SEPARATE ACCOUNT KGC OF ALLMERICA FIN LIFE INS & ANNUITY CO, 485BPOS, 1997-04-30

SEPARATE ACCOUNT KGC OF ALLMERICA FIN LIFE INS & ANNUITY CO
485BPOS, 1997-04-30

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File Nos. 333-10283
811-7777

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 1

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
SEPARATE ACCOUNT KGC OF ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY

ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Office)

Abigail M. Armstrong, Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)

It is proposed that this filing will become effective:

___Immediately upon filing pursuant to paragraph (b) of Rule 485.
_x_On May 1, 1997 pursuant to paragraph (b) of Rule 485
___60 days after filing pursuant to paragraph (a)(1) of Rule 485.
___On _____ pursuant to paragraph (a)(1) of Rule 485.

VARIABLE ANNUITY POLICIES

Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933. The Rule 24f-2 Notice for
the issuer's fiscal year ended December 31, 1996 was filed on February 28,
1997.

<PAGE>

Cross Reference Sheet Showing Location in Prospectus of
Items Called for by Form N-4

Form N-4 Item No Caption in Prospectus
---------------------

1 . . . . . . . . . . . . . Cover Page

2 . . . . . . . . . . . . . "Special Terms"

3 . . . . . . . . . . . . . "Summary"; "Annual and Transaction Expenses"

4 . . . . . . . . . . . . . Condensed Financial Information; Performance
Information

5 . . . . . . . . . . . . . "Description of the Company, the Variable Account
and the Kemper Investor Fund."

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
and Annuity Payments"

11. . . . . . . . . . . . . "Surrender"; "Withdrawal"' "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"

Form N-4 Item No. Caption in Statement of Additional Information
-----------------------------------------------

15. . . . . . . . . . . . . "Cover Page"

16. . . . . . . . . . . . . "Table of Contents"

<PAGE>

17. . . . . . . . . . . . . "General Information and History"

18. . . . . . . . . . . . . "Services"

19. . . . . . . . . . . . . "Underwriters"

20. . . . . . . . . . . . . "Underwriters"

21. . . . . . . . . . . . . "Performance Information"

22. . . . . . . . . . . . . "Annuity Payments"

23. . . . . . . . . . . . . "Financial Statements"

<PAGE>

ALLMERICA FINANCIAL LIFE INSURANCE KEMPER GATEWAY CUSTOM
AND ANNUITY COMPANY A VARIABLE ANNUITY

PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
MAY 1, 1997 POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING A
KEMPER GATEWAY CUSTOM CONTRACT. THE CONTRACT IS MORE FULLY
DESCRIBED LATER IN THIS PROSPECTUS. PLEASE READ THE
PROSPECTUS CAREFULLY.

1. KEMPER GATEWAY CUSTOM VARIABLE ANNUITY CONTRACT

The Kemper GATEWAY Custom variable annuity contract is a contract between
you and Allmerica Financial Life Insurance and Annuity Company. It is designed
to help you accumulate assets for your retirement or other important financial
goals on a tax-deferred basis. The Kemper GATEWAY Custom combines the concept of
professional money management with the attributes of an annuity contract.

Kemper GATEWAY Custom offers a customized investment portfolio with
experienced professional portfolio managers. You may allocate your payments
among any of 16 investment portfolios of the Investors Fund Series, the
Guarantee Period Accounts and the Fixed Account (the Guaranteed Period Accounts
and/or the Fixed Account may not be available in certain jurisdictions.) This
range of investment choices enables you to allocate your money to meet your
particular investment needs.

Like all annuities, the contract has an ACCUMULATION PHASE and an INCOME
PHASE. During the ACCUMULATION PHASE you can make payments into the contract on
any frequency. Investment and interest gains accumulate tax deferred. You may
withdraw money from your contract during the ACCUMULATION PHASE. However, as
with other tax-deferred investments, you pay taxes on earnings and any untaxed
payments to the contract when you withdraw them. A federal tax penalty may apply
if you withdraw prior to age 59 1/2.

During the INCOME PHASE you will receive regular payments from your
contract, provided you annuitize. Annuitization involves beginning a series of
payments from the capital that has built up in your contract. The amount of your
payments during the income phase will, in part, be determined by your account's
growth during the accumulation phase.

2. ANNUITY BENEFIT PAYMENTS

If you choose to annuitize your contract, you may select one of six annuity
options: 1. monthly payments for your lifetime; 2. monthly payments for your
lifetime, but for not less than 10 years; 3. monthly payments for your lifetime
with the guarantee that if payments to you are less than the accumulated value a
refund of the remaining value will be paid; 4. monthly payments for your
lifetime and your survivor's lifetime; 5. monthly payments for your lifetime and
your survivor's lifetime with the payment to the survivor being reduced to 2/3;
and 6. monthly payments for a specified period of 1 to 30 years.

You also need to decide if you want your annuity payments on a variable
basis (i.e., subject to fluctuation based on investment performance), on a fixed
basis (with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.

3. PURCHASING THIS CONTRACT

You can buy a contract through your financial representative, who can also
help you complete the proper forms. There is no fixed schedule for making
additional payments into this contract. There are no limits to the

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frequency of additional payments, but there are certain limitations as to
amount. Generally, the initial payment must be at least $2,000 and additional
payments must be at least $100. However, minimums may be reduced for certain
employer-sponsored plans.

4. INVESTMENT OPTIONS

You have full investment control over the contract. You may allocate money
to the following portfolios:

<TABLE>
<S> <C>
Money Market Portfolio Value Portfolio
Small Cap Value
Total Return Portfolio Portfolio
Value + Growth
High Yield Portfolio Portfolio
Growth Portfolio Horizon 20+ Portfolio
Government Securities
Portfolio Horizon 10+ Portfolio
International Portfolio Horizon 5 Portfolio
Small Cap Growth Portfolio Global Income Portfolio
Investment Grade Bond
Portfolio Blue Chip Portfolio
</TABLE>

You may also allocate money to the Guarantee Period Accounts and the Fixed
Account. The Guarantee Period Accounts let you choose from among nine different
Guarantee Periods (ranging in maturity from 2 to 10 years) during which
principal and interest rates are guaranteed. The Fixed Account guarantees
principal and a minimum rate of interest (never less than 3% compounded
annually).

5. EXPENSES

Each year and upon surrender, a $35 contract fee is deducted from your
contract. The contract fee is waived if the value of the contract is $50,000 or
more or if the contract is issued to and maintained by the Trustees of a 401(k)
plan. We also deduct insurance charges which amount to 1.10% annually of the
daily value of your contract value allocated to the variable investment options.
The insurance charges include: Mortality and Expense Risk Charge, 0.95%; and
Administrative Expense Charge, 0.15%. There are also investment management fees
and other portfolio operating expenses that vary by portfolio.

If you decide to surrender your contract, make withdrawals or receive
payments under certain annuity options, we may impose a surrender charge between
2% and 7% of the payment withdrawn, based on when your payments were made. In
states where premium taxes are imposed, a premium tax charge will be deducted
either when withdrawals are made or annuity payments commence.

There is currently no charge for processing investment option transfers. We
reserve the right to assess a charge, not to exceed $25, for transfers in excess
of 12 per contract year.

The following chart is designed to help you understand the charges in your
contract. Column C labeled "Total Annual Charges" shows the total of the $35
contract fee (which is represented as 0.03%) and the 1.10% insurance charges
(Column A) plus the investment charges for each portfolio (Column B.) Columns D
and E show you two examples of the charges, in dollar amounts, you would pay
under a contract. The examples assume you invest $1,000 in a portfolio which
earns 5% annually and that you withdraw your money: at the end of year 1

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(Column D), and at the end of year 10 (Column E). In Column D, the Total Annual
Charges are assessed as well as the surrender charges. In Column E, the example
shows the aggregate of all the annual charges assessed for 10 years, but there
is no surrender charge. The premium tax is assumed to be 0% in both examples.

<TABLE>
<CAPTION>
A B C D E
TOTAL ANNUAL EXPENSES AT
TOTAL ANNUAL END OF
INSURANCE TOTAL ANNUAL TOTAL ANNUAL ------------------------
PORTFOLIO CHARGES PORTFOLIO CHARGES CHARGES 1 YEAR 10 YEARS
- ------------------------------------- --------------- ----------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Money Market Portfolio 1.13% 0.60% 1.73% $ 79 $ 201
Total Return Portfolio 1.13% 0.59% 1.72% $ 79 $ 200
High Yield Portfolio 1.13% 0.65% 1.78% $ 79 $ 206
Growth Portfolio 1.13% 0.64% 1.77% $ 79 $ 205
Government Securities Portfolio 1.13% 0.66% 1.79% $ 79 $ 207
International Portfolio 1.13% 0.96% 2.09% $ 82 $ 239
Small Cap Growth Portfolio 1.13% 0.75% 1.88% $ 80 $ 217
Investment Grade Bond Portfolio 1.13% 0.85% 1.98% $ 81 $ 227
Value Portfolio 1.13% 0.95% 2.08% $ 82 $ 238
Small Cap Value Portfolio 1.13% 0.95% 2.08% $ 82 $ 238
Value + Growth Portfolio 1.13% 0.95% 2.08% $ 82 $ 238
Horizon 20+ Portfolio 1.13% 0.85% 1.98% $ 81 $ 227
Horizon 10+ Portfolio 1.13% 0.80% 1.93% $ 81 $ 222
Horizon 5 Portfolio 1.13% 0.90% 2.03% $ 82 $ 232
Global Income Portfolio 1.13% 0.95% 2.18% $ 83 $ 248
Blue Chip Portfolio 1.13% 1.05% 2.08% $ 82 $ 238
</TABLE>

For more detailed information, see the Fee Table in the Prospectus.

6. TAXES

You will not pay taxes until you withdraw money from your contract. During
the accumulation phase, earnings are withdrawn first and are taxed as ordinary
income. If you make a withdrawal prior to age 59 1/2, you may be subject to a
10% federal tax penalty on the earnings. Payments during the income phase are
considered partly a return of your investment and partly earnings. You will be
subject to income taxes on the earnings portion of each payment. However, if
your contract is funded with pre-tax or tax deductible dollars (such as a
pension or profit sharing plan contribution), then the entire payment will be
taxable.

7. WITHDRAWALS

You can make withdrawals from your contract any time during the accumulation
phase. The minimum withdrawal amount is $100. Any payment invested in the
contract for six years or longer can be withdrawn without a surrender charge.

For amounts invested for less than six years, you will not be assessed a
surrender charge on the greater of:

1. 15% or less of the contract value in any calendar year; or

2. an amount calculated under the Life Expectancy Distribution option.

You may also purchase riders that enhance your liquidity in times of need
(see "Optional Benefit Riders" below.)

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Any withdrawal from a Guarantee Period Account ("GPA") prior to the end of
the Guarantee Period will be subject to a market value adjustment which may
increase or decrease the value in that account. This adjustment will never
impact your original investment, nor will earnings in the GPA amount to less
than an effective annual rate of 3%.

8. PERFORMANCE

The value of your contract will vary depending on the investment performance
of the portfolios you choose. From time to time, we may advertise "Total Return"
and "Average Annual Total Return" based upon the periods that the portfolios
have been in existence. These returns are based upon historical data and are not
intended to indicate future performance.

The contract was first offered in 1997. Therefore, Sub-Account performance
for prior years is not available and is not shown here.

9. DEATH BENEFIT

If the annuitant dies during the accumulation phase, we will pay the
beneficiary a death benefit equal to the GREATER of:

1. the accumulated value increased for any positive market value
adjustment; or

2. gross payments reduced proportionately to reflect any withdrawals.

You may also purchase a rider that will enhance the death benefit (see
"Optional Benefit Riders" below.)

10. OTHER INFORMATION

FREE-LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), we will pay you an amount equal
to the value of your contract. This may be more or less than your original
payment. If required by applicable state or federal law, we will return your
payment.

OPTIONAL BENEFIT RIDERS: Where permitted by state law, three optional riders are
available for separate monthly charges.

ENHANCED DEATH BENEFIT RIDER: Under this rider, the death benefit is equal
to the GREATEST of:

1. the accumulated value increased for any positive market value
adjustment;

2. total payments plus a 5% annual interest rate accumulated daily,
reduced proportionately to reflect any prior withdrawals; or

3. the highest contract value on any contract anniversary, increased by
any subsequent payments and reduced proportionately to reflect any
prior withdrawals.

LIVING BENEFITS RIDER: Under this rider, you may receive your money without
a surrender charge if, after issue, you are:

1. confined to a medical care facility for the later of one year after
the issue date or 90 days; or

2. diagnosed as having a fatal illness.

DISABILITY RIDER: Under this rider, you may receive your money without a
surrender charge if you become physically disabled after issue and before
attaining age 65.

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DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Money Market Portfolio, Government Securities Portfolio
or Fixed Account to one or more of the variable investment options.

AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.

11. INQUIRIES

If you need more information you may contact us at:

Allmerica Financial Life Insurance and Annuity Company
440 Lincoln St.
Worcester, Massachusetts 01653
1-800-782-8380

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ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS

This Prospectus describes interests under flexible payment deferred variable
and fixed annuity contracts, known as Kemper Gateway Custom Contracts, issued
either on a group basis or as individual contracts by Allmerica Financial Life
Insurance and Annuity Company (the "Company") to individuals and businesses in
connection with retirement plans which may or may not qualify for special
federal income tax treatment. (For information about the tax status when used
with a particular type of plan, see "FEDERAL TAX CONSIDERATIONS"). Participation
in a group contract will be accounted for by the issuance of a certificate
describing the individual's interest under the group contract. Participation in
an individual contract will be evidenced by the issuance of an individual
contract. Certificates and individual contracts are referred to collectively
herein as the "Contract(s)." The following is a summary of information about
these Contracts. More detailed information can be found under the referenced
captions in this Prospectus.

Contract values may accumulate on a variable basis in the separate account
known as Separate Account KGC (the "Variable Account"). The assets of the
Variable Account are divided into Sub-Accounts, each investing exclusively in
shares of one of the following Portfolios of Investors Fund Series ("IFS"):

<TABLE>
<S> <C>
MONEY MARKET PORTFOLIO VALUE PORTFOLIO
TOTAL RETURN PORTFOLIO SMALL CAP VALUE PORTFOLIO
HIGH YIELD PORTFOLIO VALUE+GROWTH PORTFOLIO
GROWTH PORTFOLIO HORIZON 20+ PORTFOLIO
GOVERNMENT SECURITIES PORTFOLIO HORIZON 10+ PORTFOLIO
INTERNATIONAL PORTFOLIO HORIZON 5 PORTFOLIO
SMALL CAP GROWTH PORTFOLIO GLOBAL INCOME PORTFOLIO
INVESTMENT GRADE BOND PORTFOLIO BLUE CHIP PORTFOLIO
</TABLE>

In most jurisdictions, values also may be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period if
held for the entire Guarantee Period. If removed prior to the end of the
Guarantee Period the value may be increased or decreased by a Market Value
Adjustment. Amounts allocated to the Guarantee Period Accounts in the
accumulation phase are held in the Company's Separate Account GPA.

Additional information is contained in a Statement of Additional Information
("SAI") dated May 1, 1997, filed with the Securities and Exchange Commission
(the "SEC") and incorporated herein by reference. The Table of Contents of the
SAI is on page 4 of this Prospectus. The SAI is available upon request and
without charge through Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, MA 01653, Telephone 800-782-8380.

THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY A CURRENT PROSPECTUS OF
INVESTORS FUND SERIES. INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR
FUTURE REFERENCE.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND
ANNUITY COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. AND/OR
KEMPER DISTRIBUTORS, INC., AND ZKI AGENCY, INC. THE CONTRACTS ARE NOT DEPOSITS
OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT UNION. THE
CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE CONTRACTS
ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND POSSIBLE
LOSS OF PRINCIPAL.

DATED MAY 1, 1997
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS.................. 4
SPECIAL TERMS.......................................................... 5
SUMMARY................................................................ 6
ANNUAL AND TRANSACTION EXPENSES........................................ 11
PERFORMANCE INFORMATION................................................ 13
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND INVESTORS FUND SERIES............................................. 16
INVESTMENT OBJECTIVES AND POLICIES..................................... 17
INVESTMENT ADVISORY SERVICES........................................... 18
DESCRIPTION OF THE CONTRACT............................................ 18
A. Payments......................................................... 18
B. Right to Revoke Individual Retirement Annuity.................... 19
C. Right to Revoke All Other Contracts.............................. 20
D. Transfer Privilege............................................... 20
Automatic Transfers and Automatic Account Rebalancing Options.... 20
E. Surrender........................................................ 21
F. Withdrawals...................................................... 21
Systematic Withdrawals........................................... 22
Life Expectancy Distributions.................................... 22
G. Death Benefit.................................................... 23
Death of the Annuitant Prior to the Annuity Date................. 23
Death of an Owner Who is Not Also the Annuitant Prior to the
Annuity Date.................................................... 24
Payment of the Death Benefit Prior to the Annuity Date........... 24
Death of the Annuitant After the Annuity Date.................... 24
H. The Spouse of the Owner as Beneficiary........................... 24
I. Assignment....................................................... 24
J. Electing the Form of Annuity and Annuity Date.................... 25
K. Description of Variable Annuity Payout Options................... 26
L. Annuity Benefit Payments......................................... 27
The Annuity Unit................................................. 27
Determination of the First and Subsequent Annuity Benefit
Payments........................................................ 27
M. NORRIS Decision.................................................. 28
N. Computation of Values............................................ 28
The Accumulation Unit............................................ 28
Net Investment Factor............................................ 29
</TABLE>

2
<PAGE>
TABLE OF CONTENTS (continued)

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
CHARGES AND DEDUCTIONS................................................. 29
A. Variable Account Deductions...................................... 29
Mortality and Expense Risk Charge................................ 29
Administrative Expense Charge.................................... 30
Other Charges.................................................... 30
B. Contract Fee..................................................... 30
C. Optional Benefit Rider........................................... 30
D. Premium Taxes.................................................... 31
E. Contingent Deferred Sales Charge................................. 31
Charges for Surrender and Withdrawal............................. 31
Reduction or Elimination of Surrender Charge..................... 32
Withdrawal Without Surrender Charge.............................. 33
Living Benefits Rider............................................ 33
Disability Rider................................................. 34
Surrenders....................................................... 34
Charge at the Time Annuity Benefit Payments Begin................ 34
F. Transfer Charge.................................................. 35
GUARANTEE PERIOD ACCOUNTS.............................................. 35
FEDERAL TAX CONSIDERATIONS............................................. 37
A. Qualified and Non-Qualified Contracts............................ 38
B. Taxation of the Contracts in General............................. 38
Withdrawals Prior to Annuitization............................... 38
Annuity Payouts After Annuitization.............................. 38
Penalty on Distribution.......................................... 39
Assignments or Transfers......................................... 39
Non-Natural Owners............................................... 39
Deferred Compensation Plans of State and Local Government and
Tax-Exempt Organizations..................................... 39
C. Tax Withholding.................................................. 40
D. Provisions Applicable to Qualified Employer Plans................ 40
Corporate and Self-Employed Pension and Profit Sharing Plans..... 40
Individual Retirement Annuities.................................. 40
Tax-Sheltered Annuities.......................................... 41
Texas Optional Retirement Program................................ 14
REPORTS................................................................ 41
LOANS (QUALIFIED CONTRACTS ONLY)....................................... 41
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS...................... 41
CHANGES TO COMPLY WITH LAW AND AMENDMENTS.............................. 43
VOTING RIGHTS.......................................................... 43
DISTRIBUTION........................................................... 43
LEGAL MATTERS.......................................................... 44
FURTHER INFORMATION.................................................... 44
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT................. 45
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT........ 46
APPENDIX C -- THE DEATH BENEFIT........................................ 48
</TABLE>

3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
GENERAL INFORMATION AND HISTORY........................................ 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY....................... 3
SERVICES............................................................... 3
UNDERWRITERS........................................................... 3
ANNUITY BENEFIT PAYMENTS............................................... 4
EXCHANGE OFFER......................................................... 5
PERFORMANCE INFORMATION................................................ 7
TAX-DEFERRED ACCUMULATION.............................................. 11
FINANCIAL STATEMENTS................................................... F-1
</TABLE>

THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.

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<PAGE>
SPECIAL TERMS

ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract on any date before the
Annuity Date.

ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.

ANNUITANT: the person designated in the Contract upon whose life annuity
benefit payments are to be made.

ANNUITY DATE: the date on which annuity benefit payments begin as specified
pursuant to the Contract.

ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.

FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.

FIXED ANNUITY PAYOUT: an Annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.

GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.

GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.

GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.

GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.

MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.

OWNER: the person, persons or entity entitled to exercise the rights and
privileges under this Contract. Joint Owners are permitted if one of the two is
the Annuitant.

SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding
portfolio of Investors Fund Series.

SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.

UNDERLYING PORTFOLIOS (OR PORTFOLIOS): Money Market, Total Return High Yield,
Growth, Government Securities, International, Small Cap Growth, Investment Grade
Bond, Value, Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+, Horizon 5,
Global Income and Blue Chip Portfolios of Investors Fund Series.

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 KGC, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and are not chargeable with liabilities arising
out of any other business which the Company may conduct.

VARIABLE ANNUITY PAYOUT: an Annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain of the
Portfolios.

5
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SUMMARY

WHAT IS THE KEMPER GATEWAY CUSTOM VARIABLE ANNUITY?

The Kemper Gateway Custom variable annuity contract is an insurance contract
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Contract combines the concept of
professional money management with the attributes of an annuity contract.
Features available through the Contract include:

- A customized investment portfolio

- 16 IFS Portfolios

- 1 Fixed Account

- 9 Guarantee Period Accounts

- Experienced professional portfolio managers

- Tax deferral on earnings

- Guarantees that can protect your beneficiaries during the accumulation
phase

- Income that can be guaranteed for life.

The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated to the
combination of portfolio of securities ("Portfolios") under your Contract, to
the Guarantee Period Accounts, and to the Fixed Account. You select the
investment options most appropriate for your investment needs. As those needs
change, you may also change your allocation without incurring any tax
consequences. Your Contract's Accumulated Value is based on the investment
performance of the Portfolios and any accumulations in the Guarantee Period and
Fixed Accounts. No income taxes are paid on any earnings under the Contract
unless and until Accumulated Values are withdrawn. In addition, during the
accumulation phase, your beneficiaries receive certain protections and
guarantees in the event of 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
Portfolios, fixed annuity benefit payments with payment amounts guaranteed by
the Company, or a combination of fixed and variable annuity benefit payments.
Among the payout options available during the annuity payout phase are:

- periodic payments for your lifetime (assuming you are the Annuitant);

- periodic payments for your life and the life of another person selected by
you;

- periodic payments for your lifetime with guaranteed payments continuing to
your beneficiary for ten years in the event that you die before the end of
ten years;

- periodic payments over a specified number of years (1 to 30); under this
option you may reserve the right to convert remaining payments to a
lump-sum payout by electing a "commutable" option.

6
<PAGE>
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?

The Contract is between you, (the Owner) and us, Allmerica Financial Life
Insurance and Annuity Company ("the Company"). 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 a beneficiary. As Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual to receive 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 payments stated in "A. Payments."

WHAT ARE MY INVESTMENT CHOICES?

The Contract permits net payments to be allocated among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account.

VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the
following 16 Portfolios of IFS:

For a more detailed description of the Portfolios, see "INVESTMENT
OBJECTIVES AND POLICIES."

GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the
Guarantee Period Accounts are held in the Company's Separate Account GPA, a
non-unitized insulated separate account. Values and benefits calculated on the
basis of Guarantee Period Account allocations, however, are obligations of the
Company's General Account. Amounts allocated to a Guarantee Period Account earn
a Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available nine Guarantee Periods ranging from two to
ten years in duration. Once declared, the Guaranteed Interest Rate will not
change during the duration of the Guarantee Period. If amounts allocated to a
Guarantee Period Account are transferred, surrendered or applied to any annuity
option at any time other than the day following the last day of the applicable
Guarantee Period, a Market Value Adjustment will apply that may increase or
decrease the Account's value. For more information about the Guarantee Period
Accounts and the Market Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."

FIXED ACCOUNT. The Fixed Account is part of the General Account, which
consists of all the Company's assets other than those allocated to the Variable
Account and any other separate account. Allocations to the Fixed Account are
guaranteed as to principal and a minimum rate of interest. Additional excess
interest may be declared periodically at the Company's discretion. Furthermore,
the initial rate in effect on the date an amount is allocated to the Fixed
Account will be guaranteed for one year from that date. For more information
about the Fixed Account see "APPENDIX A. MORE INFORMATION ABOUT THE FIXED
ACCOUNT."

7
<PAGE>

THE GUARANTEE PERIOD ACCOUNTS AND/OR SOME OF THE SUB-ACCOUNTS MAY NOT BE
AVAILABLE IN ALL STATES.

WHO ARE THE PORTFOLIO MANAGERS?

Zurich Kemper Investments, Inc. ("ZKI") is the investment manager of each
Portfolio of IFS other than the Value and Small Cap Value Portfolios which are
managed by Dreman Value Advisors, Inc. ("DVA"), a wholly owned subsidiary of
ZKI. ZKI and DVA provide each Portfolio with continuous professional investment
supervision. DVA is also the sub-adviser for the Value+Growth, Horizon 20+,
Horizon 10+, and Horizon 5 Portfolios. Under the terms of its Sub-Advisory
Agreement with ZKI, DVA will manage the value portion of each of these
Portfolios and will provide such other investment advice, research and
assistance as ZKI may, from time to time, reasonably request. Zurich Investment
Management Limited ("ZIML"), an affiliate of ZKI, is a sub-adviser for certain
Portfolios described below. Under the terms of the Sub-Advisory Agreement
between ZIML and ZKI for the Total Return, High Yield, Growth, International,
Small Cap Growth, Investment Grade Bond, Value+Growth, Horizon, 20+, Horizon
10+, Horizon 5, Global Income and Blue Chip Portfolios, ZIML renders investment
advisory and management services with regard to that portion of a Portfolio's
assets as may be allocated by ZKI to ZIML from time to time for management of
foreign securities. Zurich Investment Management, Inc. ("ZIM"), a wholly owned
subsidiary of ZKI, is the investment manager of the Guarantee Period Accounts
pursuant to an Investment Advisory Agreement between the Company and ZIM.

CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?

Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Portfolios, the Guarantee Period Accounts, and the Fixed
Account. You will incur no current taxes on transfers while your money remains
in the Contract. You also may elect Automatic Account Rebalancing to ensure
assets remain allocated according to a desired mix or choose automatic dollar
cost averaging to gradually move money into one or more Portfolios. See "D.
Transfer Privilege."

WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?

You may surrender your Contract or make withdrawals any time before your
annuity payout phase begins. Each year you can take without a surrender charge
15% of the Contract's Accumulated Value or, if you are both an Owner and the
Annuitant, an amount based on your life expectancy. A 10% tax penalty may apply
on all amounts deemed to be earnings if you are under age 59 1/2. Additional
amounts may be withdrawn at anytime but may be subject to the surrender charge
for payments that have not been invested in the Contract for more than six
years. (A Market Value Adjustment may apply to any withdrawal made from a
Guarantee Period Account prior to the expiration of the Guarantee Period.)

WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?

If 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), a standard Annuitant death benefit will
be paid. The standard Annuitant death benefit is equal to the GREATER of:

- The Accumulated Value increased by any positive Market Value Adjustment;
or

- Gross payments reduced proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal, multiplied by the
withdrawal amount, and divided by the Accumulated Value immediately prior
to the withdrawal).

8
<PAGE>
If the Owner elects the Enhanced Death Benefit Rider, the Annuitant death
benefit will be the greatest of:

- The Accumulated Value increased by any positive Market Value Adjustment;

- Gross payments, with interest accumulating daily at an annual rate of 5%
starting on the date each payment was applied, 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 reduced proportionately
to reflect withdrawals after that date.

A separate charge is made for the Enhanced Death Benefit Rider. See "G.
Death Benefit" under "DESCRIPTION OF THE CONTRACT."

Regardless of whether the Enhanced Death Benefit Rider is in effect, if an
Owner who is not also the Annuitant dies during the Accumulation Phase, the
death benefit will equal the Accumulated Value of the Contract increased by any
positive Market Value Adjustment.

WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?

At each Contract anniversary and upon surrender, if the Accumulated Value is
less than $50,000, the Company will deduct a $35 Contract fee from the Contract.
There will be no Contract fee if the Accumulated Value is $50,000 or more. The
Contract fee is 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 contingent
deferred sales charge. If applicable, this charge will be between 2% and 7% of
payments withdrawn, based on when the payments were made.

Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "C. Premium Taxes."

Currently, the Company makes no charge for processing transfers. The first
12 transfers in a Contract year are guaranteed to be free of a transfer charge.
For each subsequent transfer in a Contract year, the Company reserves the right
to assess a charge which is guaranteed never to exceed $25.

The Company will deduct, on a daily basis, an annual mortality and expense
risk charge and administrative expense charge equal to 0.95% and 0.15%,
respectively, of the average daily net assets invested in each Portfolio. The
Portfolios will incur certain management fees and expenses described more fully
in "Other Charges" and in the IFS prospectus which accompanies this Prospectus.

Three optional riders (Enhanced Death Benefit Rider, Living Benefits Rider,
and Disability Rider) are available for an additional charge of 0.25%, 0.05% and
0.05%, respectively, which is deducted in arrears on a monthly basis. For more
information, see "Living Benefits Rider" and Disability Rider" under "CHARGES
AND DEDUCTIONS," and "G. Death Benefit" under "DESCRIPTION OF THE CONTRACT."

For more information, see "CHARGES AND DEDUCTIONS."

CAN I EXAMINE THE CONTRACT?

Yes. Your Contract will be delivered to you after your purchase. If you
return the Contract to the Company within ten days of receipt, the Contract will
be canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any

9
<PAGE>
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 receive the greater of the
amount described above or your entire payment. See "B. Right to Revoke
Individual Retirement Annuity" and "C. Right to Revoke All Other Contracts."

CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?

There are several changes you can make after receiving your Contract:

- You may assign your ownership to someone else, except under certain
qualified plans.

- You may change the beneficiary, unless you have designated a beneficiary
irrevocably.

- You may change your allocation of payments.

- You may make transfers of Contract value among your current investments
without any tax consequences.

- You may cancel the Contract within ten days of delivery (or longer if
required by law).

10
<PAGE>
ANNUAL AND TRANSACTION EXPENSES

The following tables show charges under your Contract, expenses of the
Sub-Accounts, and expenses of the Portfolios. In addition to the charges and
expenses described below, premium taxes are applicable in some states and
deducted as described under "C. Premium Taxes."

CONTRACT CHARGES

<TABLE>
<CAPTION>
YEARS FROM DATE
OF PAYMENT CHARGE
---------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE: 0-1 7.0%
This charge may be assessed upon surrender, withdrawal or annuitization 2 6.0%
under any commutable period certain option or a non-commutable period 3 5.0%
certain option of less than ten years. The charge is a percentage of 4 4.0%
payments applied to the amount surrendered (in excess of any amount 5 3.0%
that is free of charge) within the indicated time periods. 6 2.0%
Thereafter 0.0%
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 processing costs.
CONTRACT FEE: $35
The Contract 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 a Contract issued to and
maintained by the trustee of a 401(k) plan.
SUB-ACCOUNT EXPENSES:
(on annual basis as percentage of average daily net assets)
Mortality and Expense Risk Charge: 0.95%
Administrative Expense Charge: 0.15%
---------
Total Asset Charge: 1.10%
</TABLE>

<TABLE>
<CAPTION>
PORTFOLIO EXPENSES:
(annual basis as percentage of average daily net assets)
MANAGEMENT OTHER TOTAL
PORTFOLIO FEE EXPENSES EXPENSES
- ----------------------------------------------------------- --------------- ----------- -----------
<S> <C> <C> <C>
Money Market............................................... 0.50% 0.10% 0.60%
Total Return............................................... 0.55% 0.04% 0.59%
High Yield................................................. 0.60% 0.05% 0.65%
Growth..................................................... 0.60% 0.04% 0.64%
Government Securities...................................... 0.55% 0.11% 0.66%
International.............................................. 0.75% 0.21% 0.96%
Small Cap Growth........................................... 0.65% 0.10% 0.75%
Investment Grade Bond...................................... 0.60% 0.25%* 0.85%
Value...................................................... 0.75% 0.20%* 0.95%
Small Cap Value............................................ 0.75% 0.20%* 0.95%
Value+Growth............................................... 0.75% 0.20%* 0.95%
Horizon 20+................................................ 0.60% 0.25%* 0.85%
Horizon 10+................................................ 0.60% 0.20%* 0.80%
Horizon 5.................................................. 0.60% 0.30%* 0.90%
Global Income.............................................. 0.75% 0.30%* 1.05%
Blue Chip.................................................. 0.65% 0.30%* 0.95%
</TABLE>

*Estimated First-Year Expenses

11
<PAGE>
EXAMPLES. The following examples demonstrate the cumulative expenses which
would be paid by the Owner at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets, as required by rules of the SEC. Because the
expenses of the Portfolios differ, separate examples are used to illustrate the
expenses incurred by an Owner on an investment in the various Sub-Accounts.

THE INFORMATION GIVEN UNDER THE FOLLOWING EXAMPLES SHOULD NOT BE CONSIDERED
A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN.

(1) If, at the end of the applicable period, you surrender the Contract or
annuitize* under a commutable variable period certain option or a non-commutable
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:

<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market............................................... $ 79 $ 100 $ 122 $ 201
Total Return............................................... $ 79 $ 100 $ 122 $ 200
High Yield................................................. $ 79 $ 102 $ 125 $ 206
Growth..................................................... $ 79 $ 102 $ 124 $ 205
Government Securities...................................... $ 79 $ 102 $ 125 $ 207
International.............................................. $ 82 $ 111 $ 140 $ 239
Small Cap Growth........................................... $ 80 $ 105 $ 130 $ 217
Investment Grade Bond...................................... $ 81 $ 108 $ 135 $ 227
Value...................................................... $ 82 $ 111 $ 140 $ 238
Small Cap Value............................................ $ 82 $ 111 $ 140 $ 238
Value+Growth............................................... $ 82 $ 111 $ 140 $ 238
Horizon 20+................................................ $ 81 $ 108 $ 135 $ 227
Horizon 10+................................................ $ 81 $ 106 $ 132 $ 222
Horizon 5.................................................. $ 82 $ 109 $ 137 $ 232
Global Income.............................................. $ 83 $ 113 $ 145 $ 248
Blue Chip.................................................. $ 82 $ 111 $ 140 $ 238
</TABLE>

(2) If, at the end of the applicable time period, you annuitize* under a
life option or a non-commutable 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:

<TABLE>
<CAPTION>
UNDERLYING PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Money Market............................................... $ 17 $ 54 $ 92 $ 201
Total Return............................................... $ 17 $ 53 $ 92 $ 200
High Yield................................................. $ 18 $ 55 $ 95 $ 206
Growth..................................................... $ 18 $ 55 $ 94 $ 205
Government Securities...................................... $ 18 $ 55 $ 95 $ 207
International.............................................. $ 21 $ 65 $ 111 $ 239
Small Cap Growth........................................... $ 19 $ 58 $ 100 $ 217
Investment Grade Bond...................................... $ 20 $ 61 $ 105 $ 227
Value...................................................... $ 21 $ 64 $ 110 $ 238
Small Cap Value............................................ $ 21 $ 64 $ 110 $ 238
Value+Growth............................................... $ 21 $ 64 $ 110 $ 238
Horizon 20+................................................ $ 20 $ 61 $ 105 $ 227
Horizon 10+................................................ $ 19 $ 60 $ 103 $ 222
Horizon 5.................................................. $ 20 $ 63 $ 108 $ 232
Global Income.............................................. $ 22 $ 67 $ 115 $ 248
Blue Chip.................................................. $ 21 $ 64 $ 110 $ 238
</TABLE>

12
<PAGE>

As required in rules promulgated under the Investment Company Act of 1940
Act (the "1940 Act"), the Contract fee is reflected in the examples by a method
to show the "average" impact on an investment in the Variable Account. The total
Contract fees collected are divided by the total average net assets attributable
to the Contract. The resulting percentage is 0.03%, and the amount of the
Contract fee is assumed to be $0.30 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.

*The Contract fee is not deducted after annuitization. No contingent
deferred sales charge is assessed at the time of annuitization under an option
including a life contingency or under a non-commutable period certain option of
ten years or longer.

OPTIONAL BENEFIT RIDERS. Subject to state availablity, the Company offers
three optional benefit riders that may be elected by the Owner. A separate
monthly charge is made for each rider selected. The applicable charge is
assessed by multiplying the Accumulated Value on the last day of each month and
on the date a rider is terminated by 1/12th of the following annual percentage
rates:

<TABLE>
<CAPTION>
Enhanced Death Benefit Rider 0.25%
<S> <C>
Disability Rider 0.05%
Living Benefits Rider 0.05%
</TABLE>

For a description of these riders, see "Living Benefits Rider" and
"Disability Rider" under "CHARGES AND DEDUCTIONS," and "Enhanced Death Benefit
Rider" under "G. Death Benefit."

PERFORMANCE INFORMATION

The Contract first was offered to the public in 1997. The Company and IFS,
however, may advertise "Total Return" and "Average Annual Total Return"
performance information based on the periods that the Portfolios have been in
existence. The results for any period prior to the 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 Sub-Accounts, the
Portfolios, and (in TABLE 1) assuming that the Contract is surrendered at the
end of the applicable period.

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 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.

13
<PAGE>
The Total Return, Yield, and Effective Yield figures are adjusted to reflect
the Sub-Account's asset charges. The total return figures also reflect the $35
annual Contract fee and the contingent deferred sales charge which would be
assessed if the investment were completely surrendered at the end of the
specified period.

The Company and IFS also may advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Sub-Account and of the changes in value of the
principal invested (due to realized and unrealized capital gains or losses),
adjusted by the Sub-Account's annual asset charges, and expressed as a
percentage of the investment. Because it is assumed that the investment is NOT
surrendered at the end of the specified period, the contingent deferred sales
charge is NOT included in the calculation of supplemental total return. (See
TABLE 2)

Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity variable accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, who rank such investment products on
overall performance or other criteria; or (3) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.

PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF
A HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE PARTICULAR TIME PERIOD
ON WHICH THE CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE
CONSIDERED IN LIGHT OF THE INVESTMENT OBJECTIVES AND POLICIES, CHARACTERISTICS
AND QUALITY OF THE INVESTMENT PORTFOLIO OF THE 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.

14
<PAGE>
TABLE I
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING COMPLETE SURRENDER OF INVESTMENT)

<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED: 5 INCEPTION IF
UNDERLYING PORTFOLIO 12/31/96 YEARS LESS)*
- ------------------------------------------------------------------------------- ---------- ------------ ------------
<S> <C> <C> <C>
Money Market................................................................... -1.94% 2.52% 4.66%
Total Return................................................................... 8.66% 7.11% 10.72%
High Yield..................................................................... 6.15% 11.52% 9.95%
Growth......................................................................... 13.35% 11.44% 13.26%
Government Securities.......................................................... -4.55% 4.39% 6.54%
International.................................................................. 8.41% N/A 9.27%
Small Cap Growth............................................................... 19.69% N/A 20.20%
Investment Grade Bond.......................................................... N/A N/A -3.25%
Value.......................................................................... N/A N/A 9.62%
Small Cap Value................................................................ N/A N/A -4.85%
Value+Growth................................................................... N/A N/A 7.05%
Horizon 20+.................................................................... N/A N/A 7.77%
Horizon 10+.................................................................... N/A N/A 4.03%
Horizon 5...................................................................... N/A N/A 2.37%
Global Income.................................................................. N/A N/A N/A
Blue Chip...................................................................... N/A N/A N/A
</TABLE>

TABLE 2
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING N0 SURRENDER OF INVESTMENT)

<TABLE>
<CAPTION>
10 YEARS
YEAR (OR SINCE
ENDED: 5 INCEPTION
UNDERLYING PORTFOLIO 12/31/96 YEARS IF LESS)*
- ------------------------------------------------------------------------------------ --------- --------- -----------
<S> <C> <C> <C>
Money Market........................................................................ 3.89% 3.05% 5.76%
Total Return........................................................................ 15.53% 7.56% 12.19%
High Yield.......................................................................... 12.86% 11.90% 12.58%
Growth.............................................................................. 20.35% 11.82% 13.34%
Government Securities............................................................... 1.49% 4.89% 6.54%
International....................................................................... 15.27% N/A 9.69%
Small Cap Growth.................................................................... 26.69% N/A 21.57%
Investment Grade Bond............................................................... N/A N/A 2.87%
Value............................................................................... N/A N/A 16.56%
Small Cap Value..................................................................... N/A N/A 1.17%
Value+Growth........................................................................ N/A N/A 13.82%
Horizon 20+......................................................................... N/A N/A 14.58%
Horizon 10+......................................................................... N/A N/A 10.41%
Horizon 5........................................................................... N/A N/A 8.84%
Global Income....................................................................... N/A N/A N/A
Blue Chip........................................................................... N/A N/A N/A
</TABLE>

*The inception dates for the Portfolios are: 3/5/82 for Money Market, Total
Return and High Yield; 12/9/83 for Growth; 9/3/87 for Government Securities;
1/6/92 for International; 5/2/94 for the Small Cap Growth; 5/1/96 for Investment
Grade Bond, Value, Small Cap Value, Value+Growth, Horizon 20+, Horizon 10+,
Horizon 5; and 5/1/97 for Global Income and Blue Chip.

15
<PAGE>
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND INVESTORS FUND SERIES

THE COMPANY. The Company 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 1-800-782-8380.
The Company is subject to the laws of the State of Delaware governing insurance
companies and to regulation by the Commissioner of Insurance of Delaware. In
addition, the Company is subject to the insurance laws and regulations of other
states and jurisdictions in which it is licensed to operate. As of December 31,
1996, the Company had over $6.7 billion in assets and over $25.8 billion of life
insurance in force.

Effective October 1, 1995, the Company changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company. The
Company is an indirectly wholly owned subsidiary of First Allmerica Financial
Life Insurance Company ("First Allmerica") which, in turn is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1996 First Allmerica and its subsidiaries (including
the Company) had over $13.3 billion in combined assets and over $45.3 billion in
life insurance in force.

VARIABLE ACCOUNT. Separate Account KGC ("Variable Account") is a separate
investment account of the Company with 16 Sub-Accounts. The assets used to fund
the variable portions of the Contract are set aside in Sub-Accounts kept
separate from the general assets of the Company. Each Sub-Account invests in a
corresponding investment series ("Portfolio") of Investors Fund Series. Each
Sub-Account is administered and accounted for as part of the general business of
the Company. The income, capital gains, or capital losses of each Sub-Account,
however, are allocated to each Sub-Account, without regard to any other income,
capital gains or capital losses of the Company. Under Delaware law, the assets
of the Variable Account may not be charged with any liabilities arising out of
any other business of the Company.

The Variable Account was authorized by vote of the Board of Directors of the
Company on June 13, 1996. The Variable Account meets the definition of "separate
account" under federal securities laws, and is registered with the SEC as a unit
investment trust under the 1940 Act. This registration does not involve the
supervision of management or investment practices or policies of the Variable
Account by the SEC.

The Company reserves the right, subject to compliance with applicable law,
to change the names of the Variable Account and the Sub-Accounts.

INVESTORS FUND SERIES. The Variable Account invests in shares of Investors
Fund Series ("IFS"), a series-type mutual fund registered with the SEC as an
open-end management investment company. Registration of IFS does not involve
supervision of its management, investment practices or policies by the SEC. IFS
is designed to provide an investment vehicle for certain variable annuity
contracts and variable life insurance policies. Shares of the Portfolios of IFS
are sold only to insurance company separate accounts.

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INVESTMENT OBJECTIVES AND POLICIES

The investment objectives of the 16 Portfolios of IFS are summarized below:

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.

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.

HIGH YIELD PORTFOLIO seeks to provide a high level of current income by
investing in fixed-income securities.

GROWTH PORTFOLIO seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.

GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with
preservation of capital from a portfolio composed primarily of U.S. Government
securities.

INTERNATIONAL PORTFOLIO seeks total return, a combination of capital growth
and income, principally through an internationally diversified portfolio of
equity securities.

SMALL CAP GROWTH PORTFOLIO seeks maximum appreciation of investors' capital
from a portfolio primarily of growth stocks of smaller companies.

INVESTMENT GRADE BOND PORTFOLIO seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities.

VALUE PORTFOLIO seeks to achieve a high rate of total return from a
portfolio primarily of value stocks of larger companies.

SMALL CAP VALUE PORTFOLIO seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.

VALUE+GROWTH PORTFOLIO seeks growth of capital through professional
management of a portfolio of growth and value stocks.

HORIZON 20+ PORTFOLIO, designed for investors with approximately a 20+ year
investment horizon, seeks growth of capital, with income as a secondary
objective.

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.

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.

GLOBAL INCOME PORTFOLIO seeks high current income consistent with prudent
total return asset management by investing primarily in investment grade foreign
and domestic fixed income securities.

BLUE CHIP PORTFOLIO seeks growth of capital and of income by investing
primarily in common stocks of well capitalized, established companies having
potential for growth of capital, earnings and dividends.

There is no assurance that any of the Portfolios of IFS will achieve its
objective as stated in IFS's prospectus. Each Portfolio is diversified except
the Global Income Portfolio. More detailed information, including a description
of risks involved in investing in each of the portfolios, may be found in the
prospectus for IFS, which must accompany or precede this Prospectus, and IFS's
Statement of Additional Information available upon request from IFS, 222 South
Riverside Plaza, Chicago, IL 60606. Please read the prospectus of IFS carefully
before investing.

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INVESTMENT MANAGEMENT SERVICES

Responsibility for overall management of IFS rests with the Board of
Trustees and officers of IFS. ZKI is the investment manager of each Portfolio
other than the Value and Small Cap Value Portfolios which are managed by DVA, a
wholly owned subsidiary of ZKI. ZKI and DVA provide each Portfolio with
continuous professional investment supervision. DVA is also the sub-adviser for
the Value+Growth, Horizon 20+, Horizon 10+, and Horizon 5 Portfolios. Under the
terms of its Sub-Advisory Agreement with ZKI, DVA will manage the value portion
of each of these Portfolios and will provide such other investment advice,
research and assistance as ZKI may, from time to time, reasonably request. ZIML,
an affiliate of ZKI, is a sub-adviser of certain Portfolios of the Fund
described below. Under the terms of the Sub-Advisory Agreement between ZIML and
ZKI for the Total Return, High Yield, Growth, Global Income, Small Cap Growth,
Investment Grade Bond, Value+Growth, Blue Chip and Horizon Portfolios, ZIML
renders investment advisory and management services with regard to that portion
of a Portfolio's assets as may be allocated by ZKI to ZIML from time to time for
management of foreign securities, including foreign currency transactions and
related investments. Under the terms of the Sub-Advisory Agreement between ZIML
and ZKI for the International and Global Income Portfolios, ZIML renders
investment advisory and management services with regard to that portion of the
Portfolio's assets as may be allocated by ZKI to ZIML from time to time for
management, including services related to foreign securities, foreign currency
transactions and related investments.

For its services, ZKI is paid a management fee based upon the average daily
net assets of such Portfolios, as follows: Money Market (.50 of 1%), Total
Return (.55 of 1%), High Yield (.60 of 1%), Growth (.60 of 1%), Government
Securities (.55 of 1%), International (.75 of 1%), Small Cap Growth (.65 of 1%),
Investment Grade Bond (.60 of 1%), Value+Growth (.75 of 1%), Horizon 20+ (.60 of
1%), Horizon 10+ (.60 of 1%), Horizon 5 (.60 of 1%), Global Income (.75 of 1%)
and Blue Chip (.65 of 1%). DVA serves as the investment manager for the Value
and Small Cap Value Portfolios and is paid a management fee at an annual rate of
.75 of 1% of the average daily net assets of these Portfolios. ZKI pays DVA for
its services as sub-adviser for the Value+Growth Portfolio a sub-advisory fee,
payable monthly, at an annual rate of 0.25% of the average daily net assets of
that Portfolio. ZKI also pays DVA a sub-advisory fee, payable monthly, at an
annual rate of 0.25% of the portion of the average daily assets of each Horizon
Portfolio allocated by ZKI to DVA for management. ZKI pays ZIML for its services
a sub-advisory fee, payable monthly at the following annual rates applied to
that portion of the average daily net assets of the applicable Portfolio
allocated by ZKI to ZIML for management: 0.35% for the Growth, International,
Small Cap Growth, Total Return, Value+Growth, Horizon 20+, Horizon 10+, Horizon
5 and Blue Chip Portfolios; and 0.30% for the High Yield, Investment Grade Bond
and Global Income Portfolios. For more information, see the IFS prospectus and
SAI.

DESCRIPTION OF THE CONTRACT

A. PAYMENTS.

The Company's underwriting requirements, which include receipt of the
initial payment and allocation instructions by the Company at its Principal
Office, must be met before a Contract can be issued. These requirements may also
include the proper completion of an application; however, where permitted, the
Company may issue a Contract without completion of an application for certain
classes of annuity contracts. Payments are to be made payable to the Company. A
net payment is equal to the payment received less the amount of any applicable
tax. The initial net payment will be credited to the Contract as of the date
that all issue requirements are properly met. If all issue requirements are not
complied with within five business days of the Company's

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receipt of the initial payment, the payment will be returned unless the Owner
specifically consents to the holding of the initial payment until completion of
any outstanding issue requirements. Subsequent payments will be credited as of
the Valuation Date received at the Principal Office.

Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least
$2,000. Under a salary deduction or monthly automatic payment plan, the minimum
initial payment is $167. In all cases, 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 Money Market Portfolio.

Generally, unless otherwise requested, all payments will be allocated among
the accounts in the same proportion that the initial net payment is allocated
or, if subsequently changed, according to the most recent allocation
instructions. To the extent permitted by state law, however, if the Contract is
issued as an IRA or is issued in Georgia, Idaho, Indiana, Michigan, Missouri,
North Carolina, Oklahoma, Oregon, South Carolina, Texas, Utah, Washington or
West Virginia, any portion of the initial net payment and of additional net
payments received during the Contract's first 15 days measured from the date of
issue, allocated to any Sub-Account and/or any Guarantee Period Account, will be
held in the Money Market Portfolio until the end of the 15-day period.
Thereafter, these amounts will be allocated as requested.

The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
be honored. The Company will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of an Owner identify themselves by name and identify the Annuitant by
name, date of birth and social security number. All transfer instructions by
telephone are tape recorded.

B. RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY.

An individual purchasing a Contract intended to qualify as an IRA may revoke
the Contract at any time within ten days after receipt of the Contract and
receive a refund. In order to revoke the Contract, the Owner must mail or
deliver the Contract to the agent through whom the Contract was purchased or to
the Principal Office at 440 Lincoln Street, Worcester, MA 01653. Mailing or
delivery must occur on or before ten days after receipt of the Contract for
revocation to be effective.

Within seven days the Company will provide a refund equal to the greater of
(1) gross payments, or (2) the Accumulated Value plus any amounts deducted under
the Contract or by the Portfolios for taxes, charges or fees.

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.

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<PAGE>
C. RIGHT TO REVOKE ALL OTHER CONTRACTS.

In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, an Owner may
revoke the Contract at any time within ten days (20 days in Idaho) after receipt
of the Contract and receive a refund as described under "B. Right to Revoke
Individual Retirement Annuity," above.

In all other states, an Owner may return the Contract at any time within ten
days (or the number of days required by state law if more than ten) after
receipt of the Contract. The Company will pay to the Owner an amount equal to
the sum of (1) the difference between the payment paid, including fees, and any
amount allocated to the Variable Account, and (2) the Accumulated Value of
amounts allocated to the Variable Account as of the date the request is
received. If the Contract was purchased as an IRA, the IRA revocation right
described above may be utilized in lieu of the special surrender right.

D. TRANSFER PRIVILEGE.

At any time prior to the Annuity Date an Owner may have amounts transferred
among all accounts. Transfer values will be effected at the Accumulation Value
next computed after receipt of the transfer order. The Company will make
transfers pursuant to written or telephone requests. As discussed in "A.
Payments," a properly completed authorization form must be on file before
telephone requests will be honored. In Oregon and Massachusetts, payments and
transfers to the Fixed Account are subject to certain restrictions. See
"APPENDIX A. MORE INFORMATION ABOUT THE FIXED ACCOUNT."

Transfers to a Guarantee Period Account must be at least $1,000. If the
amount to be transferred to a Guarantee Period Account is less than $1,000, the
Company may transfer that amount to the Sub-Account which invests in the Money
Market Portfolio.

AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT
REBALANCING OPTIONS. The Owner may elect automatic transfers of a predetermined
dollar amount, not less than $100, on a periodic basis (monthly, bi-monthly,
quarterly, semi-annually or annually) from the Sub-Account investing in the
Money Market Portfolio or the Government Securities Portfolio, or from the Fixed
Account (the source account) to one or more of the Sub-Accounts. Automatic
transfers may not be made into the Fixed Account, the Guarantee Period Accounts
or, if applicable, the Portfolio being used as the source account. If an
automatic transfer would reduce the balance in the source account to less than
$100, the entire balance will be transferred proportionately to the chosen
Portfolios. Automatic transfers will continue until the amount in the source
account on a transfer date is zero or the Owner's request to terminate the
option is received by the Company. If additional amounts are allocated to the
source account after its balance has fallen to zero, this option will not
restart automatically, and the Owner must provide a new request to the Company.

The Owner may request automatic rebalancing of Sub-Account allocations on a
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 the option is received by
the Company.

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The Company reserves the right to limit the number of Portfolios that may be
utilized for automatic transfers and rebalancing, and to discontinue either
option upon advance written notice. The first automatic transfer and all
subsequent transfers of that request in the same Contract year count as one
transfer towards the 12 transfers which are guaranteed to be free of a transfer
charge in each Contract year. Currently, Dollar Cost Averaging and Automatic
Account Rebalancing may not be in effect simultaneously. Either option may be
elected when the Contract is purchased or at a later date.

E. SURRENDER.

At any time prior to the Annuity Date, an Owner may surrender the Contract
and receive an amount equal to the Surrender Value. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The amount payable to the Owner upon surrender
will be based on the Contract's Accumulated Value as of the Valuation Date on
which the request and the Contract are received at the Principal Office.

Before the Annuity Date, a contingent deferred sales 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 a Contract under which a commutable period
certain option is elected may be surrendered. The Surrender Amount is the
commuted value of any unpaid installments, computed on the basis of the assumed
interest rate incorporated in such annuity benefit payments. No contingent
deferred sales 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 right is reserved by the Company 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 Accumulated Value of his or her Contract, subject to the limits stated
below. The Owner must file a signed, written request for withdrawals,
satisfactory to the Company, at the Principal Office. The written request must
indicate the dollar amount the Owner wishes to receive and the accounts from
which such amount is to be withdrawn. The Contract value following the
withdrawal will reflect an amount withdrawn equal to the amount requested by the
Owner plus any

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<PAGE>
applicable contingent deferred sales 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 account, a percentage of
the withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.

Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "E. Surrender."

After the Annuity Date, only a Contract under which future variable annuity
benefit payments are limited to a specified period may be withdrawn. A
withdrawal after the Annuity Date will result in cancellation of a number of
Annuity Units equivalent in value to the amount withdrawn.

For important restrictions on withdrawals which are applicable to Owners who
are participants under Section 403(b) plans or under the Texas ORP, see "FEDERAL
TAX CONSIDERATIONS," "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."

For important tax consequences which may result from withdrawals, see
"FEDERAL TAX CONSIDERATIONS."

SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100, and will be subject to any
applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the 16th day
following the issue date or the date elected, if later. If elected after the
issue date, the Owner may elect, by written request, a specific dollar amount
and the percentage of this amount to be taken from each designated Sub-Account
and/or the Fixed Account, or the Owner may elect to withdraw a specific
percentage of the Accumulated Value calculated as of the withdrawal dates, and
may designate the percentage of this amount which should be taken from each
account. The first withdrawal will take place on the date the written request is
received at the Principal Office or, if later, on a date specified by the Owner.

If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals by written request to the Principal Office only.

LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date an Owner who also
is the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to a life expectancy distribution ("LED") option by returning
a properly signed LED request form to the Principal Office. The LED option
permits the Owner to make systematic withdrawals from the Contract over his or
her lifetime. The amount withdrawn from the Contract changes each year, because
life expectancy changes each year that a person lives. For example, actuarial
tables indicate that a person age 70 has a life expectancy of 16 years, but a
person who attains age 86 has a life expectancy of another 6.5 years.

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If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one) and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner may elect monthly, bi-monthly, quarterly,
semi-annual, or annual distributions, and may terminate the LED option at any
time. The Owner also may elect to receive distributions under a LED option which
is determined on the joint life expectancy of the Owner and a beneficiary. The
Company also may offer other systematic withdrawal options.

If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS," "B. Taxation of the Contracts in General."

G. DEATH BENEFIT.

If the Annuitant dies (or an Owner predeceases the Annuitant) prior to the
Annuity Date while the Contract is in force, the Company will pay the
beneficiary a death benefit, except where the Contract continues as provided in
"H. The Spouse of the Owner as Beneficiary."

DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE.

STANDARD DEATH BENEFIT. Upon the death of the Annuitant (including an Owner
who is also the Annuitant), the standard death benefit is equal to the greater
of:

(a) the Accumulated Value under the Contract increased for any positive
Market Value Adjustment, or

(b) the sum of the gross payments reduced proportionately to reflect
withdrawals. For each withdrawal, the proportionate reduction is
calculated as the death benefit under this option immediately prior to
the withdrawal multiplied by the withdrawal amount and divided by the
Accumulated Value immediately prior to the withdrawal.

ENHANCED DEATH BENEFIT RIDER. At the time of application for the Contract,
the Owner may elect an optional Enhanced Death Benefit Rider. Under the Enhanced
Death Benefit Rider, if the Annuitant dies before the Annuity Date, the death
benefit will be the greatest of:

(a) the Accumulated Value increased by any positive Market Value Adjustment,
or

(b) gross payments accumulated daily at an annual rate of 5%, starting on
the Valuation Date of each payment, reduced proportionately to reflect
withdrawals. For each withdrawal, the proportionate reduction is
calculated as the death benefit under this option immediately prior to
the withdrawal multiplied by the withdrawal amount and divided by the
Accumulated Value immediately prior to the withdrawal, or

(c) the highest Accumulated Value that would have been payable as a death
benefit on the Contract anniversary, increased for subsequent payments,
and decreased proportionately for subsequent withdrawals.

A separate charge is made for an optional Enhanced Death Benefit Rider. On
the last day of each month and on the date the Rider is terminated, a charge
equal to 11/12th of an annual rate of 0.25% is made against the

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Accumulated Value of the Contract at that time. The charge is made through a
pro-rata reduction (based on relative values) of Accumulation Units in the
Sub-Accounts, of dollar amounts in the Fixed Account, and of dollar amounts in
the Guarantee Period Accounts.

DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY
DATE. Under either death benefit, 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 a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.

If distribution of the death benefit is deferred under (1) or (2), any value
in the Guarantee Period Accounts will be transferred to the Sub-Account
investing in the Money Market Portfolio. The excess, if any, of the enhanced
death benefit over the Accumulated Value also will be added to the Money Market
Portfolio. The beneficiary may, by written request, effect transfers and
withdrawals during the deferral period and prior to annuitization under (2), but
may not make additional payments. The death benefit will reflect any earnings or
losses experienced during the deferral period. If there are multiple
beneficiaries, the consent of all is required.

With respect to the death benefit, the Accumulated Value under the Contract
will be based on the unit values next computed after due proof of the death has
been received.

DEATH OF THE ANNUITANT 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.

H. THE SPOUSE OF THE OWNER AS BENEFICIARY.

The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. 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 Money Market Portfolio; (2) the excess, if any, of the death
benefit over the Contract's Accumulated Value also will be added to the Money
Market Portfolio. This value never will be subject to a surrender charge when
withdrawn. Additional payments may be made; however, a surrender charge will
apply to these amounts if they have not been invested in the Contract for more
than 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 upon such new Owner's death.

I. ASSIGNMENT.

The Contract, other than those sold in connection with certain qualified
plans, may be assigned by the Owner at any time prior to the Annuity Date and
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

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<PAGE>
filed at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay to the
assignee, in one sum, that portion of the Surrender Value of the Contract to
which the assignee appears to be entitled. The Company will pay the balance, if
any, in one sum to the Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.

J. ELECTING THE FORM OF ANNUITY AND ANNUITY DATE.

The Annuity Date is selected by the Owner. To the extent permitted in your
state, 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 new
Annuity Date. 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. 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 payout option selected. See "FEDERAL TAX CONSIDERATIONS" for
further information.

Subject to certain restrictions described below, the Owner has the right (1)
to select the annuity payout option under which annuity benefit payments are to
be made, and (2) to determine whether payments are to be made on a fixed basis,
a variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the Accounts
selected.

To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account, and the annuity benefit payments will be fixed
in amount. See "APPENDIX A. MORE INFORMATION ABOUT THE FIXED ACCOUNT."

Under a variable annuity, 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 meet 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
non-commutable "period certain" may elect instead to receive a lump sum
settlement. See "K. Description of Variable Annuity Payout Options."

If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity payout option can be made up to one month prior to the
Annuity Date.

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<PAGE>
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 Investment Grade Bond, Value+Growth, Horizon 10+
and Horizon 5 Portfolios. The Company also provides these same options funded
through the Fixed Account (fixed-amount annuity option). Regardless of how
payments were allocated during the accumulation period, any of the variable
annuity options or the fixed-amount options may be selected, or any of the
variable annuity payout options may be selected in combination with any of the
fixed-amount annuity payout options. Other annuity options may be offered by the
Company. IRS regulations may not permit certain of the available annuity options
when used in connection with certain qualified Contracts.

VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the payee with the
guarantee that if the payee 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. It would be possible under this option for the Annuitant to
receive only one annuity benefit payment if the Annuitant dies prior to the due
date of the second annuity benefit payment, two annuity benefit payments if the
Annuitant dies before the due date of the third annuity benefit payment, and so
on. Payments will continue, however, during the lifetime of the Annuitant, no
matter how long he or she lives.

UNIT FUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically
during the lifetime of the payee 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 divided by the dollar
amount of the first payment, and

(2) is the number of payments paid prior to the death of the payee.

JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees 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 in 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 two payees 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 or the beneficiary in
the Contract. There is no minimum number of payments under this option.

PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic
payments for a stipulated number of years ranging from one to 30. This option
may be commutable, that is, the payee reserves the right to receive a lump sum
in place of installments, or it becomes non-commutable. The payee must reserve
this right at the time benefits begin.

It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under the period
certain option to elect to convert to a variable annuity

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<PAGE>

involving a life contingency. The Company may discontinue or change this
practice at any time, but not with respect to election of the option made prior
to the date of any change in this practice. See "FEDERAL TAX CONSIDERATIONS" for
a discussion of the possible adverse tax consequences of selecting a period
certain option.

L. ANNUITY BENEFIT PAYMENTS.

THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a
measure of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity payout 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 product of (1) the net
investment factor of the Sub-Account for the current Valuation Period, and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity payout
options offered in the Contract.

DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The
first periodic annuity benefit payment is based upon the Accumulated Value as of
a date not more than four weeks preceding the date that the first annuity
benefit payment is due. Variable annuity benefit payments are due on the first
of a month, which is the date the payment is to be received by the Annuitant,
and currently are based on unit values as of the 15th day of the preceding
month.

The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life contingency options and non-commutable period certain options of
ten or more years, the annuity value is the Accumulated Value less any premium
taxes and adjusted for any Market Value Adjustment. For commutable period
certain options or any period certain option less than ten years, the value is
Surrender Value less any premium tax. For a death benefit annuity, the annuity
value will be the amount of the death benefit. The annuity rates in the Contract
are based on a modification of the 1983(a) Individual Mortality Table on rates.

The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity payout option. The
variable annuity payout options offered by the Company are based on a 3.5%
assumed interest rate. Variable payments are affected by the assumed interest
rate used in calculating the annuity option rates. Variable annuity benefit
payments will increase over periods when the actual net investment result of the
Sub-Accounts funding the annuity exceeds the equivalent of the assumed interest
rate for the period. Variable annuity benefit payments will decrease over
periods when the actual net investment result of the respective Sub-Account is
less than the equivalent of the assumed interest rate for the period.

The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
is determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than ten years, the Surrender Value less premium taxes, if any,
is used rather than the Accumulated Value. The dollar amount of the first
variable annuity benefit payment then is divided by the value of an Annuity Unit
of the selected Sub-Accounts to determine the number of Annuity Units
represented by the first payment. This number of Annuity Units remains fixed
under all

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<PAGE>
annuity options except the joint and two-thirds survivor annuity option. For
each subsequent payment, the dollar amount of the variable annuity benefit
payment is determined by multiplying this fixed number of Annuity Units by the
value of an Annuity Unit on the applicable Valuation Date.

After the first benefit payment, the dollar amount of each periodic variable
annuity benefit payment will vary with subsequent variations in the value of the
Annuity Unit of the selected Sub-Accounts. The dollar amount of each fixed
amount annuity benefit payment is fixed and will not change, except under the
joint and two-thirds survivor annuity option.

From time to time, the Company may offer Owners both fixed and variable
annuity rates more favorable than those contained in the Contract. Any such
rates will be applied uniformly to all Owners of the same class.

For an illustration of variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.

M. NORRIS DECISION.

In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States
Supreme Court ruled that, in connection with retirement benefit options offered
under certain employer-sponsored employee benefit plans, annuity options based
on sex-distinct actuarial tables are not permissible under Title VII of the
Civil Rights Act of 1964. The ruling requires that benefits derived from
contributions paid into a plan after August 1, 1983 be calculated without regard
to the sex of the employee. Annuity benefits attributable to payments received
by the Company under a Contract issued in connection with an employer-sponsored
benefit plan affected by the NORRIS decision will be based on the greater of (1)
the Company's unisex non-guaranteed current annuity payout option rates, or (2)
the guaranteed unisex rates described in such Contract, regardless of whether
the Annuitant is male or female.

N. COMPUTATION OF VALUES.

THE ACCUMULATION UNIT. Each net payment is allocated to the accounts
selected by the Owner. Allocations to the Sub-Accounts are credited to the
Contract in the form of Accumulation Units. Accumulation Units are credited
separately for each Sub-Account. The number of Accumulation Units of each
Sub-Account credited to the Contract is equal to the portion of the net payment
allocated to the Sub-Account, divided by the dollar value of the applicable
Accumulation Unit as of the Valuation Date the payment is received in good order
at the Company's Principal Office. The number of Accumulation Units resulting
from each payment will remain fixed unless changed by a subsequent split of
Accumulation Unit value, a transfer, a withdrawal, or surrender. The dollar
value of an Accumulation Unit of each Sub-Account varies from Valuation Date to
Valuation Date based on the investment experience of that Sub-Account, and will
reflect the investment performance, expenses and charges of its Portfolios. The
value of an Accumulation Unit 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.

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<PAGE>

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 0.95% on an annual
basis of the daily value of the Sub-Account's assets; and

(4) is an administrative charge of 0.15% on an annual basis of the daily
value of the Sub-Account's assets.

The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of Accumulation Unit calculation using a
hypothetical example see the SAI.

CHARGES AND DEDUCTIONS

Deductions under the Contract and charges against the assets of the
Sub-Accounts are described below. Other deductions and expenses paid out of the
assets of the Portfolios are described in the prospectus and SAI of IFS.

A. VARIABLE ACCOUNT DEDUCTIONS.

MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 0.95% on
an annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
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 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.

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 0.55% for mortality risk and
0.40% for expense risk.

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<PAGE>
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation phase and the
annuity payout phase. The daily administrative expense charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given Contract and
the amount of expenses actually attributable to that Contract.

Deductions for the Contract fee (described under "B. Contract Fee") and for
the administrative expense charge are designed to reimburse the Company for the
cost of administration and related expenses and are not expected to be a source
of profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
limited to, clerical, accounting, actuarial and legal services, rent, postage,
telephone, office equipment and supplies, expenses of preparing and printing
registration statements, expense of preparing and typesetting prospectuses and
the cost of printing prospectuses not allocable to sales expense, filing and
other fees.

OTHER CHARGES. Because the Sub-Accounts hold shares of the Portfolios, the
value of the net assets of the Sub-Accounts will reflect the investment advisory
fee and other expenses incurred by the Portfolios. The prospectus and SAI of the
Underlying Portfolios contain additional information concerning expenses of the
Portfolios.

B. CONTRACT FEE.

A $35 Contract fee currently is deducted on the Contract anniversary date
and upon full surrender of the Contract when the Accumulated Value is less than
$50,000. The Contract fee is waived for Contract issued to and maintained by the
trustee of a 401(k) plan. Where Contract value has been allocated to more than
one account, a percentage of the total Contract fee will be deducted from the
value in each account. The portion of the charge deducted from each account will
be equal to the percentage which the value in that account bears to the
Accumulated Value under the Contract. The deduction of the Contract fee from a
Sub-Account will result in cancellation of a number of Accumulation Units equal
in value to the percentage of the charge deducted from that account.

Where permitted by law, the Contract fee also may be waived for Contracts
where, on the issue date, either the Owner or the Annuitant is within the
following classes of individuals; employees and registered representatives of
any broker-dealer which has entered into a sales agreement with the Company to
sell the Contract; employees of the Company, its affiliates and subsidiaries;
officers, directors, trustees and employees of any of the Portfolios; investment
managers or Sub-Advisers; and the spouses of and immediate family members
residing in the same household with such eligible persons. "Immediate family
members" means children, siblings, parents and grandparents.

C. OPTIONAL BENEFIT RIDERS.

Subject to state availability, the Company offers three optional benefit
riders that may be elected by the Owner. A separate monthly charge is made for
each rider selected. On the last day of each month and on the date the rider is
terminated, a charge equal to 11/12th of an 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 (based on relative values in Accumulation
Units of the Sub-Accounts, of dollar amounts in the Fixed Account, and of dollar
amounts in the Guarantee Period Accounts).

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<PAGE>
The applicable charge is assessed on the Accumulated Value on the last day
of each month and on the date a rider is terminated, multiplied by 11/12th of
the following annual percentage rates:

<TABLE>
<S> <C>
Enhanced Death Benefit Rider............................................ 0.25%
Living Benefits Rider................................................... 0.05%
Disability Rider........................................................ 0.05%
</TABLE>

For a description of these riders, see "Living Benefits Rider" and
"Disability Rider" under "E. Contingent Deferred Sales Charge," below, and "G.
Death Benefit" under "DESCRIPTION OF THE CONTRACT."

D. PREMIUM TAXES.

Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. The Company makes a
charge for state and municipal premium taxes, when applicable, and deducts the
amount paid as a premium tax charge. The current practice of the Company is to
deduct the premium tax charge in one of two ways:

(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for these Contracts at the time the payments are
received); or

(2) the premium tax charge is deducted when annuity benefit payments begin.

In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law. If no amount for premium tax was deducted
at the time the payment was received, but subsequently tax is determined to be
due prior to the Annuity Date, the Company reserves the right to deduct the
premium tax from the Contract value at the time such determination is made.

E. CONTINGENT DEFERRED SALES CHARGE.

No charge for sales expense is deducted from payments at the time the
payments are made. A contingent deferred sales charge is deducted from the
Accumulated Value of the Contract, however, 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 contingent deferred sales 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 not defined as New Payments;
and (3) Earnings -- the amount of Contract Value in excess of all payments that
have not been surrendered previously. For purposes of determining the amount of
any contingent deferred sales charge, surrenders will be deemed to be taken
first from the withdrawal without surrender charge amount; then from Old
Payments, and then from New Payments. The withdrawal without surrender charge
amount, followed by Old Payments may be withdrawn from the Contract at any time
without the imposition of a contingent deferred sales charge. If a withdrawal is
attributable all or in part to New Payments, a contingent deferred sales charge
may apply.

An Owner may withdraw 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 in any calendar year, the
amount withdrawn in excess of 15% is 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 contingent deferred sales charge may be

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<PAGE>
imposed. This surrender charge never will be applied to earnings. The amount of
the charge will depend upon the number of years that the New Payments, if any,
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 earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the FIFO method of accounting. (See "FEDERAL TAX CONSIDERATIONS" for
a discussion of how withdrawals are treated for income tax purposes.)

The Contingent Deferred Sales Charges are as follows:

<TABLE>
<CAPTION>
CHARGE AS PERCENTAGE OF
YEARS FROM DATE OF PAYMENT NEW PAYMENTS WITHDRAWN
- ----------------------------------------------------------------------------- -------------------------
<S> <C>
Less than 1.................................................................. 7%
2............................................................................ 6%
3............................................................................ 5%
4............................................................................ 4%
5............................................................................ 3%
6............................................................................ 2%
Thereafter................................................................... 0%
</TABLE>

The amount withdrawn equals the amount requested by the Owner plus the
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total contingent deferred sales charge
exceed a maximum limit of 7% of total gross New Payments. Such total charge
equals the aggregate of all applicable contingent deferred sales charges for
surrender, withdrawals and annuitization.

REDUCTION OR ELIMINATION OF SURRENDER CHARGE. From time to time, where
permitted by state law, the Company may allow a reduction in or elimination of
the contingent deferred sales 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 contingent deferred sales 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 and subsidiaries; officers, directors,
trustees and employees of any of the Portfolios, investment managers or
sub-advisers; and the spouses of and immediate family members residing in the
same household with such eligible persons. "Immediate family members" means
children, siblings, parents and grandparents. Finally, contingent deferred sales
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.

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<PAGE>

Any reduction or elimination in the amount or duration of the contingent
deferred sales charge will not discriminate unfairly among purchasers of the
Contract. The Company will not make any changes to this charge where prohibited
by law.

Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the
contingent deferred sales 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
contingent deferred sales charge, if any, on an amount ("Withdrawal Without
Surrender Charge") equal to the greater of (1) and (2) where:

(1) 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 contingent deferred sales charge was applied; and

(2) 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, would have a Free Withdrawal Amount of $2,250, which is equal to the
greater of:

(1) 15% of Accumulated Value ($2,250); or

(2) 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 LIFO basis. If more than one withdrawal is made
during the year, on each subsequent withdrawal the Company will waive the
contingent deferred sales load, 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.

LIVING BENEFITS RIDER. For a separate monthly charge, an optional Living
Benefits Rider may be elected at the time of application for the Contract. Under
this rider, the surrender charge will be waived if the Owner (or the Annuitant
if the Owner is not a person):

(1) is admitted to a "medical care facility" after the issue date of the
Contract and remains confined there until the later of one year after the
issue date, or 90 consecutive days;

(2) is first diagnosed by a licensed "physician" as having a "fatal Illness"
after the issue date of the Contract; or

(3) commencing one year after issue of the Contract, is confined to a
hospice or receives home health care services, with certification from a
licensed physician that the confinement to the hospice or receipt of home
health care services is expected to continue until death.

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
inpatient care when it is prescribed in writing by a licensed "physician" and
based on physical limitations which

33
<PAGE>

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 contingent deferred sales charges have been waived under this rider,
no additional payments under the Contract will be accepted.

On the last day of each month and on the date the rider is terminated, a
charge equal to 11/12th of an annual rate of 0.05% is made against the
Accumulated Value of the Contract at that time. The charge is made through a
pro-rata reduction in Accumulation Units of the Sub-Accounts, of dollar amounts
in the Fixed Account, and of dollar amounts in the Guarantee Period Accounts,
based on relative values.

DISABILITY RIDER. For a separate monthly charge, an optional Disability
Rider may be elected at the time of application for the Contract. Under this
rider, the surrender charge will be waived if the Owner (or the Annuitant if the
Owner is not a person) is physically disabled after the issue date of the
Contract and before attaining age 65. The Company may require proof of
continuing disability, including written confirmation of receipt and approval of
any claim for Social Security disability benefits, and reserves the right to
obtain, at its expense, an examination by a licensed physician of its choice.

Where contingent deferred sales charges have been waived under this rider,
no additional payments under the Contract will be accepted.

SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Contract, net of the
applicable contingent deferred sales charge on New Payments, the Contract fee
and any applicable tax withholding and adjusted for any applicable Market Value
Adjustment. Subject to the same rules applicable to withdrawals, the Company
will not assess a contingent deferred sales 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 contingent deferred sales 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 "D. Surrender" and "F.
Withdrawals" under "DESCRIPTION OF THE CONTRACT," and see "FEDERAL TAX
CONSIDERATIONS."

CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the 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.")

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No contingent deferred sales charge is imposed at the time of annuitization
in any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. 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 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 contingent deferred
sales 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.

E. TRANSFER CHARGE.

The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year. For more
information, see "D. Transfer Privilege."

GUARANTEE PERIOD ACCOUNTS

Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Fixed Account are not
registered as an investment company under the provisions of the Securities Act
of 1933 (the "1933 Act") or the 1940 Act. Accordingly, the staff of the SEC has
not reviewed the disclosures in this Prospectus relating to the Guarantee Period
Accounts or the Fixed Account. Nevertheless, disclosures regarding the Guarantee
Period Accounts and the Fixed Account of the Contract or any benefits offered
under these accounts may be subject to the provisions of the 1933 Act relating
to the accuracy and completeness of statements made in the Prospectus.

INVESTMENT OPTIONS. In most jurisdictions, there currently are nine
Guarantee Periods available under the Contract with durations ranging from two
through ten years. Each Guarantee Period Account established for the Owner is
accounted for separately in a non-unitized segregated account. Each Guarantee
Period Account provides for the accumulation of interest at a Guaranteed
Interest Rate. The Guaranteed Interest Rate on amounts allocated or transferred
to a Guarantee Period Account is determined from time to time by the Company in
accordance with market conditions; however, once an interest rate is in effect
for a Guarantee Period Account, the Company may not change it during the
duration of the Guarantee Period. In no event will the Guaranteed Interest Rate
be less than 3%.

To the extent permitted by law, the Company reserves the right at any time
to offer Guarantee Periods with durations that differ from those which were
available when a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period. Owners may
allocate net payments or make transfers from any of the Sub-Accounts, the Fixed
Account or an existing Guarantee Period Account to establish a new Guarantee
Period Account at any time prior to the Annuity Date. (In Oregon and
Massachusetts, payments and transfers to the Fixed Account are subject to
certain restrictions. See APPENDIX A.) Transfers from a Guarantee Period Account
on any date other than on the day following the expiration of that Guarantee
Period will be subject to a Market Value Adjustment. The Company establishes a
separate investment account each time the Owner allocates or transfers amounts
to a Guarantee Period Account except that amounts allocated to the same
Guarantee Period on the same day will be treated as one Guarantee Period
Account. The minimum

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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 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 the
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 Money Market Portfolio. Where amounts have been
renewed automatically in a new Guarantee Period, it is the Company's current
practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of a Market Value Adjustment.

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." A Market
Value Adjustment will apply to all other transfers, withdrawals or a surrender.
Amounts applied under an annuity option are treated as withdrawals when
calculating the Market Value Adjustment. The Market Value Adjustment will be
determined by multiplying the amount taken from each Guarantee Period Account
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)](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

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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.

PROGRAM TO PROTECT PRINCIPAL AND PROVIDE GROWTH POTENTIAL. Under this
feature, the Owner elects a Guarantee Period and one or more Sub-Accounts. The
Company then will compute the proportion of the initial payment that must be
allocated to the Guarantee Period selected, assuming no transfers or
withdrawals, in order to ensure that on the last day of the Guarantee Period it
will equal the amount of the entire initial payment. The required amount then
will be allocated to the pre-selected Guarantee Period Account and the remaining
balance to the other investment options selected by the Owner in accordance with
the procedures described in "A. Payments."

WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals". In addition, the following 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 contingent deferred
sales charge applies to the withdrawal, it will be calculated as set forth under
"E. Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.

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.

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.

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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.

The IRS has issued regulations relating to the diversification requirements
for variable annuity and variable life insurance contracts under Section 817(h)
of the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are adequately diversified if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, 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 Portfolios will comply with the
diversification requirements.

A. QUALIFIED AND NON-QUALIFIED CONTRACTS.

From a federal tax viewpoint there are two types of variable annuity
contracts: "qualified" contracts and "non-qualified" contracts. A qualified
contract is one that is purchased in connection with a retirement plan which
meets the requirements of Sections 401, 403, or 408 of the Code, while a
non-qualified contract is one that is not purchased in connection with one of
the indicated retirement plans. The tax treatment for certain withdrawals or
surrenders will vary according to whether they are made from a qualified
contract or a non-qualified contract. For more information on the tax provisions
applicable to qualified Contracts, see "D. Provisions Applicable to Qualified
Employer Plans."

B. TAXATION OF THE CONTRACTS IN GENERAL.

The Company believes that the Contract described in this Prospectus will,
with certain exceptions (see "Non-Natural Owner," below), be considered an
annuity contract under Section 72 of the Code. This section governs the taxation
of annuities. The following discussion concerns annuities subject to Section 72.

WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase
in the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
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.

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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, 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 the LED option prior to age 59 1/2. Subsequent Private Letter Rulings,
however, have treated LED-type withdrawal programs as effectively avoiding the
10% penalty tax. The position of the IRS on this issue is unclear.

ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. 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.

NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.

DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986,

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<PAGE>
a contract owned by a state or local government or a tax-exempt organization
will not be treated as an annuity under Section 72 as well. In addition, plan
assets are treated as property of the employer and are subject to the claims of
the employer's general creditors.

C. TAX WITHHOLDING.

The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.

The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.

D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.

The tax rules applicable to qualified employer plans, as defined by the
Code, are complex and vary according to the type of plan. Benefits under a
qualified plan 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"). IRAs are subject to limits on the amounts
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from other types
of retirement plans may be "rolled over," on a tax-deferred basis, to an IRA.
Purchasers of an IRA Contract will be provided with supplementary information as
may be required by the IRS or other appropriate agency, and will have the right
to revoke the Contract as described in this Prospectus. See "B. Right to Revoke
Individual Retirement Annuity."

Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
IRAs. Employer contributions that may be made to such plans are larger than the
amounts that may be contributed to regular IRAs, and may be deductible to the
employer.

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TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of
the Code, payments made to annuity contracts purchased for employees under
annuity plans adopted by public school systems and certain organizations which
are tax exempt under Section 501(c)(3) of the Code are excludable from the gross
income of such employees to the extent that total annual payments do not exceed
the maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.

Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA Contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.

TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA Contract
issued to participants in the Texas Optional Retirement Program may not be
received except in the case of the participant's death, retirement or
termination of employment in the Texas public institutions of higher education.
These additional restrictions are imposed under the Texas Government Code and a
prior opinion of the Texas Attorney General.

REPORTS

An Owner is sent a report semi-annually which states certain financial
information about the Portfolios. The Company also will furnish an annual report
to the Owner containing a statement of his or her account, including unit values
and other information as required by applicable law, rules and regulations.

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 Money Market Portfolio
instead.

ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS

The Company reserves the right, subject to applicable law and to the
provision of the participation agreement with the Company, IFS, ZKI, and Kemper
Distributors, Inc. (the "Participation Agreement"), to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-

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Accounts may purchase. If the shares of any Portfolio no longer are available
for investment or if in the Company's judgment further investment in any
Portfolio should become inappropriate in view of the purposes of the Variable
Account or the affected Sub-Account, the Company may redeem the shares of that
Portfolio and substitute shares of another registered open-end management
company. The Company will not substitute any shares attributable to a Contract
interest in a Sub-Account without notice to the Owner and prior approval of the
SEC and state insurance authorities, to the extent required by the 1940 Act or
other applicable law. The Variable Account may, to the extent permitted by law,
purchase other securities for other contracts or permit a conversion between
contracts upon request by an Owner.

The Company also reserves the right to establish additional sub-accounts of
the Variable Account, each of which would invest in shares corresponding to a
new portfolio or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.

Shares of the Portfolios also are issued to separate accounts of other
insurance companies which issue variable life contracts ("mixed funding").
Shares of the Portfolios also are issued to other unaffiliated insurance
companies ("shared funding"). It is conceivable that in the future such mixed
funding or shared funding may be disadvantageous for variable life owners or
variable annuity owners. Although the Company and IFS do not currently foresee
any such disadvantages to either variable life insurance owners or variable
annuity owners, the Company and the trustees of IFS intend to monitor events in
order to identify any material conflicts between such Owners and to determine
what action, if any, should be taken in response thereto. If the trustees were
to conclude that separate portfolios should be established for variable life and
variable annuity separate accounts, the Company will bear the attendant
expenses.

If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change, and will notify Owners of all such changes. If the Company deems it to
be in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration no longer is required, or may be combined with
other sub-accounts or other separate accounts of the Company.

The Company reserves the right, subject to compliance with applicable law
and to the provisions of the Participation Agreement, to (1) transfer assets
from the Variable Account or Sub-Account to another of the Company's variable
accounts or sub-accounts having assets of the same class, (2) to operate the
Variable Account or any Sub-Account as a management investment company under the
1940 Act or in any other form permitted by law, (3) to deregister the Variable
Account under the 1940 Act in accordance with the requirements of the 1940 Act,
(4) to substitute the shares of any other registered investment company for the
Portfolio shares held by a Sub-Account, in the event that Portfolio shares are
unavailable for investment, or if the Company determines that further investment
in such Portfolio shares is inappropriate in view of the purpose of the
Sub-Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the
Sub-Accounts. In no event will the changes described be made without notice to
Owners in accordance with the 1940 Act.

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CHANGES TO COMPLY WITH LAW AND AMENDMENTS

The Company reserves the right, without the consent of Owners, to suspend
sales of the Contract as presently offered, 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 regulations, including but not limited to requirements
for annuity contracts and retirement plans under the Code and pertinent
regulations or any state statute or regulation.

VOTING RIGHTS

The Company will vote 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 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 Portfolio. During the
accumulation phase, the number of Portfolio shares attributable to each Owner
will be determined by dividing the dollar value of the Accumulation Units of the
Sub-Account credited to the Contract by the net asset value of one Portfolio
share. During the annuity payout phase, the number of Portfolio shares
attributable to each 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 Portfolio share. Ordinarily, the Annuitant's voting interest in the
Portfolio will decrease as the reserve for the variable annuity is depleted.

DISTRIBUTION

The Contract offered by this Prospectus may be purchased from certain
independent broker-dealers, including representatives of Allmerica Investments,
Inc. (the Principal Underwriter) which are registered under the Securities
Exchange Act of 1934 and are members of the National Association of Securities
Dealers, Inc. ("NASD").

The Company pays commissions, not to exceed 6.0% of payments, to
broker-dealers which 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 contingent deferred sales charges and profits from
the Company's General Account. 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 contingent deferred sales charges
assessed on a Contract will be retained by the Company.

43
<PAGE>
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.

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.

44
<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 amount in excess of the Withdrawal
Without Surrender Charge Amount is withdrawn while the Contract is in force and
before the Annuity Date, a contingent deferred sales 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.

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 Money Market Portfolio.

In Oregon, no payments to the Fixed Account will be permitted if the
Contract is issued after the Annuitant's 81st birthday.

45
<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 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 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 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, 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)](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 (2555 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.

46
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)

Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10

<TABLE>
<S> <C>
The market value factor = [(1 + i)/(1 + j)](n/365) - 1
= [(1 + .08)/(1 + .10)](2555/365) - 1
= (.98182)(7) - 1
= -.12054
The market value = the market value factor multiplied by the withdrawal
adjustment
= -.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>
<S> <C>
The market value factor = [(1 + i)/(1 + j)](n/365) - 1
= [(1 + .08)/(1 + .07)](2555/365) - 1
= (1.0093)(7) - 1
= .06694
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06694 X $62,985.60
= $4,216.26
</TABLE>

NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)

Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11

<TABLE>
<S> <C>
The market value factor = [(1 + i)/(1 + j)](n/365) - 1
= [(1 + .08)/(1 + .11)](2555/365) - 1
= (.97297)(7) - 1
= -.17454
The market value = Minimum of the market value factor multiplied by the
adjustment 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>

POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)

Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06

<TABLE>
<S> <C>
The market value factor = [(1 + i)/(1 + j)](n/365) - 1
= [(1 + .08)/(1 + .06)](2555/365) - 1
= (1.01887)(7) - 1
= .13981
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25)
= $8,349.25
</TABLE>

47
<PAGE>
APPENDIX C
THE DEATH BENEFIT

PART 1: DEATH OF THE ANNUITANT -- WITHOUT ENHANCED DEATH BENEFIT RIDER

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. The table below presents examples of
the death benefit based on the hypothetical Accumulated Values.

<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT
- --------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1 53,000.00 0.00 53,000.00 50,000.00 53,000.00
2 53,530.00 500.00 54,030.00 50,000.00 54,030.00
3 58,883.00 0.00 58,883.00 50,000.00 58,883.00
4 52,994.70 500.00 53,494.70 50,000.00 53,494.70
5 58,294.17 0.00 58,294.17 50,000.00 58,294.17
6 64,123.59 500.00 64,623.59 50,000.00 64,623.59
7 70,535.95 0.00 70,535.95 50,000.00 70,535.95
8 77,589.54 500.00 78,089.54 50,000.00 78,089.54
9 85,348.49 0.00 85,348.49 50,000.00 85,348.49
10 93,883.34 0.00 93,883.34 50,000.00 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 reduced proportionately to reflect
withdrawals.

The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a) or
(b).

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. The table
below presents examples of the death benefit based on the hypothetical
Accumulated Values.

<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT
- --------- ------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 0.00 53,000.00 50,000.00 53,000.00
2 53,530.00 0.00 500.00 54,030.00 50,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,297.21 3,883.00
4 3,494.70 0.00 500.00 3,994.70 3,297.21 3,297.21
5 3,844.17 0.00 0.00 3,844.17 3,297.21 3,297.21
6 4,228.59 0.00 500.00 4,728.59 3,297.21 4,728.59
7 4,651.45 0.00 0.00 4,651.45 3,297.21 3,297.21
8 5,116.59 0.00 500.00 5,616.59 3,297.21 5,616.59
9 5,628.25 0.00 0.00 5,628.25 3,297.21 5,628.25
10 691.07 5,000.00 0.00 691.07 368.05 691.07
</TABLE>

Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.

Death Benefit (b) is the gross payments reduced proportionately to reflect
withdrawals.

The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a) or
(b).

48
<PAGE>
PART 2: DEATH OF THE ANNUITANT -- WITH ENHANCED DEATH BENEFIT RIDER

DEATH BENEFIT ASSUMING NO WITHDRAWALS

<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- --------- ------------- ------------- ------------ ------------ ------------ ------------
<C> <S> <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 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).

DEATH BENEFIT ASSUMING WITHDRAWALS

<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWAL ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- --------- ------------- ------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 53,000.00 0.00 0.00 53,000.00 52,500.00 50,000.00 53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,816.94 3,635.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 4,007.79 3,883.00 4,007.79
5 3,844.17 0.00 0.00 3,844.17 4,208.18 4,007.79 4,208.18
6 4,228.59 0.00 500.00 4,728.59 4,418.59 4,208.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 4,639.51 4,728.59 4,728.59
8 5,116.59 0.00 500.00 5,616.59 4,871.49 4,728.59 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,115.07 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 599.51 628.25 691.07
</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 5%, reduced
proportionately to reflect withdrawals.

49
<PAGE>
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).

PART 3: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT (with or without Enhanced
Death Benefit)

<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
- --------- ------------- ------------- ------------
<C> <S> <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.

50
<PAGE>

ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY

STATEMENT OF ADDITIONAL INFORMATION

FOR

FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS FUNDED
THROUGH

SUB-ACCOUNTS OF

SEPARATE ACCOUNT KGC

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS FOR SEPARATE ACCOUNT KGC DATED MAY 1,
1997 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ALLMERICA
INVESTMENTS, INC., 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653,
TELEPHONE 1-800-782-8380.

DATED: MAY 1, 1997

<PAGE>

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 7

TAX-DEFERRED ACCUMULATION. . . . . . . . . . . . . . . . . . . . . . . . . . 11

FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

GENERAL INFORMATION AND HISTORY

Separate Account KGC (the "Variable Account") is a separate investment account
of Allmerica Financial Life Insurance and Annuity Company (the "Company")
authorized by vote of the Board of Directors on June 13, 1996. The Company is a
life insurance company organized under the laws of Delaware in July 1974. Its
Principal Office is located at 440 Lincoln Street, Worcester, Massachusetts
01653, telephone 508-855-1000. The Company is subject to the laws of the State
of Delaware governing insurance companies and to regulation by the Commissioner
of Insurance of Delaware. In addition, the Company is subject to the insurance
laws and regulations of other states and jurisdictions in which it is licensed
to operate. As of December 31, 1996, the Company had over $6.7 billion in
assets and over $25.8 billion of life insurance in force.

Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1996, First Allmerica and its subsidiaries
(including the Company) had over $13.3 billion in combined assets and over
$45.3 billion in life insurance in force.

Each Sub-Account invests in a corresponding investment portfolio of Kemper
Investors Fund (the "Fund"), a series-type mutual fund registered with the
Securities and Exchange Commission (the "SEC") as an open-end, diversified
management investment company. Currently, 14 Sub-Accounts of the Variable
Account are available under the Contract. The Money Market Portfolio, Total
Return Portfolio, High Yield Portfolio, Growth Portfolio, Government Securities
Portfolio, International Portfolio, Small Cap Growth Portfolio, Investment Grade
Bond Portfolio, Value Portfolio, Small Cap Value Portfolio, Value+Growth
Portfolio, Horizon

-2-

<PAGE>

20+Portfolio, Horizon 10+Portfolio, and Horizon 5 Portfolio ("Underlying
Portfolios"). Each Portfolio available under the Contract has its own
investment objectives and certain attendant risks.

TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY

The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contract or the Variable Account.

The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its parent and affiliated companies.

The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.

SERVICES

CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Fund shares owned by the Sub-Accounts are held on an open
account basis. A Sub-Account's ownership of Fund shares is reflected on the
records of the Fund, and is not represented by any transferable stock
certificates.

EXPERTS. The financial statements of Allmerica Financial Life Insurance
and Annuity Company prepared in accordance with generally accepted accounting
principles as of and for the year ended December 31, 1996 and the statutory
basis financial statements of Allmerica Financial Life Insurance and Annuity
Company for 1995 and each of the three years ended December 31, 1995 included
in this Statement of Additional Information ("SAI") constitiuting part of this
Registration Statement, have been so included in reliance on the reports of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.

The financial statements of Allmerica Financial Life Insurance and Annuity
Company included herein should be considered only as bearing on the ability
of Allmerica Financial Life Insurance and Annuity Company to meet its
obligations under the Policies.

UNDERWRITERS

Allmerica Investments, Inc. ("Allmerica Investments"), a registered broker-
dealer under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. (NASD), serves as principal underwriter
for the Contract pursuant to a contract with 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 is an indirectly wholly owned subsidiary of 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 6.0% of purchase

-3-

<PAGE>

payments, to entities which sell the Contract. To the extent permitted by NASD
rules, promotional incentives or payments also may be provided to such entities
based on sales volumes, the assumption of wholesaling functions or other sales-
related criteria. Additional payments may be made for other services not
directly related to the sale of the Contract, including the recruitment and
training of personnel, production of promotional literature and similar
services. A Promotional Allowance of 1.0% 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 are paid by the Company, and 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.

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.

LLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated
by the following hypothetical example: Assume that the assets of a
Sub-Account at the beginning of a one-day Valuation Period were $5,000,000;
that the value of an Accumulation Unit on the previous date was $1.135000;
and that during the Valuation Period, the investment income and net realized
and unrealized capital gains exceed net realized and unrealized capital
losses by $1,675. The Accumulation Unit value at the end of the current
Valuation Period would be calculated as follows:

(1) Accumulation Unit Value -- Previous Valuation Period. . . . . . .$ 1.135000

(2) Value of Assets -- Beginning of Valuation Period. . . . . . . . .$5,000,000

(3) Excess of Investment Income and Net Gains Over Capital Losses . . . .$1,675

(4) Adjusted Gross Investment Rate for the Valuation Period
(3) DIVIDED BY (2). . . . . . . . . . . . . . . . . . . . . . . . .0.000335

(5) Annual Charge (one-day equivalent of 1.10% per annum) . . . . . . .0.000030

(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . . . .0.000305

(7) Net Investment Factor 1.000000 + (6). . . . . . . . . . . . . . . .1.000305

(8) Accumulation Unit Value -- Current Period (1) x (7) . . . . . . .$ 1.135346

Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
accumulated unit value at the end of the Valuation Period would have been
$1.134586.

The method for determining the amount of annuity benefit payments is described
in detail under "Determination of First and Subsequent Annuity Benefit Payments"
in the Prospectus.

-4-

<PAGE>

ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL EXAMPLE.
The determination of the Annuity Unit value and the variable annuity payment may
be illustrated by the following hypothetical example: Assume an Annuitant has
40,000 Accumulation Units in a Separate Account, and that the value of an
Accumulation Unit on the Valuation Date used to determine the amount of the
first variable annuity benefit payment is $1.120000. Therefore, the
Accumulation Value of the Contract is $44,800 (40,000 x $1.120000). Assume also
that the Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax or contingent
deferred sales charge, the first monthly payment would be 44.800 multiplied by
$6.57, or $294.34.

Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum,
for the Valuation Date as of which the first payment was calculated, was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment, the number of Annuity Units represented by that payment
is determined to be 267.5818. The value of this same number of Annuity Units
will be paid in each subsequent month under most options. Assume further that
the net investment factor for the Valuation Period applicable to the next
annuity benefit payment is 1.000190. Multiplying this factor by .999906 (the
one-day adjustment factor for the assumed interest rate of 3.5% per annum)
produces a factor of 1.000096. This then is multiplied by the Annuity Unit
value on the immediately preceding Valuation Date (assumed here to be
$1.105000). The result is an Annuity Unit value of $1.105106 for the current
monthly payment. The current monthly payment then is determined by multiplying
the number of Annuity Units by the current Annuity Unit value, or 267.5818 times
$1.105106, which produces a current monthly payment of $295.71.

METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both
commutable and non-commutable period certain annuity benefit payment 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 annuity period certain option is elected. The number of
Annuity Units on which each payment is based would be calculated using the
Surrender Value less any premium tax. Assume this results in 250.0000 Annuity
Units. Assume the Commuted Value is requested with 60 monthly payments
remaining and a current Annuity Unit Value of $1.200000. Based on these
assumptions, the dollar amount of remaining payments would be $300 a month for
60 months. The present value at 3.5% of all remaining payments would be
$16.560.72.

EXCHANGE OFFER

A. VARIABLE ANNUITY CONTRACT EXCHANGE OFFER

The Company will permit Owners of certain variable annuity contracts, described
below, to exchange their contracts at net asset value for the variable annuity
Contract described in the Prospectus, which is 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 the Company's Elective Payment Variable
Annuity contracts issued 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

-5-

<PAGE>

Company should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.

CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge otherwise
applicable to the Exchanged Contract will be assessed as a result of the
exchange. Instead, the contingent deferred sales 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 contingent deferred sales charge computation outlined in the new Contract
and the 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 THE 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.

CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the new Contract, as described in the Prospectus, imposes higher charge
percentages against the excess amount redeemed than the Single Payment Exchanged
Contract. 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 $35 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.

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.

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.

-6-

<PAGE>

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.

B. FIXED ANNUITY EXCHANGE OFFER.

This exchange offer also applies to all fixed annuity contracts issued by the
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 contingent deferred sales 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 Funds to
which it is allocated. The new Contract has a different charge structure than a
fixed annuity contract, which includes not only a contingent deferred sales
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
Funds. 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 revoke the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right to
Revoke Individual Retirement Annuity" and "Right to Revoke All Other Contracts,"
will have their exchanged contract automatically reinstated as of the date of
revocation. 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 contingent deferred sales 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.

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 tax and retirement planning, 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 may be advertised based on a period of time that an Underlying
Portfolio has been in existence, even if longer than the period of time that the
Contract has been offered. The results for

-7-

<PAGE>

any period prior to a Contract being offered will be calculated as if the
Contract had been offered during that period, with all charges assumed to be
those applicable to the Contract.

TOTAL RETURN

"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specified period, reduced
by the Sub-Account's asset charge and any applicable contingent deferred sales
charge which would be assessed upon complete withdrawal of the investment.

-8-

<PAGE>

Total Return figures are calculated by standardized methods prescribed by rules
of 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:

P(1 + T)n = 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 assets
of the Sub-Account. This charge is 1.10% 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 contingent deferred sales charge, if any,
applicable at the end of the period is included in the calculation, according to
the following schedule:

Years from date of Charge as percentage
Payment of New Payments Withdrawn*
------------------ -------------------------

0 - 1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
Thereafter 0%

*Subject to the maximum limit described in the Prospectus.

No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In all calendar years, an amount equal to (1) 15% of the
Accumulated Value, or (2) the life expectancy distribution is not subject to the
contingent deferred sales charge.

The calculations of Total Return reflect the deduction of an $0.88 annual
Contract fee, representing a pro-rata portion of the $35 annual Contract fee
based on a mean Contract size of $40,000.

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. It
is assumed, however, 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:

P(1 + T)n = 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 1.10% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
contract is NOT withdrawn at the end of the specified period, and there is
therefore no adjustment for the contingent deferred sales charge that would be
applicable if the Contract was withdrawn at the end of the period.

The calculations of Supplemental Total Return include the deduction of an $0.88
annual Contract fee, representing a pro-rata portion of the $35 annual Contract
fee based on a mean contract size of $40,000.

YIELD AND EFFECTIVE YIELD -- 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, 1996:

Yield 3.47%
Effective Yield 3.53%

The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, subtracting
a charge reflecting the annual 1.10% deduction for mortality and expense risk
and the administrative charge, dividing the difference by the value of the
account at the beginning of the same period to obtain the base period return,
and then multiplying the return for a seven-day base period by (365/7), with the
resulting yield carried to the nearest hundredth of one percent.

The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:

Effective Yield = [(base period return + 1)(365/7)] - 1

The calculations of yield and effective yield reflect the $35 annual Contract
fee.

-10-

<PAGE>

TAX-DEFERRED ACCUMULATION

NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN

After-tax contributions
and tax-deferred earnings
-------------------------

Taxable Lump After-tax contributions
No Withdrawals Sum Withdrawal and taxable earnings
-------------- -------------- -----------------------

10 Years . . . . . $107,946 $ 86,448 $ 81,693
20 Years . . . . . 233,048 165,137 133,476
30 Years . . . . . 503,133 335,021 218,082

This chart compares the accumulation of a $50,000 initial investment into a non-
qualified annuity contract and 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: 0.95% for mortality and expense risk; 0.15% administration charges; 7%
maximum deferred sales charge; and $35 annual Contract fee. The tax-deferred
accumulation would be reduced if these charges were reflected. No implication
is intended by the use of these assumptions that the return shown is guaranteed
in any way or that the return shown represents an average or expected rate of
return over the period of the Contract. (IMPORTANT -- THIS IS NOT AN
ILLUSTRATION OF YIELD OR RETURN.)

Unlike savings plans, contributions to non-qualified annuity contracts provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a non-qualified annuity contract (and you have
many different options on how you receive your funds), they are subject to
income tax. At the time of receipt, if the person receiving the monies is
retired, not working or has additional tax exemptions, these monies may be taxed
at a lesser rate.

FINANCIAL STATEMENTS

Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for Separate Account KGC.

-11-

<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY

FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company

In our opinion, the accompanying balance sheet and the related statement of
income, of shareholder's equity, and of cash flows present fairly, in all
material respects, the financial position of Allmerica Financial Life Insurance
and Annuity Company at December 31, 1996, and the results of their operations
and their cash flows for the year in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP

Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF INCOME

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
REVENUES
Premiums..................................... $ 32.7
Universal life and investment product
policy fees............................... 176.2
Net investment income...................... 171.7
Net realized investment losses............. (3.6)
Other income............................... 0.9
---------
Total revenues......................... 377.9
---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 192.6
Policy acquisition expenses................ 49.9
Other operating expenses................... 86.6
---------
Total benefits, losses and expenses.... 329.1
---------
Income before federal income taxes............. 48.8
---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 26.9
Deferred................................... (9.8)
---------
Total federal income tax expense....... 17.1
---------
Net income..................................... $ 31.7
---------
---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------------------- ----------
<S> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$1,660.2).......................................... $ 1,698.0
Equity securities-at fair value (cost of $33.0)..... 41.5
Mortgage loans...................................... 221.6
Real estate......................................... 26.1
Policy loans........................................ 131.7
Other long-term investments......................... 7.9
----------
Total investments............................... 2,126.8
----------
Cash and cash equivalents............................. 18.8
Accrued investment income............................. 37.7
Deferred policy acquisition costs..................... 632.7
----------
Reinsurance receivables:
Future policy benefits.............................. 68.1
Outstanding claims, losses and loss adjustment
expenses........................................... 3.5
Other............................................... 0.9
----------
Total reinsurance receivables................... 72.5
----------
Other assets.......................................... 8.2
Separate account assets............................... 4,524.0
----------
Total assets.................................... $ 7,420.7
----------
----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,163.0
Outstanding claims, losses and loss adjustment
expenses........................................... 15.4
Unearned premiums................................... 2.7
Contractholder deposit funds and other policy
liabilities........................................ 32.8
----------
Total policy liabilities and accruals........... 2,213.9
----------
Expenses and taxes payable............................ 77.3
Deferred federal income taxes......................... 60.2
Separate account liabilities.......................... 4,523.6
----------
Total liabilities............................... 6,875.0
----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,518 shares issued and outstanding...... 2.5
Additional paid-in-capital............................ 346.3
Unrealized appreciation on investments, net........... 20.5
Retained earnings..................................... 176.4
----------
Total shareholder's equity...................... 545.7
----------
Total liabilities and shareholder's equity...... $ 7,420.7
----------
----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENTS OF SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
COMMON STOCK
Balance at beginning of year............... $ 2.5
Issued during year......................... --
---------
Balance at end of year..................... 2.5
---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 324.3
Contributed from parent.................... 22.0
---------
Balance at end of year..................... 346.3
---------
RETAINED EARNINGS
Balance at beginning of year............... 144.7
Net income................................. 31.7
---------
Balance at end of year..................... 176.4
---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 23.8
---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities........... (5.1)
(Provision) benefit for deferred
federal income taxes.................... 1.8
---------
(3.3)
---------
Balance at end of year................. 20.5
---------
Total shareholder's equity......... $ 545.7
---------
---------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------- ----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 31.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized losses................. 3.6
Net amortization and depreciation... 3.5
Deferred federal income taxes
(benefits)........................... (9.8)
Change in deferred policy
acquisition costs.................... (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable.............................. (0.2)
Change in accrued investment
income............................... 1.2
Change in policy liabilities and
accruals, net........................ (39.9)
Change in reinsurance receivable.... (1.5)
Change in expenses and taxes
payable.............................. 32.3
Separate account activity, net...... 10.5
Other, net.......................... (0.2)
----------
Net cash provided by operating
activities.................... (35.6)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 809.4
Proceeds from disposals of equity
securities............................. 1.5
Proceeds from disposals of other
investments............................ 17.5
Proceeds from mortgages matured or
collected.............................. 34.0
Purchase of available-for-sale fixed
maturities............................. (795.8)
Purchase of equity securities........... (13.2)
Purchase of other investments........... (36.2)
Other investing activities, net......... (2.1)
----------
Net cash (used in) provided by
investing activities.......... 15.1
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in........................ 22.0
----------
Net cash provided by financing
activities.................... 22.0
----------
Net change in cash and cash equivalents..... 1.5
Cash and cash equivalents, beginning of
year....................................... 17.3
----------
Cash and cash equivalents, end of year...... $ 18.8
----------
----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.4
Income taxes paid....................... $ 16.5
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF PRESENTATION

Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation, which is wholly owned by First
Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC").

The stockholder's equity of the Company is being maintained at a minimum
level of 5% of general account assets by FAFLIC in accordance with a policy
established by vote of FAFLIC's Board of Directors.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

B. VALUATION OF INVESTMENTS

The Company classifies all debt and equity securities as available-for-sale.

Realized gains and losses on sales of fixed maturities and equity securities
are determined on the specific-identification basis using amortized cost for
fixed maturities and cost for equity securities. Fixed maturities and equity
securities with other than temporary declines in fair value are written down to
estimated fair value resulting in the recognition of realized losses.

Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.

Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.

Policy loans are carried principally at unpaid principal balances.

Real estate that has been acquired through the foreclosure of mortgage loans
is valued at the estimated fair value at the time of foreclosure. The Company
considers several methods in determining fair value at foreclosure, using
primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.

Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.

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 and real
estate are included in realized investment gains or losses.

F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

C. FINANCIAL INSTRUMENTS

In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including debt, investments
such as fixed maturities, mortgage loans and equity securities, and investment
and loan commitments. These instruments involve credit risk and also may be
subject to risk of loss due to interest rate fluctuation. The Company evaluates
and monitors each financial instrument individually and, when appropriate,
obtains collateral or other security to minimize losses.

D. CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.

E. DEFERRED POLICY ACQUISITION COSTS

Acquisition costs consist of commissions, underwriting costs and other
costs, which vary with, and are primarily related to, the production of
revenues. Acquisition costs related to universal life and group variable
universal life products and contractholder deposit funds are deferred and
amortized in proportion to total estimated gross profits over the expected life
of the contracts using a revised interest rate applied to the remaining benefit
period. Acquisition costs related to annuity and other life insurance businesses
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination.

Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of these costs will be
realized. The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.

F. SEPARATE ACCOUNTS

Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of certain pension,
variable annuity and variable life insurance contractholders. Assets consist
principally of bonds, common stocks, mutual funds, and short-term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the contractholders and, therefore, are not included in the
Company's net income. Appreciation and depreciation of the Company's interest in
the separate accounts, including undistributed net investment income, is
reflected in shareholder's equity or net investment income.

G. POLICY LIABILITIES AND ACCRUALS

Future policy benefits are liabilities for life, health and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for individual life and annuity policies, and are based upon
estimates as to future investment yield, mortality and withdrawals that include
provisions for adverse deviation. Future policy benefits for individual life
insurance and annuity policies are computed using interest rates ranging from 2
1/2% to 6% for life insurance and 2% to 9 1/2% for annuities. Mortality,
morbidity and withdrawal assumptions for all policies are based on the Company's
own experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.

F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

Individual health benefit liabilities for active lives are estimated using
the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.

Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.

Premiums for individual accident and health insurance are reported as earned
on a pro-rata basis over the contract period. The unexpired portion of these
premiums is recorded as unearned premiums.

Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.

All policy liabilities and accruals are based on the various estimates
discussed above. Although the adequacy of these amounts cannot be assured,
management believes that it is more likely than not that policy liabilities and
accruals will be sufficient to meet future obligations of policies in force. The
amount of liabilities and accruals, however, could be revised in the near term
if the estimates discussed above are revised.

H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES

Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values.

I. FEDERAL INCOME TAXES

AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life tax losses that can be applied to offset life company taxable
income.

The Board of Directors has delegated to AFC management the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated life-nonlife 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

F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

as defined by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109). These differences result primarily from loss
reserves, policy acquisition expenses, and unrealized appreciation/depreciation
on investments.

J. NEW ACCOUNTING PRONOUNCEMENTS

In March, 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued. This statement
requires companies to write down to fair value long-lived assets whose carrying
value is greater than the undiscounted cash flows of those assets. The statement
also requires that long-lived assets of which management is committed to
dispose, either by sale or abandonment, be valued at the lower of their carrying
amount or fair value less costs to sell. This statement is effective for fiscal
years beginning after December 15, 1995. The adoption of this statement has not
had a material effect on the financial statements.

2. INVESTMENTS

A. SUMMARY OF INVESTMENTS

The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale fixed maturities and equity
securities were as follows:

<TABLE>
<CAPTION>
1996
--------------------------------------------
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....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>

(1) Amortized cost for fixed maturities and cost for equity securities.

In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC 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, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. In addition,
fixed maturities, excluding those securities on deposit in New York, with an
amortized cost of $4.2 million were on deposit with various state and
governmental authorities at December 31, 1996.

There were no contractual fixed maturity investment commitments at December
31, 1996.

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

F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

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>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------

<S> <C> <C>
Due in one year or less..................................... $ 129.2 $ 130.0
Due after one year through five years....................... 459.0 473.4
Due after five years through ten years...................... 735.1 751.1
Due after ten years......................................... 336.9 343.5
--------- ---------
Total................................................... $1,660.2 $1,698.0
--------- ---------
--------- ---------
</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>
FOR THE YEAR ENDED DECEMBER 31 PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ ------------------ ----- ------

<S> <C> <C> <C>
1996

Fixed maturities............................................ $496.6 $4.3 $8.3
------- ----- ------
Equity securities........................................... $ 1.5 $0.4 $0.1
------- ----- ------
</TABLE>

Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:

<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------

<S> <C> <C> <C>
1996

Net appreciation (depreciation), beginning of year.......... $ 20.4 $ 3.4 $ 23.8
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities............................................... (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities.............. 9.0 -- 9.0
Provision for deferred federal income taxes............... 4.1 (2.3) 1.8
---------- ------ ------
(7.7) 4.4 (3.3)
---------- ------ ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ ------
---------- ------ ------
</TABLE>

(1) Includes net appreciation on other investments of $2.2 million.

B. MORTGAGE LOANS AND REAL ESTATE

AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.

F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------

<S> <C>
Mortgage loans.......................... $221.6
------
Real estate:
Held for sale......................... 26.1
Held for production of income......... --
------
Total real estate................... 26.1
------
Total mortgage loans and real estate.... $247.7
------
------
</TABLE>

Reserves for mortgage loans were $9.5 million at December 31, 1996.

During 1996, non-cash investing activities included real estate acquired
through foreclosure of mortgage loans, which had a fair value of $0.9 million.

At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $16.0 million.
These commitments generally expire within one year.

Mortgage loans and real estate investments comprised the following property
types and geographic regions:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------

<S> <C>
Property type:
Office building....................... $ 86.1
Residential........................... 39.0
Retail................................ 55.9
Industrial / warehouse................ 52.6
Other................................. 25.3
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
Geographic region:

South Atlantic........................ $ 72.9
Pacific............................... 37.0
East North Central.................... 58.3
Middle Atlantic....................... 35.0
West South Central.................... 5.7
New England........................... 21.9
Other................................. 28.1
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
</TABLE>

At December 31, 1996, scheduled mortgage loan maturities were as follows:
1997 -- $58.6 million; 1998 -- $53.1 million; 1999 -- $21.5 million; 2000 --
$52.3 million; 2001 -- $7.7 million; and $28.4 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 1996, the Company refinanced $7.8 million of mortgage
loans based on terms which differed from those granted to new borrowers.

F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

C. INVESTMENT VALUATION ALLOWANCES

Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------

<S> <C> <C> <C> <C>
1996

Mortgage loans........... $12.5 $4.5 $7.5 $ 9.5
Real estate.............. 2.1 -- 0.4 1.7
---------- --------- ---------- ----------
Total................ $14.6 $4.5 $7.9 $11.2
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>

The carrying value of impaired loans was $21.5 million with related reserves
of $7.3 million as of December 31, 1996. All impaired loans were reserved as of
December 31, 1996.

The average carrying value of impaired loans was $26.3 million, with related
interest income while such loans were impaired, of $3.4 million as of December
31, 1996.

D. OTHER

At December 31, 1996, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.

3. INVESTMENT INCOME AND GAINS AND LOSSES

A. NET INVESTMENT INCOME

The components of net investment income were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- ------

<S> <C>
Fixed maturities............................. $137.2
Mortgage loans............................... 22.0
Equity securities............................ 0.7
Policy loans................................. 10.2
Real estate.................................. 6.2
Other long-term investments.................. 0.8
Short-term investments....................... 1.4
------
Gross investment income...................... 178.5
Less investment expenses..................... (6.8)
------
Net investment income........................ $171.7
------
------
</TABLE>

At December 31, 1996, mortgage loans on non-accrual status were $5.0
million, including restructured loans of $2.6 million. The effect of
non-accruals, compared with amounts that would have been recognized in
accordance with the original terms of the investments, was to reduce net income
by $0.1 million in 1996. There were no fixed maturities on non-accrual status at
December 31, 1996.

The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $25.4 million at December 31, 1996. Interest income on
restructured mortgage loans that would have been recorded in accordance with the
original terms of such loans amounted to $3.6 million in 1996. Actual interest
income on these loans included in net investment income aggregated $2.2 million
in 1996.

F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

There were no fixed maturities or mortgage loans which were non-income
producing for the twelve months ended December 31, 1996.

B. REALIZED INVESTMENT GAINS AND LOSSES

Realized gains (losses) on investments were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----

<S> <C>
Fixed maturities............................. $(3.3)
Mortgage loans............................... (3.2)
Equity securities............................ 0.3
Real estate.................................. 2.5
Other........................................ 0.1
-----
Net realized investment losses............... $(3.6)
-----
-----
</TABLE>

Proceeds from voluntary sales of investments in fixed maturities were $496.6
million in 1996. Realized gains on such sales were $4.3 million, and realized
losses were $8.3 million for 1996.

4. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:

CASH AND CASH EQUIVALENTS

For these short-term investments, the carrying amount approximates fair value.

FIXED MATURITIES

Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.

EQUITY SECURITIES

MORTGAGE LOANS

Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans are
limited to the lesser of the present value of the cash flows or book value.

F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

REINSURANCE RECEIVABLES

The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses. reported in the balance sheet approximates fair
value.

POLICY LOANS

The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.

INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)

Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.

The estimated fair values of the financial instruments were as follows:

<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 CARRYING FAIR
(IN MILLIONS) VALUE VALUE
- --------------------------------------------- --------- --------

<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 18.8 $ 18.8
Fixed maturities........................... 1,698.0 1,698.0
Equity securities.......................... 41.5 41.5
Mortgage loans............................. 221.6 229.3
Policy loans............................... 131.7 131.7
Reinsurance receivables.................... 72.5 72.5
--------- --------
$2,184.1 $2,191.8
--------- --------
--------- --------

FINANCIAL LIABILITIES
Individual annuity contracts............... 910.2 703.6
Supplemental contracts without life
contingencies............................. 15.9 15.9
Other individual contract deposit funds.... 0.3 0.3
--------- --------
$ 926.4 $ 719.8
--------- --------
--------- --------
</TABLE>

5. DEBT

During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.

Interest expense was $3.4 million in 1996, relating to interest payments on
repurchase agreements, and is recorded in other operating expenses.

F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

6. FEDERAL INCOME TAXES

Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Federal income tax expense (benefit)
Current.................................... $26.9
Deferred................................... (9.8)
-----
Total........................................ $17.1
-----
-----
</TABLE>

The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.

The deferred tax (assets) liabilities are comprised of the following at
December 31, 1996:

<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -------
<S> <C>
Deferred tax (assets) liabilities
Loss reserves.............................. (137.0)
Deferred acquisition costs................. 186.9
Investments, net........................... 14.2
Bad debt reserve........................... (1.1)
Other, net................................. (2.8)
-------
Deferred tax liability, net.................. $ 60.2
-------
-------
</TABLE>

Gross deferred income tax liabilities totaled $201.1 million at December 31,
1996. Gross deferred income tax assets totaled $140.9 million at December 31,
1996.

Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.

The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.

7. RELATED PARTY TRANSACTIONS

The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $112.4 million in 1996. The net amounts payable to FAFLIC
and affiliates for accrued expenses and various other liabilities and
receivables were $13.3 million at December 31, 1996.

F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

8. DIVIDEND RESTRICTIONS

Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.

Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.

At January 1, 1997, AFLIAC could pay dividends of $11.9 million to FAFLIC
without prior approval.

9. REINSURANCE

In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.

Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.

The effects of reinsurance were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
Life insurance premiums:
Direct....................................... $ 53.3
Assumed...................................... 3.1
Ceded........................................ (23.7)
---------
Net premiums................................... $ 32.7
---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 206.4
Assumed...................................... 4.5
Ceded........................................ (18.3)
---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 192.6
---------
---------
</TABLE>

F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

10. DEFERRED POLICY ACQUISITION EXPENSES

The following reflects the changes to the deferred policy acquisition asset:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
-------------------------------------------------- --------
<S> <C>
Balance at beginning of year...................... $ 555.7
Acquisition expenses deferred................... 116.6
Amortized to expense during the year............ (49.9)
Adjustment to equity during the year............ 10.3
--------
Balance at end of year............................ $ 632.7
--------
--------
</TABLE>

11. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS

The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.

The liability for future policy benefits and outstanding claims, losses and
loss adjustment expenses related to the Company's accident and health business
was $178.6 million at December 31, 1996. Accident and health claim liabilities
have been re-estimated for all prior years and were increased by $3.2 million in
1996.

12. CONTINGENCIES

REGULATORY AND INDUSTRY DEVELOPMENTS

Unfavorable economic conditions may contribute to an increase in the number
of insurance companies that are under regulatory supervision. This may result in
an increase in mandatory assessments by state guaranty funds, or voluntary
payments by solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Mandatory assessments, which are subject
to statutory limits, can be partially recovered through a reduction in future
premium taxes in some states. The Company is not able to reasonably estimate the
potential effect on it of any such future assessments or voluntary payments.

LITIGATION

The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.

13. STATUTORY FINANCIAL INFORMATION

The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment

F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED

reserves are based on different assumptions, life insurance reserves are based
on different assumptions and income tax expense reflects only taxes paid or
currently payable. Statutory net income and surplus are as follows:

<TABLE>
<CAPTION>
(IN MILLIONS) 1996
--------------------------------------------------- ---------
<S> <C>
Statutory net income............................... $ 5.4
Statutory Surplus.................................. $ 234.0
---------
</TABLE>

14. SUBSEQUENT EVENT (UNAUDITED)

On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income business under a 100%
coinsurance agreement to Metropolitan Life Insurance Company. The consummation
of the transaction is subject to the negotiation of definitive arrangements and
regulatory approvals and is expected to occur on or before October 1, 1997. In
connection with this transaction, the Company has recorded an after-tax charge
of $35 million net income in the first quarter of 1997 related to the
reinsurance of this business.

F-17
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(FORMERLY SMA LIFE ASSURANCE COMPANY)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DECEMBER 31, 1995

<TABLE>
<S> <C>
Statutory Financial Statements
Report of Independent Accountants....................................................... 1
Statement of Assets, Liabilities, Surplus and Other Funds............................... 3
Statement of Operations and Changes in Capital and Surplus.............................. 4
Statement of Cash Flows................................................................. 5
Notes to Statutory Financial Statements................................................. 6
</TABLE>

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)

We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.

In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.

<PAGE>

TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)

Page 2

In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.

As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.

[LOGO]

Price Waterhouse LLP
Boston, MA

February 5, 1996

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
AS OF DECEMBER 31,
(IN THOUSANDS)

<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ----------

<S> <C> <C>
Cash......................................... $ 7,791 $ 7,248
Investments:
Bonds...................................... 1,659,575 1,595,275
Stocks..................................... 18,132 12,283
Mortgage loans............................. 239,522 295,532
Policy loans............................... 122,696 116,600
Real estate................................ 40,967 51,288
Short term investments..................... 3,500 45,239
Other invested assets...................... 40,196 27,443
---------- ----------
Total cash and investments............. 2,132,379 2,150,908
Premiums deferred and uncollected............ (1,231) 5,452
Investment income due and accrued............ 38,413 39,442
Other assets................................. 6,060 10,569
Assets held in separate accounts............. 2,978,409 1,869,695
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------

LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves.............................. $ 856,239 $ 890,880
Annuity and other fund reserves............ 865,216 928,325
Accident and health reserves............... 167,246 121,580
Claims payable............................. 11,047 11,720
---------- ----------
Total policy liabilities............... 1,899,748 1,952,505
Expenses and taxes payable................... 20,824 17,484
Other liabilities............................ 27,499 36,466
Asset valuation reserve...................... 31,556 20,786
Obligations related to separate account
business.................................... 2,967,547 1,859,502
---------- ----------
Total liabilities...................... 4,947,174 3,886,743
---------- ----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized -- 10,000 shares
Issued and outstanding -- 2,517
shares.................................... 2,517 2,517
Paid-in surplus............................ 199,307 199,307
Unassigned surplus (deficit)............... 4,282 (13,621)
Special contingency reserves............... 750 1,120
---------- ----------
Total surplus and other funds.......... 206,856 189,323
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

STATEMENT OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)

<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and other considerations:
Life..................................... $ 156,864 $ 195,633 $ 189,285
Annuities................................ 729,222 707,172 660,143
Accident and health...................... 31,790 31,927 35,718
Reinsurance commissions and reserve
adjustments............................. 20,198 4,195 2,309
----------- ----------- -----------
Total premiums and other
considerations........................ 938,074 938,927 887,455
Net investment income...................... 167,470 170,430 177,612
Realized capital losses, net of tax........ (2,295) (17,172) (7,225)
Other revenue.............................. 37,466 26,065 19,055
----------- ----------- -----------
Total revenue.......................... 1,140,715 1,118,250 1,076,897
----------- ----------- -----------

POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits.... 391,254 331,418 275,290
Increase (decrease) in policy reserves... (22,669) 40,113 15,292
----------- ----------- -----------
Total policy benefits.................. 368,585 371,531 290,582
Operating and selling expenses............. 150,215 164,175 160,928
Taxes, except capital gains tax............ 26,536 22,846 19,066
Net transfers to separate accounts......... 556,856 553,295 586,539
----------- ----------- -----------
Total policy benefits and operating
expenses.............................. 1,102,192 1,111,847 1,057,115
----------- ----------- -----------
NET INCOME................................... 38,523 6,403 19,782
Capital and Surplus, Beginning of Year....... 189,323 182,216 171,941
Unrealized capital gains (losses) on
investments............................... 8,279 12,170 (9,052)
Transfer from (to) asset valuation
reserve................................... (10,770) (9,822) 1,974
Other adjustments.......................... (18,499) (1,644) (2,429)
----------- ----------- -----------
CAPITAL AND SURPLUS, END OF YEAR............. $ 206,856 $ 189,323 $ 182,216
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)

<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------

<S> <C> <C> <C>
Premiums, deposits and other income......... $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded......................... 20,693 3,279 22,185
Net investment income...................... 170,949 173,294 182,843
Net increase in policy loans............... (6,096) (7,585) (7,812)
Benefits to policyholders and
beneficiaries............................. (393,472) (330,900) (298,612)
Operating and selling expenses and taxes... (153,504) (193,796) (171,533)
Net transfers to separate accounts......... (608,480) (600,760) (634,021)
Federal income tax (excluding tax on
capital gains)............................ (6,771) (19,603) (4,828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
Real estate and other invested assets.... (11,929) (24,544) (2,392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").

The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.

The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:

- Bonds considered to be "available-for-sale" or "trading" are
not carried at fair value and changes in fair value are not
recognized through surplus or the statement of operations,
respectively;

- The Asset Valuation Reserve, represents a reserve against
possible losses on investments and is recorded as a liability
through a charge to surplus. The Interest Maintenance Reserve
is designed to include deferred realized gains and losses (net
of applicable federal income taxes) due to interest rate
changes and is also recorded as a liability, however, the
deferred net realized investment gains and losses are amortized
into future income generally over the original period to
maturity of the assets sold. These liabilities are not required
under generally accepted accounting principles;

- Total premiums, deposits and benefits on certain
investment-type contracts are reflected in the statement of
operations, instead of using the deposit method of accounting;

- Policy acquisition costs, such as commissions, premium taxes
and other items, are not deferred and amortized in relation to
the revenue/gross profit streams from the related contracts;

- Benefit reserves are determined using statutorily prescribed
interest, morbidity and mortality assumptions instead of using
more realistic expense, interest, morbidity, mortality and
voluntary withdrawal assumptions with provision made for
adverse deviation;

- Amounts recoverable from reinsurers for unpaid losses are not
recorded as assets, but as offsets against the respective
liabilities;

- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial
statements and those included in the tax returns;

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED

- Certain adjustments related to prior years are recorded as
direct charges or credits to surplus;

- Certain assets, designated as "non-admitted" assets
(principally agents' balances), are not recorded as assets, but
are charged to surplus; and,

- Costs related to other postretirement benefits are recognized
only for employees that are fully vested.

The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.

VALUATION OF INVESTMENTS -- Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are carried
generally at cost and common stocks are carried at market value. Policy loans
are carried principally at unpaid principal balances.

Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.

An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.

FINANCIAL INSTRUMENTS -- In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.

RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS -- In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.

SEPARATE ACCOUNTS -- Separate account assets and liabilities represent
segregated funds administered and invested by the Company for the benefit of
certain variable annuity and variable life contract holders. 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

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
contract holders 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 capital
and surplus.

INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES -- Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in force.
These liabilities are computed based upon mortality, morbidity and interest rate
assumptions applicable to these coverages, including provision for adverse
deviation. Reserves are computed using interest rates ranging from 3% to 6% for
individual life insurance policies, 3% to 5 1/2% for accident and health
policies and 3 1/2% to 9 1/2% for annuity contracts. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. The assumptions vary by plan, age at issue,
year of issue and duration. Claims reserves are computed based on historical
experience modified for expected trends in frequency and severity. Withdrawal
characteristics of annuity and other fund reserves vary by contract. At December
31, 1995 and 1994, approximately 84% and 77%, respectively, of the contracts
(included in both the general account and separate accounts of the Company) were
not subject to discretionary withdrawal or were subject to withdrawal at book
value less surrender charge.

All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.

FEDERAL INCOME TAXES -- AFC, its life insurance subsidiaries, First Allmerica
and Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.

The federal income tax allocation policies and procedures 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.

CAPITAL GAINS AND LOSSES -- Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED

NOTE 2 -- INVESTMENTS

BONDS -- The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------

<S> <C> <C> <C> <C>
Federal government bonds................................ $ 67,039 $ 3,063 $ -- $ 70,102
State, local and government agency bonds................ 13,607 2,290 23 15,874
Foreign government bonds................................ 12,121 772 249 12,644
Corporate securities.................................... 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities.............................. 95,385 951 -- 96,336
---------- ------------- ------------- ----------
Total................................................... $1,659,574 $62,912 $ 6,457 $1,715,939
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------

DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>

Federal government bonds................................ $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds................ 1,110 54 -- 1,164
Foreign government bonds................................ 31,863 83 3,735 28,211
Corporate securities.................................... 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities.............................. 81,780 268 1,737 80,311
---------- ------------- ------------- ----------
Total................................................... $1,595,275 $ 8,558 $62,245 $1,541,588
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
</TABLE>

The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will 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 obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.

<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) VALUE VALUE
--------------------

<S> <C> <C>
Due in one year or less................. $ 250,578 $ 258,436
Due after one year through five years... 736,003 763,179
Due after five years through ten
years.................................. 538,897 558,445
Due after ten years..................... 134,097 135,880
--------------------
Total................................... $1,659,575 $1,715,940
--------------------
--------------------
</TABLE>

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED

MORTGAGE LOANS AND REAL ESTATE -- Mortgage loans and real estate investments,
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 are generally no more than 75% of the property value at
the time the original loan is made. At December 31, 1995 and 1994, mortgage loan
and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------

<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------

GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>

South Atlantic.......................... $ 86,410 $ 92,934
East North Central...................... 55,991 72,704
Middle Atlantic......................... 38,666 48,688
Pacific................................. 32,803 39,892
West North Central...................... 21,486 27,377
Mountain................................ 9,939 12,211
New England............................. 24,886 26,613
East South Central...................... 5,487 6,224
West South Central...................... 4,821 20,177
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
</TABLE>

Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.

NET INVESTMENT INCOME -- The components of net investment income for the year
ended December 31 were as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $122,318 $123,495 $126,729
Stocks....................................... 1,653 1,799 953
Mortgage loans............................... 26,356 31,945 40,823
Real estate.................................. 9,139 8,425 9,493
Policy loans................................. 9,486 8,797 8,215
Other investments............................ 3,951 1,651 674
Short term investments....................... 2,252 1,378 840
-------- -------- --------
175,155 177,490 187,727
Less investment expenses................... 9,703 9,138 11,026
-------- -------- --------
Net investment income, before IMR
amortization................................ 165,452 168,352 176,701
IMR amortization........................... 2,018 2,078 911
-------- -------- --------
Net investment income........................ $167,470 $170,430 $177,612
-------- -------- --------
-------- -------- --------
</TABLE>

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED

REALIZED CAPITAL GAINS AND LOSSES -- Realized capital gains (losses) on
investments for the years ended December 31 were as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $ 727 $ 645 $ 10,133
Stocks....................................... (263) (62) 16
Mortgage loans............................... (1,083) (17,142) (83)
Real estate.................................. (1,892) 605 (2,044)
-------- -------- --------
(2,511) (15,954) 8,022
Less income tax.............................. 400 968 3,296
-------- -------- --------
Net realized capital gains (losses) before
transfer to IMR............................. (2,911) (16,922) 4,726
Net realized capital gains transferred to
IMR......................................... 616 (250) (11,951)
-------- -------- --------
Net realized capital gains (losses).......... $ (2,295) $(17,172) $ (7,225)
-------- -------- --------
-------- -------- --------
</TABLE>

Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $.5 million, respectively, were realized on those
sales.

NOTE 3 -- FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION

Statement of Financial Accounting Standards 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 recognized upon
immediate liquidation. In cases where market prices are not available, estimates
of fair value are based on discounted cash flow analyses which utilize current
interest rates for similar financial instruments which have comparable terms and
credit quality.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:

FINANCIAL ASSETS:

CASH AND SHORT TERM INVESTMENTS -- The carrying amounts reported in the
statement of assets, liabilities, surplus and other funds approximate fair
value.

BONDS -- 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.

STOCKS -- 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.

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED

POLICY LOANS -- The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.

FINANCIAL LIABILITIES:

ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) -- Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.

The estimated fair values of the financial instruments as of December 31 were as
follows:

<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------

<S> <C> <C> <C> <C>
Financial Assets:
Cash.................................. $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments................ 3,500 3,500 45,239 45,239
Bonds................................. 1,659,575 1,715,940 1,595,275 1,541,588
Stocks................................ 18,132 18,414 12,283 12,590
Mortgage loans........................ 239,522 250,196 295,532 291,704
Policy loans.......................... 122,696 122,696 116,600 116,600

Financial Liabilities:
Individual annuity contracts.......... 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies........................ 16,796 16,796 16,673 16,673
Other contract deposit funds............ 632 632 1,105 1,105
</TABLE>

NOTE 4 -- FEDERAL INCOME TAXES

The federal income tax provisions for 1995, 1994 and 1993 were $17.4
million, $13.1 million and $8.6 million, respectively, which include taxes
applicable to realized capital gains of $.4 million, $1.0 million and $3.3
million.

The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.

The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS has
completed its examination of all of the consolidated federal income tax returns
through 1988. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED

NOTE 5 -- REINSURANCE

The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is as
follows:

<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
------- ------- -------

<S> <C> <C> <C>
Reinsurance premiums assumed................. $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded................... 42,914 17,430 14,798
Deduction from insurance liability including
reinsurance recoverable on unpaid claims.... 82,227 46,734 42,805
</TABLE>

Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .

During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance. Premiums
ceded and reinsurance credits taken under this agreement amounted to $25.4
million and $20.7 million, respectively. At December 31, 1995, the deduction
from insurance liability, including reinsurance recoverable on unpaid claims
under this agreement was $12.7 million.

NOTE 6 -- ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES

The Company regularly updates its estimates of policy and claims liabilities
as new information becomes available and further events occur which may impact
the resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.

The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.

NOTE 7 -- DIVIDEND RESTRICTIONS

Delaware has enacted laws governing the payment of dividends to stockholders
by insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its 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 (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

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)

NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. At January 1, 1996, the Company could pay dividends
of $4.3 million to First Allmerica, without prior approval.

NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS

First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.

NOTE 9 -- FUNDS ON DEPOSIT

In March 1994, the Company voluntarily withdrew from being licensed in New
York. In connection with the withdrawal First Allmerica, which is licensed in
New York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company 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 the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.

Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.

NOTE 10 -- LITIGATION

<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP
VALUE GROWTH VALUE INTERNATIONAL GROWTH VALUE+GROWTH HORIZON 20+
----------- ----------- ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Kemper Investors Fund.... -- -- -- -- -- -- --

LIABILITIES:
-- -- -- -- -- -- --
----------- ----------- ----------- ------------- ----------- ------------ -----------
Net assets............ -- -- -- -- -- -- --
----------- ----------- ----------- ------------- ----------- ------------ -----------
----------- ----------- ----------- ------------- ----------- ------------ -----------

INVESTMENT
TOTAL HIGH GRADE GOVERNMENT MONEY
RETURN HORIZON 10+ HORIZON 5 YIELD BOND SECURITIES MARKET
----------- ----------- ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Kemper Investors Fund.... -- -- -- -- -- -- --

The accompanying notes are an integral part of these financial statements.

F-1
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

NOTE 1 -- ORGANIZATION

Separate Account KGC (VA-KGC) is a separate investment account of Allmerica
Financial Life Insurance and Annuity Company (the Company), established on
December 20, 1996 for the purpose of separating from the general assets of the
Company those assets used to fund certain variable annuity policies issued by
the Company. The Company is a wholly-owned subsidiary of First Allmerica
Financial Life Insurance Company (First Allmerica). Under applicable insurance
law, the assets and liabilities of VA-KGC are clearly identified and
distinguished from the other assets and liabilities of the Company. VA-KGC
cannot be charged with liabilities arising out of any other business of the
Company.

VA-KGC is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). VA-KGC currently offers fourteen
Sub-Accounts under the Kemper Gateway Custom contracts. Each Sub-Account invests
exclusively in a corresponding investment portfolio of Kemper Investors Fund
(KINF) managed by Zurich Kemper Investments, Inc. (ZKI). The Value and Small Cap
Value Portfolios are managed by Dreman Value Advisors, Inc. (DVA), a wholly
owned subsidary of ZKI. KINF is an open-end, diversified management investment
company registered under the 1940 Act.

VA-KGC has two types of variable annuity policies, "qualified" policies and
"non-qualified" policies. A qualified policy is one that is purchased in
connection with a retirement plan which meets the requirements of Section 401,
403, or 408 of the Internal Revenue Code, while a non-qualified policy is one
that is not purchased in connection with one of the indicated retirement plans.
The tax treatment for certain partial redemptions or surrenders will vary
according to whether they are made from a qualified policy or a non-qualified
policy.

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 KINF. Net realized gains and losses on
securities sold are determined on 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 KINF at net asset
value.

FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code and files a consolidated federal
income tax return with First Allmerica. The Company anticipates no tax liability
resulting from the operations of VA-KGC. Therefore, no provision for income
taxes has been charged against VA-KGC.

NOTE 3 -- INVESTMENTS

There were no investment purchases and sales for the year ended December 31,
1996.

NOTE 4 -- RELATED PARTY TRANSACTIONS

The Company makes a charge of .95% per annum based on the average daily net
assets of each Sub-Account at each valuation date for mortality and expense
risks. The Company also charges each Sub-Account .15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account but are paid to
the Company on a monthly basis.

F-2
<PAGE>
SEPARATE ACCOUNT KGC -- KEMPER GATEWAY CUSTOM

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
A contract fee of $35 is currently deducted on the Contract anniversary date
and upon full surrender of the contract when the accumulated value is less than
$50,000. The contract fee is waived for contracts issued to and maintained by
the Trustee of a 401(k) plan.

Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of VA-KGC, and does not receive any compensation for sales of the VA-KGC --
Kemper Gateway Custom contracts. Commissions are paid to registered
representatives of Allmerica Investments by the Company. As the current series
of policies have a contingent deferred sales charge, no deduction is made for
sales charges at the time of the sale.

NOTE 5 -- DIVERSIFICATION REQUIREMENTS

Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of Treasury.

The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VA-KGC satisfies the current requirements of
the regulations, and it intends that VA-KGC will continue to meet such
requirements.

F-3
<PAGE>

PART C. OTHER INFORMATION

Item 24. FINANCIAL STATEMENTS AND EXHIBITS.

(a) FINANCIAL STATEMENTS

FINANCIAL STATEMENTS INCLUDED IN PART A
None

FINANCIAL STATEMENTS INCLUDED IN PART B
Financial Statements for Allmerica Financial Life Insurance and Annuity
Company and for Separate Account KGC

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 in Initial
Registration Statement on August 16, 1996 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 in Pre-Effective
Amendment No. 1 and is incorporated by reference herein.

<PAGE>

(b) Form of Sales Agreement was previously filed in Initial
Registration Statement on August 16, 1996 and is
incorporated by reference herein.

(c) Broker's Agreement and Specimen Schedule of Sales
Commissions for Variable Annuity Policies were previously
filed on November 3, 1994 in Registration Statement
No. 33-85916, and are incorporated by reference herein.

Exhibit 4 - Policy Form was previously filed in Initial
Registration Statement on August 16, 1996 and is incorporated
by reference herein.
Exhibit 5 - Application Form was previously filed in Initial Registration
Statement on August 16, 1996 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 in Initial Registration Statement on August
16, 1996 and is incorporated by reference herein.
Exhibit 7 - Not Applicable.

Exhibit 8 - None

Exhibit 9 - Consent and Opinion of Counsel is filed herewith

Exhibit 10 - Consent and Opinion of Independent Accountants is filed herewith

Exhibit 11 - None.

Exhibit 12 - None.

Exhibit 13 - None.

Exhibit 15 - Participation Agreement was previously filed in Pre-Effective
Amendment No. 1 and is incorporated by reference herein.

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

NAME AND POSITION PRINCIPAL OCCUPATION(S) DURING
WITH COMPANY PAST FIVE YEARS
------------ ---------------

Bruce C. Anderson, Director Director of First Allmerica since 1996;
Vice President, First Allmerica

Abigail M. Armstrong, Secretary and Secretary of First Allmerica since 1996;
Counsel Counsel, First Allmerica

John P. Kavanaugh, Director, Vice Director and Chief Investment Officer
President and Chief Investment of First Allmerica since 1996; Vice
Officer President, First Allmerica since 1991

John F. Kelly, Director Director of First Allmerica since 1996;
Senior Vice President, General Counsel
and Assistant Secretary, First
Allmerica

J. Barry May, Director Director of First Allmerica since 1996;
Director and President, The Hanover
Insurance Company since 1996; Vice
President, The Hanover Insurance
Company, 1993 to 1996

James R. McAuliffe, Director Director of First Allmerica since 1996;
President and CEO, Citizens Insurance
Company of America since 1994; Vice
President 1982 to 1994 and Chief
Investment Officer, First Allmerica
1986 to 1994

John F. O'Brien, Director and Director, Chairman of the Board,
Chairman of the Board President and Chief Executive Officer,
First Allmerica since 1989

Edward J. Parry, III, Director, Vice Director and Chief Financial Officer of
President, Chief Financial Officer First Allmerica since 1996; Vice
and Treasurer President and Treasurer, First Allmerica
since 1993

Richard M. Reilly, Director, Director of First Allmerica since 1996;
President and Chief Executive Vice President, First Allmerica since
Officer 1990; Director, Allmerica Investments,
Inc. since 1990; Director and President,
Allmerica Investment Management Company,
Inc. since 1990

Larry C. Renfro, Director Director of First Allmerica since 1996;
Vice President, First Allmerica since
1990

Eric A. Simonsen, Director and Director of First Allmerica since 1996;
Vice President Vice President, First Allmerica since
1990; Chief Financial Officer, First
Allmerica 1990 to 1996

Phillip E. Soule, Director Director of First Allmerica since 1996;
Vice President, First Allmerica

<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY

NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653

AAM High Yield Fund, L.L.C. Limited Liability Company

AFC Capital Trust I Statutory Business Trust

Allmerica Asset Management 440 Lincoln Street Investment advisory services
Limited Worcester MA 01653

Allmerica Asset Management, Inc. 440 Lincoln Street Investment advisory services
Worcester MA 01653

Allmerica Employees Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653

Allmerica Equity Index Pool Grantor Trust

Allmerica Financial Alliance 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance

Allmerica Financial Benefit 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance

Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653

Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653

Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident and
and Annuity Company (formerly Worcester MA 01653 health insurance, annuities,
known as SMA Life Assurance variable annuities and
Company) variable life insurance

Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653

Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper

Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653

Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities

<PAGE>

Allmerica Institutional Services, Inc. 440 Lincoln Street Accounting, marketing and
Inc. (formerly known as 440 Financial Worcester MA 01653 shareholder services for
Group of Worcester, Inc.) investment companies

Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653

Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653

Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653

Allmerica 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
Worcester MA 01653 services 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

APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial paper

Beltsville Drive Limited 440 Lincoln Street Real estate partnership
Partnership Worcester MA 01653

Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653

Citizens Insurance Company of 645 West Grand River Multi-line property and
America Howell MI 48843 casualty insurance

Citizens Insurance Company of 333 Pierce Road Multi-line property and
Illinois Itasca IL 60143 casualty insurance

Citizens Insurance Company of the 3950 Priority Way Multi-line property and
Midwest South Drive, Suite 200 casualty insurance
Indianapolis IN 46280

<PAGE>

Citizens Insurance Company of 8101 N. High Street Multi-line property and
Ohio P.O. Box 342250 casualty insurance
Columbus OH 43234

Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843

First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity,
Insurance Company (formerly State Worcester MA 01653 accident and health insurance
Mutual Life Assurance Company company
of America)

Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653

The Hanover American Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance

The Hanover Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance

Hanover Texas Insurance 801 East Campbell Road Attorney-in-fact for Hanover
Management Company, Inc. Richardson TX 75081 Lloyd's Insurance Company

Hanover Lloyd's Insurance 801 East Campbell Road Multi-line property and
Company Richardson TX 75081 casualty insurance

Linder Skokie Real Estate 440 Lincoln Street Real estate holding company
Corporation Worcester MA 01653

Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises

Logan Wells Water Company, Inc. 603 Heron Drive Water Company serving land
Bridgeport NJ 08014 development investment

Massachusetts Bay Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance

SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653

Somerset Square, Inc. 440 Lincoln Street Real estate holding company
Worcester MA 01653

Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653

</TABLE>

Item 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT. See attached
organization chart.

<PAGE>

Allmerica Financial Corporation

Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company

Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
Logan Wells
Water Company,
Inc.

New Jersey

______________________________________________________________________________________________________________________
| | | | | |
59.47% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Somerset Allmerica Allmerica
Property Management Trust Square, Inc. Financial Life Institutional
& Casualty Services, Inc. Company, N.A. Insurance and Services, Inc.
Companies, Inc. Annuity Company
Federally
Delaware Delaware Chartered Massachusetts Delaware Massachusetts
|
___________________________________________________________________________
| | | |
100% 100% 100% 100%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois

Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Employee American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company

Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest

Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.

Michigan

Allmerica Financial Corporation

Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
SMA
Financial Corp.

Massachusetts
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 100% Allmerica
Allmerica Allmerica Allmerica Allmerica Linder Asset
Investments, Investment Asset Financial Services Skokie Management,
Inc. Management Management, Insurance Real Estate Limited
Company, Inc. Inc. Agency, Inc. Corporation

Massachusetts Massachusetts Massachusetts Massachusetts Massachusetts Bermuda

________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund

Massachusetts Massachusetts Massachusetts
_____________________________________
| | Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica Allmerica
Alliance Investment Trust Funds Securities
Insurance Trust
Company
Massachusetts Massachusetts Massachusetts
New Hampshire Massachusetts
|
|
100% Affiliated Management Investment Companies
Lloyd's
Credit Hanover Lloyd's
Corporation Insurance
Company

Massachusetts Texas

Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of the Hanover
Insurance Company

Beltsville
AAM High Drive
Yield Fund, Properties
L.L.C. Limited
Partnership
Massachusetts
Delaware
LLC established for the benefit of
First Allmerica, Allmerica Limited partnership involving First Allmerica, as
Financial Life, Hanover and general partner and Allmerica Financial Life as
Citizens limited partner

</TABLE>
<PAGE>

Item 27. NUMBER OF CONTRACT OWNERS.

As of December 31, 1996 the Variable Account had no Contract Owners

Item 28. INDEMNIFICATION.

Article VIII of the Bylaws of the Depositor state: 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 judgement,
except in relation to matters as to which he shall be finally adjudged in such
action, suit or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.

Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, Officers and Controlling Persons of Registrant under any
registration statement, underwriting agreement or otherwise, Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, 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.

Item 29. PRINCIPAL UNDERWRITERS.

(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
- VEL Account, VEL II Account, Group Vel, Separate Accounts VA-A, VA-B,
VA-C, VA-G, VA-H, VA-K, VA-P, Allmerica Select Separate Account
Inheiritage Account, Separate Account KG, Fulcrum Separate
Account and Fulcrum Variable Life Separate Account of Allmerica
Financial Life Insurance and Annuity Company
- Separate Accounts I, VA-K, VA-P, VEL II Account, Inheiritage Account
Group VEL Account, Allmerica Select Separate Account, Fulcrum Variable
Life Separate Account, Fulcrum Separate Account, Separate
Account KG and KGC of First Allmerica Financial
Life Insurance Company.
- Allmerica Investment Trust

(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653

<PAGE>

Name Position or Office with Underwriter
---- -----------------------------------

Emil J. Aberizk Vice President

Abigail M. Armstrong Secretary and Counsel

Richard F. Betzler, Jr. Vice President

Phillip J. Coffey Vice President

Thomas J. Cunningham Vice President, Chief Financial Officer
and Controller

John F. Kelly Director

William F. Monroe, Jr. Vice President

David J. Mueller Vice President

John F. O'Brien Director

Stephen Parker President, Director and Chief
Executive Officer

Edward J. Parry, III Treasurer

Richard M. Reilly Director

Eric A. Simonsen Director

Mark Steinberg Senior Vice President

Item 30. LOCATION OF ACCOUNTS AND RECORDS.

Each account, book or other document required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts 01653.

<PAGE>

Item 31. MANAGEMENT SERVICES.

The Company provides daily unit value calculations and related services for
the Company's separate accounts.

Item 32. UNDERTAKINGS.

(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.

(b) The registrant hereby undertakes to include in the prospectus a postcard
that the applicant can remove to send for a Statement of Additional Information.

(c) The registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the requirements
of Form N-4.

(d) The Company hereby undertakes that the aggregate fees and charges under the
contract are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Insurance Company.

Item 33. REPRESENTATIONS CONCERNING WITHDRAWAL RESTRICTIONS ON SECTION 403(b)
PLANS AND UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM.

<PAGE>

Registrant, a separate account of Allmerica Financial Life Insurance and Annuity
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the 1940
Act with respect to withdrawal restrictions under the Texas Optional Retirement
Program ("Program") and (b) relying on the "no-action" letter (Ref. No. IP-6-88)
issued on November 28, 1988 to the American Council of Life Insurance, in
applying the withdrawal restrictions of Internal Revenue Code Section
403(b)(11). Registrant has taken the following steps in reliance on the letter:

1. Appropriate disclosures regarding the redemption restrictions imposed by
the Program and by Section 403(b)(11) have been included in the prospectus
of each registration statement used in connection with the offer of the
Company's variable contracts.

2. Appropriate disclosures regarding the redemption restrictions imposed by
the Program and by Section 403(b)(11) have been included in sales
literature used in connection with the offer of the Company's variable
contracts.

3. Sales Representatives who solicit participants to purchase the variable
contracts have been instructed to specifically bring the redemption
restrictions imposed by the Program and by Section 403(b)(11) to the
attention of potential participants.

4. A signed statement acknowledging the participant's understanding of (I) the
restrictions on redemption imposed by the Program and by Section 403(b)(11)
and (ii) the investment alternatives available under the employer's
arrangement will be obtained from each participant who purchases a variable
annuity contract prior to or at the time of purchase.

Registrant hereby represents that it will not act to deny or limit a transfer
request except to the extent that a Service-Ruling or written opinion of
counsel, specifically addressing the fact pattern involved and taking into
account the terms of the applicable employer plan, determines that denial or
limitation is necessary for the variable annuity contracts to meet the
requirements of the Program or of Section 403(b). Any transfer request not so
denied or limited will be effected as expeditiously as possible.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this 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 2nd day of April, 1997.

SEPARATE ACCOUNT KGC OF
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY

By: /s/ Abigail M. Armstrong
---------------------------------
Abigail M. Armstrong, Secretary

SIGNATURES TITLE DATE
- ---------- ----- ----

/s/ John F. O'Brien Director and
John F. O'Brien Chairman of the Board

/s/ Bruce C. Anderson Director
Bruce C. Anderson

/s/ John P. Kavanaugh Director April 2, 1997
John P. Kavanaugh

/s/ John F. Kelly Director
John F. Kelly

/s/ James R. McAuliffe Director
James R. McAuliffe

/s/ Edward J. Parry III Director, Vice President,Treasurer
Edward J. Parry III And Chief Accounting Officer

<PAGE>

/s/ Richard M. Reilly Director, President and
Richard M. Reilly Chief Executive Officer

/s/ Larry C. Renfro Director
Larry C. Renfro

/s/ Eric A. Simonsen Director
Eric A. Simonsen

/s/ Phillip E. Soule Director
Phillip E. Soule

<PAGE>

EXHIBIT TABLE

Exhibit 9 - Consent and Opinion of Counsel.

Exhibit 10 - Consent of Independent Accountants

<PAGE>

ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY

April 2, 1997

Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653

Gentlemen:

In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company"), I have participated in the preparation of the
Post-Effective Amendment to the Registration Statements for Separate Account
KGC on Form N-4 under the Securities Act of 1933 and 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 KGC is a separate account of the Company validly existing
pursuant to the Delaware Insurance Code and the regulations issued
thereunder.

2. The assets held in Separate Account KGC are not chargeable with liabilities
arising out of any other business the Company may conduct.

3. The individual qualified and non-qualified variable annuity contracts,
when issued in accordance with the Prospectus contained in the Registration
Statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.

In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.

I hereby consent to the filing of this opinion as an exhibit to the
Post-Effective Amendment to the Registration Statements on Form N-4 under the
Securities Act of 1933.

Very truly yours,

/s/Sylvia Kemp-Orino
Sylvia Kemp-Orino
Assistant Vice President and Counsel

<PAGE>
Exhibit 10

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 1 to the Registration
Statement on Form N-4 of our report dated February 3, 1997, relating to the
financial statements of Allmerica Financial Life Insurance and Annuity
Company and our report dated February 5, 1996, relating to the statutory basis
financial statements of Allmerica Financial Life Insurance and Annuity Company,
both of which appear in such Statement of Additional Information. We also
consent to the reference to us under the heading "Experts" in such Statement
of Additional Information.

/s/ Price Waterhouse LLP

Price Waterhouse LLP
Boston, Massachusetts
April 21, 1997