
Company Protected Parties, other than such information as is publicly available
or as may be independently developed or compiled by the Fund, the Adviser or
CSAMSI from information supplied to them by the Company Protected Parties'
customers who also maintain accounts directly with the Fund, the Adviser or
CSAMSI, the Fund, the Adviser and CSAMSI will hold such information or property
in confidence and refrain from using, disclosing or distributing any of such
information or other property except: (a) with the Company's prior written
consent; or (b) as required by law or judicial process. The Company acknowledges
that the identities of the customers of the Fund, the Adviser, CSAMSI or any of
their affiliates (collectively the "Adviser Protected Parties" for purposes of
this Section 12.1), information maintained regarding those customers, and all
computer programs and procedures or other information developed or used by the
Adviser Protected Parties or any of their employees or agents in connection with
the Fund's, the Adviser's or CSAMSI's performance of their respective duties
under this Agreement are the valuable property of the Adviser Protected Parties.
The Company agrees that if it comes into possession of any list or compilation
of the identities of or other information about the Adviser Protected Parties'
customers, or any other information or property of the Adviser Protected
Parties, other than such information as is publicly available or as may be
independently developed or compiled by the Company from information supplied to
them by the Adviser Protected Parties'
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customers who also maintain accounts directly with the Company, the Company will
hold such information or property in confidence and refrain from using,
disclosing or distributing any of such information or other property except: (a)
with the Fund's, the Adviser's or CSAMSI's prior written consent; or (b) as
required by law or judicial process. Each party acknowledges that any breach of
the agreements in this Section 12.1 would result in immediate and irreparable
harm to the other parties for which there would be no adequate remedy at law and
agree that in the event of such a breach, the other parties will be entitled to
equitable relief by way of temporary and permanent injunctions, as well as such
other relief as any court of competent jurisdiction deems appropriate.
12.2. The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or otherwise
affect their construction or effect.
12.3. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together will constitute one and the same
instrument.
12.4. If any provision of this Agreement will be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement will
not be affected thereby.
12.5. This Agreement will not be assigned by any party hereto without the prior
written consent of all the parties; provided, however, that CSAMSI may assign
without further consent of the parties hereto, in whole or in part, its
responsibilities hereunder as Fund distributor, to a third party distributor
which may be appointed to serve as Fund distributor.
12.6. Each party to this Agreement will maintain all records required by law,
including records detailing the services it provides. Such records will be
preserved, maintained and made available to the extent required by law and in
accordance with the 1940 Act and the rules thereunder. Each party to this
Agreement will cooperate with each other party and all appropriate governmental
authorities (including without limitation the SEC, the NASD and state insurance
regulators) and will permit each other and such authorities reasonable access to
its books and records in connection with any investigation or inquiry relating
to this Agreement or the transactions contemplated hereby. Upon request by the
Fund or CSAMSI, the Company agrees to promptly make copies or, if required,
originals of all records pertaining to the performance of services under this
Agreement available to the Fund or CSAMSI, as the case may be. The Fund agrees
that the Company will have the right to inspect, audit and copy all records
pertaining to the performance of services under this Agreement pursuant to the
requirements of any state insurance department. Each party also agrees to
promptly notify the other parties if it experiences any difficulty in
maintaining the records in an accurate and complete manner. This provision will
survive termination of this Agreement.
12.7. Each party represents that the execution and delivery of this Agreement
and the consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate or board action, as applicable, by such
party and when so executed and delivered this Agreement will be the valid and
binding obligation of such party enforceable in accordance with its terms.
12.8. The parties to this Agreement acknowledge and agree that all liabilities
of the Fund arising, directly or indirectly, under this agreement, will be
satisfied solely out of the assets of the Fund and that no trustee,
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officer, agent or holder of shares of beneficial interest of the Fund will be
personally liable for any such liabilities. No Portfolio or series of the Fund
will be liable for the obligations or liabilities of any other Portfolio or
series.
12.9. The parties to this Agreement may amend the schedules to this Agreement
from time to time to reflect changes in or relating to the Contracts, the
Accounts or the Designated Portfolios of the Fund or other applicable terms of
this Agreement.
12.10 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights.
12.11 The Trustees of the Fund shall use their best efforts to ensure that
every note, bond, contract, instrument, certificate or undertaking made or
issued by the Trustees or by any officer or officers of the Fund shall give
notice that the Fund's Agreement and Declaration of Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and shall recite that the same
was executed or made by or behalf of the Fund by the Trustees as Trustees and
not individually, and that the obligations of such instrument are not binding
upon any of the Trustees or the shareholders of any Portfolio individually but
are binding only upon the assets and property of the Fund, and may contain such
further recital as he or she or they may deem appropriate, but the omission
thereof shall not operate to bind any officer of Fund or shareholder of shares
of any Portfolio individually.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and behalf by its duly authorized representative as
of the date specified below.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY
By: /s/ Richard M. Reilly
--------------------------
Name: Richard M. Reilly
Title: Vice President
WARBURG, PINCUS TRUST
By: /s/ Hal Liebes
--------------------------
Name: Hal Liebes
Title: Secretary
CREDIT SUISSE ASSET MANAGEMENT, LLC
By: /s/ Hal Liebes
--------------------------
Name: Hal Liebes
Title: General Counsel and Managing Director
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC.
20
<PAGE>
By: /s/ Hal Liebes
--------------------------
Name: Hal Liebes
Title: Secretary
21
<PAGE>
SCHEDULE 1
PARTICIPATION AGREEMENT
BY AND AMONG
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AND
WARBURG, PINCUS TRUST
AND
CREDIT SUISSE ASSET MANAGEMENT, LLC
AND
CREDIT SUISSE ASSET MANAGEMENT SECURITIES, INC.
The following separate accounts are permitted in accordance with the provisions
of this Agreement to invest in Designated Portfolios of the Fund shown in
Schedule 2:
SEPARATE ACCOUNT KG
SEPARATE ACCOUNT KGC
22
<PAGE>
SCHEDULE 2
PARTICIPATION AGREEMENT
BY AND AMONG
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
AND
WARBURG, PINCUS TRUST
AND
WARBURG PINCUS ASSET MANAGEMENT, INC.
AND
COUNSELLORS SECURITIES INC.
The Separate Account(s) shown on Schedule 1 may invest in the following
Designated Portfolios of the Warburg, Pincus Trust:
Emerging Markets Portfolio
Growth & Income Portfolio
International Equity Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
Emerging Growth Portfolio
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