<PAGE>
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. 6
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7
SEPARATE ACCOUNT KGC OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Mary Eldridge, Secretary
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b) of Rule 485.
----
on (date) 1999 pursuant to paragraph (b) of Rule 485
----
60 days after filing pursuant to paragraph (a)(1) of Rule 485.
----
on (date) pursuant to paragraph (a)(1) of Rule 485.
----
this post-effective amendment designates a new effective date
----
for a previously filed post-effective amendment.
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("the
1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("the 1933
Act"). The Rule 24f-2 Notice for the issuer's fiscal year ended December 31,
1998 was filed on or before March 30, 1999.
<PAGE>
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
<TABLE>
<CAPTION>
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ---------------- ---------------------
<S> <C>
1.....................Cover Page
2.....................Special Terms
3.....................Summary of Fees and Expenses; Summary of Contract Features
4.....................Condensed Financial Information; Performance Information
5.....................Description of the Companies, the Variable Accounts and the Underlying
Portfolios
6.....................Charges and Deductions
7.....................Description of the Contract
8.....................Electing the Form of Annuity and the Annuity Date; Description of
Variable Annuity Payout Options; 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
17....................General Information and History
18....................Services
19....................Underwriters
20....................Underwriters
21....................Performance Information
22....................Annuity Benefit Payments
23....................Financial Statements
</TABLE>
<PAGE>
Allmerica Financial Life Insurance
and Annuity Company
First Allmerica Financial Life
Insurance Company
KEMPER GATEWAY CUSTOM
A Variable Annuity
<TABLE>
<S> <C>
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE
IMPORTANT POINTS THAT YOU SHOULD KNOW AND
CONSIDER BEFORE PURCHASING A KEMPER GATEWAY
PROFILE CUSTOM VARIABLE ANNUITY CONTRACT. THE CONTRACT
May 1, 1999 IS MORE FULLY DESCRIBED LATER IN THIS
as revised PROSPECTUS. PLEASE READ THE PROSPECTUS
November 15, 1999 CAREFULLY.
</TABLE>
1. Kemper GATEWAY Custom Variable Annuity Contract
The Kemper GATEWAY Custom variable annuity contract is a contract between you
(the contract owner) and Allmerica Financial Life Insurance and Annuity Company
(for contracts issued in the District of Columbia, Puerto Rico, the Virgin
Islands and any state except Hawaii and New York) or First Allmerica Financial
Life Insurance Company (for contracts issued in Hawaii and New York). It is
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Kemper GATEWAY
Custom contract 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 17 of the
available 26 investment portfolios of the Kemper Variable Series, the 4
investment portfolios of the Scudder Variable Life Investment Fund, the 2
investment portfolios of The Alger American Fund, one investment portfolio of
the Dreyfus Investment Portfolios and the one investment portfolio of The
Dreyfus Socially Responsible Growth Fund, Inc. in addition to the Guarantee
Period Accounts and the Fixed Account. (The Guarantee Period Accounts and/or the
Fixed Account may not be available in certain jurisdictions). This range of
investment choices enables you to allocate your money to meet your particular
investment needs.
Like all deferred annuities, the contract has an ACCUMULATION PHASE and, if you
annuitize, an ANNUITY PAYOUT PHASE. During the ACCUMULATION PHASE you can make
payments into the contract on any frequency. Investment and interest gains
accumulate tax deferred. You may also withdraw money from your contract during
the ACCUMULATION PHASE; however, as with other tax-deferred investments,
P-1
<PAGE>
you pay taxes on earnings and any pre-tax payments to the contract when you
withdraw them. A federal tax penalty may apply if you withdraw money prior to
age 59 1/2.
During the ANNUITY PAYOUT PHASE you 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 ANNUITY PAYOUT PHASE will, in part, be determined by your
contract's growth during the ACCUMULATION PHASE.
2. Annuity Benefit Payments
If you choose to annuitize your contract, you may select one of six annuity
options: (1) periodic payments guaranteed for your lifetime; (2) periodic
payments guaranteed for your lifetime, but for not less than 10 years;
(3) periodic payments for your lifetime with the guarantee that if payments to
you are less than the accumulated value at annuitization, a refund of the
remaining value will be paid; (4) periodic payments guaranteed for your lifetime
and your survivor's lifetime; (5) periodic payments guaranteed for your lifetime
and your survivor's lifetime with the payment to the survivor being reduced to
2/3; and (6) periodic payments guaranteed for a specified period of 1 to 30
years. Other annuity options may be offered by the Company.
You also need to decide if you want 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 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.
P-2
<PAGE>
4. Investment Options
You may allocate money among a total of 17 of the offered Sub-Accounts investing
in the following portfolios:
<TABLE>
<S> <C>
KVS Portfolios:
- --------------------------------------
Kemper Aggressive Growth Kemper Index 500
Kemper Technology Growth Kemper Horizon 20+
Kemper-Dreman Financial Services Kemper Total Return
Kemper Small Cap Growth Kemper Horizon 10+
Kemper Small Cap Value Kemper High Yield
Kemper-Dreman High Return Equity Kemper Horizon 5
Kemper International Kemper Global Income
Kemper International Growth and Kemper Investment Grade Bond
Income Kemper Government Securities
Kemper Global Blue Chip Kemper Money Market
Kemper Growth KVS Focused Large Cap Growth
Kemper Contrarian Value KVS Growth Opportunities
Kemper Blue Chip KVS Growth And Income
Kemper Value+Growth
Scudder VLIF Portfolios:
- --------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
The Alger American Fund Portfolios:
- --------------------------------------
Alger American Leveraged AllCap
Alger American Balanced
Dreyfus Investment Portfolios:
- --------------------------------------
Dreyfus MidCap Stock
The Dreyfus Socially Responsible
Growth Fund, Inc.:
- --------------------------------------
Dreyfus Socially Responsible Growth
</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).
P-3
<PAGE>
5. Expenses
Each year and upon surrender, a $35 contract fee is deducted from your contract.
(This fee may vary by state. See your contract for more information.) The
contract fee is waived if the value of the contract is $50,000 or more. The
contract fee is waived on the date the fee is assessed or if the contract is
issued to and maintained by the Trustees of a 401(k) plan. We also deduct
insurance charges at a total annual rate of 1.10% of the average daily value of
your contract value allocated to the variable investment options. The insurance
charges include a mortality and expense risk charge of 0.95% and an
administrative expense charge of 0.15%. There are also investment management
fees and other portfolio operating expenses that vary by portfolio. (In
addition, if you elect any of the available optional riders, additional expenses
will apply.)
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 annual
$35 contract fee (which is represented as 0.04%) and the 1.10% insurance charges
(Column A) plus the investment charges for each portfolio (Column B.) Optional
rider charges are not included. Columns D and E show you two examples of the
charges, in dollar amounts, you would pay under a contract. The examples assume
that you invest $1,000 in a portfolio earning 5% annually and that you withdraw
your money: (1) at the end of year 1 (Column D), and (2) at the end of year 10
(Column E). In Column D, the Total Annual 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. The following chart does not
reflect the optional rider charges which, if elected, would increase the Total
Annual Insurance Charges.
P-4
<PAGE>
<TABLE>
<CAPTION>
A B C D E
Total
Annual
Expenses
Total Total at End of
Annual Annual Total -----------
Insurance Portfolio Annual 1 10
Portfolio Charges Charges Charges Year Years
- -------------------------------------------------- --------- --------- ------- ---- -----
<S> <C> <C> <C> <C> <C>
Kemper Aggressive Growth* 1.14% 0.95% 2.09% $82 $239
Kemper Technology Growth* 1.14% 0.95% 2.09% $82 $239
Kemper-Dreman Financial Services** 1.14% 0.99% 2.13% $83 $243
Kemper Small Cap Growth 1.14% 0.70% 1.84% $80 $212
Kemper Small Cap Value 1.14% 0.80% 1.94% $81 $223
Kemper-Dreman High Return Equity** 1.14% 0.87% 2.01% $81 $230
Kemper International 1.14% 0.93% 2.07% $82 $237
Kemper International Growth and Income** 1.14% 1.12% 2.26% $84 $256
Kemper Global Blue Chip** 1.14% 1.56% 2.70% $88 $300
Kemper Growth 1.14% 0.65% 1.79% $79 $207
Kemper Contrarian Value 1.14% 0.78% 1.92% $81 $221
Kemper Blue Chip 1.14% 0.76% 1.90% $80 $219
Kemper Value+Growth 1.14% 0.78% 1.92% $81 $221
Kemper Index 500*** 1.14% 0.55% 1.69% $78 $197
Kemper Horizon 20+ 1.14% 0.67% 1.81% $79 $209
Kemper Total Return 1.14% 0.60% 1.74% $79 $202
Kemper Horizon 10+ 1.14% 0.64% 1.78% $79 $206
Kemper High Yield 1.14% 0.65% 1.79% $79 $207
Kemper Horizon 5 1.14% 0.66% 1.80% $79 $208
Kemper Global Income 1.14% 1.05% 2.19% $83 $249
Kemper Investment Grade Bond 1.14% 0.67% 1.81% $79 $209
Kemper Government Securities 1.14% 0.66% 1.80% $79 $208
Kemper Money Market 1.14% 0.54% 1.68% $78 $195
KVS Focused Large Cap Growth**** 1.14% 1.15% 2.29% $84 $259
KVS Growth Opportunities**** 1.14% 1.15% 2.29% $84 $259
KVS Growth And Income**** 1.14% 1.15% 2.29% $84 $259
Scudder International 1.14% 1.05% 2.19% $83 $249
Scudder Global Discovery 1.14% 1.78% 2.92% $90 $321
Scudder Capital Growth 1.14% 0.51% 1.65% $78 $192
Scudder Growth and Income 1.14% 0.56% 1.70% $79 $198
Alger American Leveraged AllCap 1.14% 0.96% 2.10% $82 $240
Alger American Balanced 1.14% 0.92% 2.06% $82 $236
Dreyfus MidCap Stock** 1.14% 1.00% 2.14% $83 $244
Dreyfus Socially Responsible Growth 1.14% 0.80% 1.94% $81 $223
</TABLE>
* These portfolios commenced operations after May 1, 1999. Charges have been
estimated and annualized. The charges reflect any expense reimbursements and/ or
fee waivers. For more detailed information, see the Fee Table in the Prospectus.
** These portfolios commenced operations on May 1, 1998. Charges have been
annualized. The charges reflect any expense reimbursements and/or fee waivers.
For more detailed information, see the Fee Table in the Prospectus.
P-5
<PAGE>
*** This portfolio commenced operations on September 1, 1999. Charges have been
estimated and annualized. The charges reflect any expense reimbursements and/or
fee waivers. For more detailed information, see the Fee Table in the Prospectus.
**** These portfolios commenced operations on October 29, 1999. Charges have
been estimated and annualized. The charges reflect any expense reimbursements
and/or fee waivers. For more detailed information, see the Fee Table in the
Prospectus.
6. Taxes
Under current tax rules, you will not pay taxes until you withdraw money from
your contract. During the accumulation phase, earnings are withdrawn first and
are taxed as ordinary income. If you make a withdrawal prior to age 59 1/2, you
may be subject to a 10% federal tax penalty on the earnings. Payments during the
annuity payout phase are considered partly a return of your original investment
and partly earnings. You will be subject to income taxes on the earnings portion
of each payment. However, if your contract is funded with pre-tax or tax
deductible dollars (such as a pension or profit sharing plan contribution), then
the entire payment may be taxable.
7. Withdrawals
You can make withdrawals from your contract any time during the accumulation
phase. The minimum withdrawal amount is $100. Any payment invested in the
contract for more than six years can be withdrawn without a surrender charge.
For amounts invested six years or less, you will not be assessed a surrender
charge on the greatest of: (1) 15% or less of the contract value in any calendar
year; or (2), if you are also the Annuitant, an amount calculated under the Life
Expectancy Distribution option. (Similarly, no surrender charge will apply if an
amount is withdrawn based on the Annuitant's life expectancy and the Owner is a
trust or other nonnatural person.)
You may also purchase riders that enhance your liquidity in times of need (see
"Optional Benefit Riders" below).
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%.
P-6
<PAGE>
8. Performance
The value of your contract will vary up or down depending on the investment
performance of the Sub-Accounts investing in the underlying portfolios you
choose. The first chart below illustrates past returns on a calendar year basis
for each Sub-Account of Allmerica Financial Life Insurance and Annuity Company's
Separate Account KGC based on the inception dates of each of its Sub-Accounts.
The second chart illustrates the same information for each Sub-Account of First
Allmerica Financial Life Insurance Company's Separate Account KGC. Each Company
offers the same Sub-Accounts; however, Separate Account KGC of Allmerica
Financial Life Insurance and Annuity Company and each of its Sub-Accounts has
been in existence for a longer period. The performance figures reflect the
contract fee, the insurance charges, and the investment charges and other
expenses of the underlying portfolios. They do not reflect the surrender charges
which, if applied, would reduce such performance. In addition, they do not
reflect any optional rider charges which, if elected, would reduce performance.
Please note that past performance is not a guarantee of future results.
P-7
<PAGE>
Separate Account KGC (Kemper Gateway Custom) of
Allmerica Financial Life Insurance and Annuity Company
<TABLE>
<CAPTION>
Calendar Year Ended
December 31
---------------------------------------
Portfolio 1998 1997
- --------- --------------- ---------------
<S> <C> <C>
Kemper Aggressive Growth N/A N/A
Kemper Technology Growth N/A N/A
Kemper-Dreman Financial Services N/A N/A
Kemper Small Cap Growth 16.80% N/A
Kemper Small Cap Value -12.67% N/A
Kemper-Dreman High Return Equity N/A N/A
Kemper International 8.43% N/A
Kemper International Growth and
Income N/A N/A
Kemper Global Blue Chip N/A N/A
Kemper Growth 13.59% N/A
Kemper Contrarian Value 17.44% N/A
Kemper Blue Chip 12.43% N/A
Kemper Value+Growth 18.59% N/A
Kemper Index 500 N/A N/A
Kemper Horizon 20+ 11.73% N/A
Kemper Total Return 13.65% N/A
Kemper Horizon 10+ 10.04% N/A
Kemper High Yield -0.08% N/A
Kemper Horizon 5 8.51% N/A
Kemper Global Income 9.75% N/A
Kemper Investment Grade Bond 6.67% N/A
Kemper Government Securities 5.80% N/A
Kemper Money Market 3.91% N/A
KVS Focused Large Cap Growth N/A N/A
KVS Growth Opportunities N/A N/A
KVS Growth And Income N/A N/A
Scudder International N/A N/A
Scudder Global Discovery N/A N/A
Scudder Capital Growth N/A N/A
Scudder Growth and Income N/A N/A
Alger American Leveraged AllCap N/A N/A
Alger American Balanced N/A N/A
Dreyfus MidCap Stock N/A N/A
Dreyfus Socially Responsible
Growth N/A N/A
</TABLE>
P-8
<PAGE>
Separate Account KGC (Kemper Gateway Custom) of
First Allmerica Financial Life Insurance Company
<TABLE>
<CAPTION>
Calendar Year Ended
December 31
---------------------------------------
Portfolio 1998 1997
- --------- --------------- ---------------
<S> <C> <C>
Kemper Aggressive Growth N/A N/A
Kemper Technology Growth N/A N/A
Kemper-Dreman Financial Services N/A N/A
Kemper Small Cap Growth 16.74% N/A
Kemper Small Cap Value -12.56% N/A
Kemper-Dreman High Return Equity N/A N/A
Kemper International 8.37% N/A
Kemper International Growth and
Income N/A N/A
Kemper Global Blue Chip N/A N/A
Kemper Growth 13.71% N/A
Kemper Contrarian Value 17.53% N/A
Kemper Blue Chip 12.49% N/A
Kemper Value+Growth 18.63% N/A
Kemper Index 500 N/A N/A
Kemper Horizon 20+ 11.75% N/A
Kemper Total Return 13.69% N/A
Kemper Horizon 10+ N/A N/A
Kemper High Yield 0.13% N/A
Kemper Horizon 5 N/A N/A
Kemper Global Income N/A N/A
Kemper Investment Grade Bond 6.67% N/A
Kemper Government Securities N/A N/A
Kemper Money Market 3.98% N/A
KVS Focused Large Cap Growth N/A N/A
KVS Growth Opportunities N/A N/A
KVS Growth And Income N/A N/A
Scudder International N/A N/A
Scudder Global Discovery N/A N/A
Scudder Capital Growth N/A N/A
Scudder Growth and Income N/A N/A
Alger American Leveraged AllCap N/A N/A
Alger American Balanced N/A N/A
Dreyfus MidCap Stock N/A N/A
Dreyfus Socially Responsible
Growth N/A N/A
</TABLE>
P-9
<PAGE>
9. Death Benefit
If the annuitant dies during the accumulation phase, we will pay the beneficiary
a death benefit. The death benefit is equal to the GREATER of: (a) the
accumulated value increased for any positive market value adjustment; or
(b) gross payments, decreased proportionately to reflect any prior 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), you will receive a refund in
accordance with the terms of the contract's "Right to Examine" provision.
OPTIONAL BENEFIT RIDERS: Where permitted by state law, four optional riders are
available for separate monthly charges.
Optional Minimum Guaranteed Annuity Payout Rider (not available in all
jurisdictions):
This optional rider is available for a separate monthly charge and guarantees
you a minimum amount of fixed lifetime income during the annuity payout phase
subject to certain conditions. On each contract anniversary a minimum guaranteed
annuity payout benefit base is determined. This minimum guaranteed annuity
payout benefit base (less any applicable premium taxes) is the value that will
be annuitized should you exercise the rider. In order to exercise the rider, a
fixed annuitization option involving a life contingency must be selected.
Annuitization under this rider will occur at the guaranteed annuity purchase
rates listed under the Annuity Option Tables in your contract. The minimum
guaranteed annuity payout benefit base is equal to the greatest of:
(a) the accumulated value increased by any positive market value adjustment, if
applicable, or
(b) the accumulated value on the effective date of the rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest accumulated value on any contract anniversary since the rider
effective date, as determined after positive adjustments have been made for
subsequent payments and any positive market value adjustment, if applicable,
and negative adjustments have been made for subsequent withdrawals.
P-10
<PAGE>
Enhanced Death Benefit Rider:
Under this rider, the death benefit is equal to the GREATEST of:
(a) the accumulated value increased for any positive market value
adjustment;
(b) gross payments compounded daily at the annual rate of 5%, decreased
proportionately to reflect any prior withdrawals (except in Hawaii and
New York where (b) equals gross payments decreased proportionately to
reflect withdrawals); or
(c) the death benefit that would have been payable on the most recent
contract anniversary, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This enhanced guaranteed death benefit works in the following way assuming no
withdrawals are made. On the first anniversary, the death benefit will be equal
to the greater of (a) the accumulated value (increased by any positive market
value adjustment) or (b) gross payments compounded daily at the annual rate of
5% (except in Hawaii and New York where (b) equals gross payments). The higher
of (a) or (b) will then be locked in until the second anniversary, at which time
the death benefit will be equal to the greatest of (a) the Contract's then
current accumulated value increased by any positive market value adjustment;
(b) gross payments compounded daily at the annual rate of 5% (5% compounding
does not apply in Hawaii and New York) or (c) the locked-in value of the death
benefit at the first anniversary. The greatest of (a), (b) or (c) will be locked
in until the next Contract anniversary. This calculation will then be repeated
on each anniversary date while the Contract remains in force and prior to the
Annuity Date. As noted above, the values of (b) and (c) will be decreased
proportionately if withdrawals are taken.
Living Benefits Rider (not available in New York or New Jersey):
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.
P-11
<PAGE>
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. Under New
York contracts, the disability also must exist for a continuous period of at
least four months.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Kemper Money Market Portfolio, the Kemper Government
Securities Portfolio or the Fixed Account to one or more of the variable
investment options. There is no charge for this service.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
There is no charge for this service.
11. Inquiries
If you need more information you may contact us at 1-800-782-8380 or send
correspondence to:
Kemper Gateway Annuities
Allmerica Financial
P.O. Box 8632
Boston, Massachusetts 02266-8632
P-12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
Worcester, Massachusetts
This Prospectus provides important information about the Kemper Gateway Custom
variable annuity contracts issued by Allmerica Financial Life Insurance and
Annuity Company (in all jurisdictions except Hawaii and New York) and First
Allmerica Financial Life Insurance Company in New York and Hawaii. The contract
is a flexible payment tax-deferred combination variable and fixed annuity
offered on both a group and individual basis. Please read this Prospectus
carefully before investing and keep it for future reference. Annuities involve
risks including possible loss of principle.
The Variable Account, known as Separate Account KGC is subdivided into Sub-
Accounts, each investing exclusively in shares of one of the following
portfolios:
<TABLE>
<CAPTION>
KVS Portfolios:
- ---------------
<S> <C>
Kemper Aggressive Growth Kemper Index 500
Kemper Technology Growth Kemper Horizon 20+
Kemper-Dreman Financial Services Kemper Total Return
Kemper Small Cap Growth Kemper Horizon 10+
Kemper-Dreman High Return Equity Kemper High Yield
Kemper International Kemper Horizon 5
Kemper International Kemper Global Income
Growth and Income Kemper Investment Grade Bond
Kemper Global Blue Chip Kemper Government Securities
Kemper Growth Kemper Money Market
Kemper Contrarian Value KVS Focused Large Cap Growth
Kemper Blue Chip KVS Growth Opportunities
Kemper Value+Growth KVS Growth And Income
Scudder VLIF Portfolios:
- ------------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
The Alger American Fund: The Dreyfus Socially Responsible
Alger American Leveraged AllCap Growth Fund, Inc.:
Alger American Balanced Dreyfus Socially Responsible Growth
Dreyfus Investment Portfolios:
- ------------------------------------
Dreyfus MidCap Stock
</TABLE>
This annuity is NOT a bank deposit; federally insured or endorsed by any bank or
governmental agency.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined that the information is truthful or complete. Any
representation to the contrary is a criminal offense.
DATED MAY 1, 1999 AS REVISED NOVEMBER 15, 1999
<PAGE>
The Fixed Account is part of the Company's General Account and pays an interest
rate guaranteed for one year from the time a payment is received. The Guarantee
Period Accounts offer fixed rates of interest for specified periods ranging from
2 to 10 years. A Market Value Adjustment is applied to payments removed from a
Guarantee Period Account before the end of the specified period. The Market
Value Adjustment may be positive or negative. Payments allocated to a Guarantee
Period Account are held in the Company's Separate Account GPA (except in
California where they are allocated to the General Account.)
A Statement of Additional Information dated May 1, 1999 as revised November 15,
1999 containing more information about this annuity is on file with the
Securities and Exchange Commission and is incorporated by reference into this
Prospectus. A copy may be obtained free of charge by calling Allmerica
Investments, Inc. at 1-800-782-8380. The Table of Contents of the Statement of
Additional Information is listed on page 5 of this Prospectus. This Prospectus
and the Statement of Additional Information can also be obtained from the
Securities and Exchange Commission's website (http://www.sec.gov).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SPECIAL TERMS 5
SUMMARY OF FEES AND EXPENSES 7
SUMMARY OF CONTRACT FEATURES 17
PERFORMANCE INFORMATION
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS AND THE
UNDERLYING PORTFOLIOS 26
INVESTMENT OBJECTIVES AND POLICIES 28
INVESTMENT MANAGEMENT SERVICES 31
DESCRIPTION OF THE CONTRACT 35
A. Payments 35
B. Right to Cancel Individual Retirement Annuity 36
C. Right to Cancel All Other Contracts 36
D. Transfer Privilege 37
Automatic Transfers and Automatic Account Rebalancing
Options 37
E. Surrender 39
F. Withdrawals 40
Systematic Withdrawals 40
Life Expectancy Distributions 41
G. Death Benefit 42
Death of the Annuitant Prior to the Annuity Date 42
Death of an Owner Who is Not Also the Annuitant Prior
to the Annuity Date 43
Payment of the Death Benefit Prior
to the Annuity Date 43
Death of the Annuitant On or After the Annuity Date 44
H. The Spouse of the Owner as Beneficiary 44
I. Assignment 45
J. Electing the Form of Annuity and Annuity Date 45
K. Description of Variable Annuity Payout Options 46
L. Annuity Benefit Payments 48
Determination of the First Variable Annuity Benefit
Payment 48
The Annuity Unit 49
Determination of the Number of Annuity Units 49
Dollar Amount of Subsequent Variable Annuity Benefit
Payments 49
M. Optional Minimum Guaranteed Annuity Payout Rider 50
N. NORRIS Decision 52
O. Computation of Values 53
The Accumulation Unit 53
Net Investment Factor 54
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
CHARGES AND DEDUCTIONS 54
A. Variable Account Deductions 54
Mortality and Expense Risk Charge 54
Administrative Expense Charge 55
Other Charges 55
B. Contract Fee 56
C. Optional Benefit Riders 56
Living Benefits Rider 57
Disability Rider 58
D. Premium Taxes 58
E. Surrender Charge 59
Charges for Surrender and Withdrawal 59
Reduction or Elimination of Surrender Charge and
Additional Amounts Credited 60
Withdrawal Without Surrender Charge 61
Surrenders 61
Charge at the Time Annuity Benefit Payments Begin 62
F. Transfer Charge 63
GUARANTEE PERIOD ACCOUNTS 63
FEDERAL TAX CONSIDERATIONS 66
A. Qualified and Non-Qualified Contracts 68
B. Taxation of the Contracts in General 68
Withdrawals Prior to Annuitization 68
Annuity Payouts After Annuitization 69
Penalty on Distribution 69
Assignments or Transfers 70
Nonnatural Owners 70
Deferred Compensation Plans of State and Local
Government and Tax-Exempt Organizations 70
C. Tax Withholding 70
D. Provisions Applicable to Qualified Employer Plans 71
Corporate and Self-Employed Pension and Profit Sharing
Plans 71
Individual Retirement Annuities 71
Tax-Sheltered Annuities 72
Texas Optional Retirement Program 72
STATEMENTS AND REPORTS 72
LOANS (QUALIFIED CONTRACTS ONLY) 73
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 73
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 75
VOTING RIGHTS 75
DISTRIBUTION 75
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
LEGAL MATTERS 76
YEAR 2000 COMPLIANCE 76
FURTHER INFORMATION 77
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED
ACCOUNT A-1
APPENDIX B -- PERFORMANCE INFORMATION
PERFORMANCE TABLES (ALLMERICA
FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY) B-1
APPENDIX C -- PERFORMANCE TABLES (FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY) C-1
APPENDIX D -- SURRENDER CHARGES AND THE MARKET
VALUE ADJUSTMENT D-1
APPENDIX E -- THE DEATH BENEFIT E-1
APPENDIX F -- CONDENSED FINANCIAL INFORMATION F-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY
3
SERVICES 3
UNDERWRITERS 3
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 6
PERFORMANCE INFORMATION 8
TAX-DEFERRED ACCUMULATION 10
FINANCIAL STATEMENTS F-1
</TABLE>
4
<PAGE>
SPECIAL TERMS
Accumulated Value: the total value of all Accumulation Units in the Sub-
Accounts plus the value of all accumulations in the Fixed Account and Guarantee
Period Accounts credited to the Contract on any date before the Annuity Date.
Accumulation Unit: a unit of measure used to calculate the value of a Sub-
Account before annuity benefit payments begin.
Annuitant: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
Annuity Date: the date on which annuity benefit payments begin. This date may
not be later than the first day of the month before the Annuitant's 90th
birthday.
Annuity Unit: a unit of measure used to calculate the value of the periodic
annuity benefit payments under the Contract.
Company: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in all jurisdictions except Hawaii and New York and exclusively
to First Allmerica Financial Life Insurance Company for contracts issued in
Hawaii and New York.
Fixed Account: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
Fixed Annuity Payout: an annuity payout option providing for annuity benefit
payments which remain fixed in amount throughout the annuity benefit payment
period selected.
General Account: all the assets of the Company other than those held in a
separate account.
Guarantee Period: the number of years that a Guaranteed Interest Rate is
credited.
Guarantee Period Account: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period.
Guaranteed Interest Rate: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
5
<PAGE>
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 (or You): the person, persons or entity entitled to exercise the rights
and privileges under this Contract. Joint Owners are permitted if one of the two
is the Annuitant.
Sub-Account: a subdivision of the Variable Account investing exclusively in the
shares of a corresponding portfolio of Kemper Variable Series ("KVS"), Scudder
Variable Life Investment Fund (Class A) ("Scudder VLIF"), The Alger American
Fund ("Alger"), Dreyfus Investment Portfolios or The Dreyfus Socially
Responsible Growth Fund, Inc. (the "Dreyfus Socially Responsible Growth Fund").
Surrender Value: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, surrender charge, and Market Value Adjustment.
Underlying Portfolios (or Portfolios): currently, the twenty-six Portfolios of
KVS, the four Portfolios of Scudder VLIF, the two Portfolios of The Alger
American Fund, the one Portfolio of the Dreyfus Investment Portfolios and the
one Portfolio of The Dreyfus Socially Responsible Growth Fund, Inc. in which the
Sub-Accounts invest.
Valuation Date: a day on which the net asset value of the shares of any of the
Underlying Portfolios is determined and unit values of the Sub-Accounts are
determined. Valuation Dates currently occur on each day on which the New York
Stock Exchange is open for trading, as well as each day otherwise required.
Variable Account: Separate Account 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 payout option providing for payments varying
in amount in accordance with the investment experience of certain of the
Portfolios.
6
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Kemper Gateway
Custom Contract. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Contract, (2) annual expenses of the Sub-Accounts, and (3) annual expenses of
the Underlying Portfolios. In addition to the charges and expenses described
below, premium taxes are applicable in some states and are deducted as described
under "D. Premium Taxes."
<TABLE>
<CAPTION>
Years From
Date of
(1) Contract Charges: Payment Charge
- --------------------- ----------- ------
<S> <C> <C>
Surrender Charge:* 0-1 7.0%
This charge may be assessed upon 2 6.0%
surrender, withdrawal or annuitization 3 5.0%
under any commutable period certain option 4 4.0%
or a noncommutable period certain option 5 3.0%
of less than ten years. The charge is a 6 2.0%
percentage of payments applied to the More than 6 0%
amount surrendered (in excess of any
amount that is free of surrender charge)
within the indicated time period.
Transfer Charge:
The Company currently makes no charge for None
processing transfers and guarantees that
the first 12 transfers in a Contract year
will not be subject to a transfer charge.
For each subsequent transfer, the Company
reserves the right to assess a charge,
guaranteed never to exceed $25, to
reimburse the Company for the costs of
processing the transfer.
Annual Contract Fee:
The fee is deducted annually and upon $35**
surrender prior to the Annuity Date when
Accumulated Value is less than $50,000.
The fee is waived for Contracts issued to
and maintained by the trustee of a 401(k)
plan.
</TABLE>
* From time to time the Company may allow a reduction of the surrender charge,
the period during which the charges apply, or both, and/or credit additional
amounts on Contracts when (1) Contracts are sold to individuals or groups of
individuals in a manner which reduces sales expenses, or (2) where the Owner or
the Annuitant on the date of issue is within certain classes of eligible
persons. For more information, see " Reduction or Elimination of Surrender
Charge and Additional Amounts Credited."
7
<PAGE>
<TABLE>
<S> <C> <C>
Optional Rider Charges:
(The annual charge is deducted on a monthly
basis at the end of each month.)
On an annual basis as a percentage of
Accumulated Value, the charge is:
Optional Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting 0.25%
period:
Optional Minimum Guaranteed Annuity
Payout Rider with a fifteen-year waiting
period: 0.15%
Optional Enhanced Death Benefit Rider: 0.25%
Optional Disability Rider: 0.05%
Optional Living Benefits Rider: 0.05%
(2) Annual Sub-Account Expenses:
- ---------------------------------------------
(on an annual basis as percentage of
average daily net assets)
Mortality and Expense Risk Charge: 0.95%
Administrative Expense Charge: 0.15%
--------
Total Annual Expenses: 1.10%
</TABLE>
** This fee may vary by state. See your Contract for more information.
8
<PAGE>
(3) Annual Portfolio Expenses: The following table shows the expenses of the
Underlying Portfolios as a percentage of average net assets for the year ended
December 31, 1998. For more information concerning fees and expenses, see the
prospectuses for the Underlying Portfolios.
<TABLE>
<CAPTION>
Management
Fee Total Portfolio
(after any Other Expenses Expenses (after
voluntary (after any any waivers/
Portfolio waivers) reimbursements) reimbursements)
- --------- ----------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth*(1).... 0.67% 0.28% 0.95%
Kemper Technology Growth*(1).... 0.66% 0.29% 0.95%
Kemper-Dreman Financial
Services**(1).................. 0.02% 0.97% 0.99%
Kemper Small Cap Growth......... 0.65% 0.05% 0.70%
Kemper Small Cap Value.......... 0.75% 0.05% 0.80%(2)
Kemper-Dreman High Return
Equity**(1).................... 0.42% 0.45% 0.87%
Kemper International............ 0.75% 0.18% 0.93%
Kemper International Growth and
Income**(1).................... 0.00% 1.12% 1.12%
Kemper Global Blue Chip**(1).... 0.00% 1.56% 1.56%
Kemper Growth................... 0.60% 0.05% 0.65%
Kemper Contrarian Value......... 0.75% 0.03% 0.78%(2)
Kemper Blue Chip................ 0.65% 0.11% 0.76%(2)
Kemper Value+Growth............. 0.75% 0.03% 0.78%(2)
Kemper Index 500***............. 0.26% 0.29% 0.55%(3)
Kemper Horizon 20+.............. 0.60% 0.07% 0.67%(2)
Kemper Total Return............. 0.55% 0.05% 0.60%
Kemper Horizon 10+.............. 0.60% 0.04% 0.64%(2)
Kemper High Yield............... 0.60% 0.05% 0.65%
Kemper Horizon 5................ 0.60% 0.06% 0.66%(2)
Kemper Global Income(1)......... 0.72% 0.33% 1.05%
Kemper Investment Grade Bond.... 0.60% 0.07% 0.67%(2)
Kemper Government Securities.... 0.55% 0.11% 0.66%
Kemper Money Market............. 0.50% 0.04% 0.54%
KVS Growth Opportunities****.... 0.58% 0.57% 1.15%(4)
KVS Growth And Income****....... 0.58% 0.57% 1.15%(4)
KVS Focused Large Cap
Growth****..................... 0.58% 0.57% 1.15%(4)
Scudder International........... 0.87% 0.18% 1.05%
Scudder Global Discovery........ 0.97% 0.81% 1.78%
Scudder Capital Growth.......... 0.47% 0.04% 0.51%
Scudder Growth and Income....... 0.47% 0.09% 0.56%
Alger American Leveraged
AllCap......................... 0.85% 0.11% 0.96%
Alger American Balanced......... 0.75% 0.17% 0.92%
Dreyfus Mid Cap Stock **........ 0.75% 0.25% 1.00%(5)
Dreyfus Socially Responsible
Growth......................... 0.75% 0.05% 0.80%
</TABLE>
9
<PAGE>
* These portfolios commenced operations after May 1, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
** These portfolios commenced operations on May 1, 1998, therefore "other
expenses" are annualized. Actual expenses may be greater or less than shown.
*** This portfolio commenced operations on September 1, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
**** These portfolios commenced operations on October 29, 1999, therefore "other
expenses" are estimated and annualized. Actual expenses may be greater or less
than shown.
(1) Pursuant to their respective agreements with Kemper Variable Series
("KVS"), the investment manager and the accounting agent have agreed, for
the one year period commencing on May 1, 1999, to limit their respective
fees and to reimburse other operating expenses, in a manner communicated to
the Board of the Fund, to the extent necessary to limit total operating
expenses of the Kemper Aggressive Growth, Kemper Technology Growth,
Kemper-Dreman Financial Services, Kemper-Dreman High Return Equity, Kemper
International Growth and Income, Kemper Global Blue Chip and Kemper Global
Income Portfolios of KVS to the levels set forth in the table above. Without
taking into effect these expense caps, for the Kemper Aggressive Growth,
Kemper Technology Growth, Kemper-Dreman Financial Services, Kemper-Dreman
High Return Equity, Kemper International Growth and Income, Kemper Global
Blue Chip and Kemper Global Income Portfolios of KVS, management fees are
estimated to be 0.75%, 0.75%, 0.75%, 0.75%, 1.00%, 1.00% and 0.75%,
respectively. Other expenses are estimated to be 0.28%, 0.29%, 0.97%, 0.45%,
18.54%, 11.32% and 0.33%, respectively; and total operating expenses are
estimated to be 1.03%, 1.04%, 1.72%, 1.20%, 19.54%, 12.32%, and 1.08%,
respectively. In addition, for the Kemper International Growth and Income
and Kemper Global Blue Chip Portfolios, the investment manager has agreed to
limit its management fee to 0.70% and 0.85%, respectively, for such
portfolios for one year from May 1, 1999.
(2) Pursuant to their respective agreements with KVS, the investment manager
and the accounting agent have agreed, for the one year period commencing on
May 1, 1999, to limit their respective fees and to reimburse other operating
expenses, in a manner communicated to the Board of the Fund, to the extent
necessary to limit total operating expenses of the following described
portfolios to the amounts set forth after the portfolio names: Kemper
Value+Growth (0.84%), Kemper Contrarian Value (0.80%), Kemper Small Cap
Value (0.84%), Kemper Horizon 5 (0.97%), Kemper Horizon 10+ (0.83%), Kemper
Horizon 20+ (0.93%), Kemper Investment Grade Bond (0.80%), and Kemper Blue
Chip (0.95%). The amounts set forth in the table above reflect actual
expenses for the past fiscal year, which were lower than these expense
limits.
10
<PAGE>
(3) The investment manager for the Kemper Index 500 Portfolio has agreed to
limit total operating expenses of the Portfolio to 0.55%. This limitation
will be effective from the portfolio's commencement of operations through
April 30, 2000. Without taking into effect this expense cap, for the Kemper
Index 500 Portfolio, management fees would be 0.45%; other expenses are
estimated to be 0.29%; and total operating expenses are estimated to be
0.74%.
(4) The investment manager for the KVS Focused Large Cap Growth, KVS Growth
Opportunities and KVS Growth And Income Portfolios has agreed, for the
period from October 29, 1999 through April 30, 2000, to limit its fees and
to reimburse other operating expenses to the extent necessary to limit total
operating expenses of the portfolios to the levels set forth in the table
above. Without taking into effect these expense caps, the management fees
would be 0.95%, other expenses are estimated to be 0.57% and total operating
expenses are estimated to be 1.52% for each portfolio.
(5) From time to time, the MidCap Stock Portfolio's investment adviser, in its
sole discretion, may waive all or part of its fees and/or voluntarily assume
certain portfolio expenses. The expenses set forth in the above table
reflect the adviser's waiver of fees or reimbursement of expenses for
calendar year 1998. Without such waivers or reimbursements, Total Portfolio
Expenses would have been 1.89% as a percentage of assets.
The Underlying Portfolio information above was provided by the Underlying
Portfolios and was not independently verified by the Company.
Expense Examples. The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. As required by rules of the Securities and
Exchange Commission ("SEC"), the Contract fee is reflected in the examples by a
method designed to show the "average" impact on an investment in the Variable
Account. The total Contract fees collected are divided by the total average net
assets attributable to the Contracts. The resulting percentage is 0.04%, and the
amount of the Contract fee is assumed to be $0.40 in the examples. The Contract
fee is deducted only when the accumulated value is less than $50,000. Lower
costs apply to Contracts owned and maintained under a 401(k) plan. Because the
expenses of the Underlying Portfolios differ, separate examples are used to
illustrate the expenses incurred by an Owner on an investment in the various
Sub-Accounts.
These examples should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown.
11
<PAGE>
(1)(a) If, at the end of the applicable time period, you surrender your Contract
or annuitize* under a commutable period certain option or a noncommutable period
certain option of less than ten years, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return on assets and no Riders:**
<TABLE>
<CAPTION>
1 3 5 10
With Surrender Charge Year Years Years Years
- --------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $82 $111 $140 $239
Kemper Technology Growth................ $82 $111 $140 $239
Kemper-Dreman Financial Services........ $83 $112 $142 $243
Kemper Small Cap Growth................. $80 $104 $128 $212
Kemper Small Cap Value.................. $81 $107 $133 $223
Kemper-Dreman High Return Equity........ $81 $109 $136 $230
Kemper International.................... $82 $110 $139 $237
Kemper International Growth and
Income................................. $84 $116 $149 $256
Kemper Global Blue Chip................. $88 $128 $170 $300
Kemper Growth........................... $79 $102 $125 $207
Kemper Contrarian Value................. $81 $106 $132 $221
Kemper Blue Chip........................ $80 $105 $131 $219
Kemper Value+Growth..................... $81 $106 $132 $221
Kemper Index 500........................ $78 $ 99 $120 $197
Kemper Horizon 20+...................... $79 $103 $126 $209
Kemper Total Return..................... $79 $101 $123 $202
Kemper Horizon 10+...................... $79 $102 $125 $206
Kemper High Yield....................... $79 $102 $125 $207
Kemper Horizon 5........................ $79 $102 $126 $208
Kemper Global Income.................... $83 $114 $145 $249
Kemper Investment Grade Bond............ $79 $103 $126 $209
Kemper Government Securities............ $79 $102 $126 $208
Kemper Money Market..................... $78 $ 99 $120 $195
KVS Focused Large Cap Growth............ $84 $117 $150 $259
KVS Growth Opportunities................ $84 $117 $150 $259
KVS Growth and Income................... $84 $117 $150 $259
Scudder International................... $83 $114 $145 $249
Scudder Global Discovery................ $90 $135 $180 $321
Scudder Capital Growth.................. $78 $ 98 $118 $192
Scudder Growth and Income............... $78 $100 $121 $198
Alger American Leveraged AllCap......... $82 $111 $141 $240
Alger American Balanced................. $82 $110 $139 $236
Dreyfus MidCap Stock.................... $83 $112 $143 $244
Dreyfus Socially Responsible Growth..... $81 $107 $133 $223
</TABLE>
12
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your Contract
or annuitize* under a commutable period certain option or a noncommutable period
certain option of less than ten years, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return on assets and election of the
Minimum Guaranteed Annuity Payout Rider** with a ten-year waiting period, the
Enhanced Death Benefit Rider, the Disability Rider and the Living Benefits
Rider:
<TABLE>
<CAPTION>
1 3 5 10
With Surrender Charge Year Years Years Years
- --------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $88 $128 $169 $299
Kemper Technology Growth................ $88 $128 $169 $299
Kemper-Dreman Financial Services........ $88 $129 $171 $303
Kemper Small Cap Growth................. $85 $121 $157 $274
Kemper Small Cap Value.................. $86 $124 $162 $284
Kemper-Dreman High Return Equity........ $87 $126 $166 $291
Kemper International.................... $88 $128 $168 $297
Kemper International Growth and
Income................................. $89 $133 $178 $315
Kemper Global Blue Chip................. $94 $145 $198 $356
Kemper Growth........................... $85 $120 $155 $269
Kemper Contrarian Value................. $86 $123 $161 $282
Kemper Blue Chip........................ $86 $123 $160 $280
Kemper Value+Growth..................... $86 $123 $161 $282
Kemper Index 500........................ $84 $117 $150 $259
Kemper Horizon 20+...................... $85 $120 $156 $271
Kemper Total Return..................... $84 $118 $152 $264
Kemper Horizon 10+...................... $85 $119 $154 $268
Kemper High Yield....................... $85 $120 $155 $269
Kemper Horizon 5........................ $85 $120 $155 $270
Kemper Global Income.................... $89 $131 $174 $308
Kemper Investment Grade Bond............ $85 $120 $156 $271
Kemper Government Securities............ $85 $120 $155 $270
Kemper Money Market..................... $84 $116 $150 $258
KVS Focused Large Cap Growth............ $90 $134 $179 $318
KVS Growth Opportunities................ $90 $134 $179 $318
KVS Growth and Income................... $90 $134 $179 $318
Scudder International................... $89 $131 $174 $308
Scudder Global Discovery................ $96 $152 $209 $376
Scudder Capital Growth.................. $84 $115 $148 $255
Scudder Growth and Income............... $84 $117 $151 $260
Alger American Leveraged AllCap......... $88 $128 $170 $300
Alger American Balanced................. $87 $127 $168 $296
Dreyfus MidCap Stock.................... $88 $130 $172 $304
Dreyfus Socially Responsible Growth..... $86 $124 $162 $284
</TABLE>
13
<PAGE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable period certain option of ten years or longer, or if
you do not surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and no
Riders:**
<TABLE>
<CAPTION>
1 3 5 10
Without Surrender Charge Year Years Years Years
- ------------------------ ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $21 $65 $111 $239
Kemper Technology Growth................ $21 $65 $111 $239
Kemper-Dreman Financial Services........ $21 $66 $113 $243
Kemper Small Cap Growth................. $18 $57 $ 98 $212
Kemper Small Cap Value.................. $19 $60 $103 $223
Kemper-Dreman High Return Equity........ $20 $62 $107 $230
Kemper International.................... $21 $64 $110 $237
Kemper International Growth and
Income................................. $23 $70 $119 $256
Kemper Global Blue Chip................. $27 $83 $141 $300
Kemper Growth........................... $18 $55 $ 95 $207
Kemper Contrarian Value................. $19 $59 $102 $221
Kemper Blue Chip........................ $19 $59 $101 $219
Kemper Value+Growth..................... $19 $59 $102 $221
Kemper Index 500........................ $17 $52 $ 90 $197
Kemper Horizon 20+...................... $18 $56 $ 96 $209
Kemper Total Return..................... $17 $54 $ 93 $202
Kemper Horizon 10+...................... $18 $55 $ 95 $206
Kemper High Yield....................... $18 $55 $ 95 $207
Kemper Horizon 5........................ $18 $56 $ 96 $208
Kemper Global Income.................... $22 $68 $116 $249
Kemper Investment Grade Bond............ $18 $56 $ 96 $209
Kemper Government Securities............ $18 $56 $ 96 $208
Kemper Money Market..................... $17 $52 $ 90 $195
KVS Focused Large Cap Growth............ $23 $71 $121 $259
KVS Growth Opportunities................ $23 $71 $121 $259
KVS Growth and Income................... $23 $71 $121 $259
Scudder International................... $22 $68 $116 $249
Scudder Global Discovery................ $29 $89 $152 $321
Scudder Capital Growth.................. $17 $51 $ 88 $192
Scudder Growth and Income............... $17 $53 $ 91 $198
Alger American Leveraged AllCap......... $21 $65 $111 $240
Alger American Balanced................. $21 $64 $109 $236
Dreyfus MidCap Stock.................... $21 $66 $113 $244
Dreyfus Socially Responsible Growth..... $19 $60 $103 $223
</TABLE>
14
<PAGE>
(2)(b) If, at the end of the applicable time period, you annuitize* under a life
option or a noncommutable period certain option of ten years or longer, or if
you do not surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming an annual 5% return on assets and
election of the Minimum Guaranteed Annuity Payout Rider** with a ten-year
waiting period, the Enhanced Death Benefit Rider, the Disability Rider and the
Living Benefits Rider:
<TABLE>
<CAPTION>
1 3 5 10
Without Surrender Charge Year Years Years Years
- ------------------------ ---- ----- ----- -----
<S> <C> <C> <C> <C>
Kemper Aggressive Growth................ $27 $ 83 $141 $299
Kemper Technology Growth................ $27 $ 83 $141 $299
Kemper-Dreman Financial Services........ $27 $ 84 $143 $303
Kemper Small Cap Growth................. $24 $ 75 $128 $274
Kemper Small Cap Value.................. $25 $ 78 $133 $284
Kemper-Dreman High Return Equity........ $26 $ 80 $137 $291
Kemper International.................... $27 $ 82 $140 $297
Kemper International Growth and
Income................................. $29 $ 88 $149 $315
Kemper Global Blue Chip................. $33 $101 $171 $356
Kemper Growth........................... $24 $ 74 $126 $269
Kemper Contrarian Value................. $25 $ 77 $132 $282
Kemper Blue Chip........................ $25 $ 77 $131 $280
Kemper Value+Growth..................... $25 $ 77 $132 $282
Kemper Index 500........................ $23 $ 71 $121 $259
Kemper Horizon 20+...................... $24 $ 74 $127 $271
Kemper Total Return..................... $23 $ 72 $123 $264
Kemper Horizon 10+...................... $24 $ 73 $125 $268
Kemper High Yield....................... $24 $ 74 $126 $269
Kemper Horizon 5........................ $24 $ 74 $126 $270
Kemper Global Income.................... $28 $ 86 $146 $308
Kemper Investment Grade Bond............ $24 $ 74 $127 $271
Kemper Government Securities............ $24 $ 74 $126 $270
Kemper Money Market..................... $23 $ 70 $120 $258
KVS Focused Large Cap Growth............ $29 $ 89 $151 $318
KVS Growth Opportunities................ $29 $ 89 $151 $318
KVS Growth And Income................... $29 $ 89 $151 $318
Scudder International................... $28 $ 86 $146 $308
Scudder Global Discovery................ $35 $107 $181 $376
Scudder Capital Growth.................. $23 $ 69 $119 $255
Scudder Growth and Income............... $23 $ 71 $121 $260
Alger American Leveraged AllCap......... $27 $ 83 $141 $300
Alger American Balanced................. $27 $ 82 $139 $296
Dreyfus MidCap Stock.................... $27 $ 84 $143 $304
Dreyfus Socially Responsible Growth..... $25 $ 78 $133 $284
</TABLE>
15
<PAGE>
* The Contract fee is not deducted after annuitization. Any applicable
surrender charge is assessed at the time of annuitization if you elect a
noncommutable period certain option of less than ten years or any commutable
period certain option. No charge is assessed if you elect any life contingency
option or a noncommutable period certain option of ten years or longer.
** If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Contract.
16
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE KEMPER GATEWAY CUSTOM VARIABLE ANNUITY?
The Kemper Gateway Custom variable annuity contract ("Contract") is an insurance
contract designed to help you accumulate assets for your retirement or other
important financial goals on a tax-deferred basis. The Contract combines the
concept of professional money management with the attributes of an annuity
contract. Features available through the Contract include:
- - A customized investment portfolio;
- - 26 KVS Portfolios, 4 Scudder VLIF Portfolios, 2 Alger Portfolios, 1 Dreyfus
Investment Portfolios Portfolio and 1 Dreyfus Socially Responsible Growth
Fund;
- - 1 Fixed Account;
- - 9 Guarantee Period Accounts;
- - Experienced professional portfolio managers;
- - Tax deferral on earnings;
- - Guarantees that can protect your beneficiaries during the accumulation phase;
- - Income payments that you can receive for life.
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, you may
allocate your initial payment and any additional payments you choose to make
among seventeen of the thirty-four portfolios of securities ("Portfolios") under
your Contract, to the Guarantee Period Accounts, and to the Fixed Account. You
select the investment options most appropriate for your investment needs. As
those needs change, you may also change your allocation without incurring any
tax consequences. Your Contract's Accumulated Value is based on the investment
performance of the Portfolios and any accumulations in the Guarantee Period and
Fixed Accounts. No income taxes are paid on any earnings under the Contract
unless you withdraw money. In addition, during the accumulation phase, your
beneficiaries receive certain protections in the event of 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-amount annuity benefit payments with payment amounts
17
<PAGE>
guaranteed by the Company, or a combination of fixed-amount and variable annuity
benefit payments. Among the payout options available during the annuity payout
phase are:
- - periodic payments for 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 any remaining 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.
An optional Minimum Guaranteed Annuity Payout Rider is available during the
accumulation phase in most jurisdictions for a separate monthly charge. See
"M. Optional Minimum Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE
CONTRACT." If elected, the Rider guarantees the Annuitant a minimum amount of
fixed annuity lifetime income during the annuity payout phase, subject to
certain conditions. On each Contract anniversary a Minimum Guaranteed Annuity
Payout Benefit Base is determined. The Minimum Guaranteed Annuity Payout Benefit
Base (less any applicable premium taxes) is the value that will be annuitized
should you exercise the Rider. In order to exercise the Rider, a fixed
annuitization option involving a life contingency must be selected.
Annuitization under this Rider will occur at the guaranteed annuity purchase
rates listed under the Annuity Option Tables in your Contract. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment, if
applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
reduced proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the Rider
effective date, as determined after positive adjustments have been made for
subsequent withdrawals and any positive Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal, by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
18
<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 (for contracts issued in all jurisdictions except
Hawaii and New York) or First Allmerica Financial Life Insurance Company (for
contracts issued in Hawaii and New York). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two also must be the
Annuitant), an Annuitant and one or more beneficiaries. As Owner, you make
payments, choose investment allocations 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?
You may allocate payments among the Sub-Accounts investing in the Portfolios,
the Guarantee Period Accounts, and the Fixed Account. As of the date of this
Prospectus, payments may be allocated to a maximum of seventeen Variable
Accounts in addition to the Kemper Money Market Portfolio during the life of the
Contract and prior to the Annuity Date.
Variable Account. You have a choice of Sub-Accounts investing in the following
Portfolios:
<TABLE>
<CAPTION>
KVS Portfolios:
- ---------------
<S> <C>
Kemper Aggressive Growth Kemper Index 500
Kemper Technology Growth Kemper Horizon 20+
Kemper-Dreman Financial Services Kemper Total Return
Kemper Small Cap Growth Kemper Horizon 10+
Kemper Small Cap Value Kemper High Yield
Kemper-Dreman High Return Equity Kemper Horizon 5
Kemper International Kemper Global Income
Kemper International Growth Kemper Investment Grade Bond
and Income Kemper Government Securities
Kemper Global Blue Chip Kemper Money Market
Kemper Growth KVS Focused Large Cap Growth
Kemper Contrarian Value KVS Growth Opportunities
Kemper Blue Chip KVS Growth And Income
Kemper Value+Growth
</TABLE>
19
<PAGE>
<TABLE>
<S> <C>
Scudder VLIF Portfolios:
- ----------------------------------
Scudder International Scudder Capital Growth
Scudder Global Discovery Scudder Growth and Income
The Alger American Fund
Portfolios:
- ----------------------------------
Alger American Leveraged AllCap
Alger American Balanced
Dreyfus Investment Portfolios:
- ----------------------------------
Dreyfus MidCap Stock
The Dreyfus Socially Responsible
Growth Fund, Inc.:
- ----------------------------------
Dreyfus Socially Responsible
Growth
</TABLE>
For a more detailed description of the Portfolios, see "INVESTMENT OBJECTIVES
AND POLICIES."
Guarantee Period Accounts. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account, except in California where assets are held in the
Company's General Account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company currently makes available nine Guarantee Periods ranging from two to
ten years in duration. Once declared, the Guaranteed Interest Rate will not
change during the duration of the Guarantee Period. If amounts allocated to a
Guarantee Period Account are transferred, surrendered or applied to any annuity
option at any time other than the day following the last day of the applicable
Guarantee Period, a Market Value Adjustment will apply that may increase or
decrease the Account's value; however, this adjustment will never be applied
against your principal. In addition, earnings in the GPA after application of
the Market Value Adjustment will not be less than an effective annual rate of
3%. For more information about the Guarantee Period Accounts and the Market
Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
Fixed Account. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore,
20
<PAGE>
the initial rate in effect on the date an amount is allocated to the Fixed
Account will be guaranteed for one year from that date. For more information
about the Fixed Account see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED
ACCOUNT."
The Guarantee Period Accounts and/or some of the Sub-Accounts may not be
available in all states.
WHO ARE THE PORTFOLIO MANAGERS?
Scudder Kemper Investments, Inc. ("Scudder Kemper") is the investment manager of
each Portfolio of KVS and each Portfolio of Scudder VLIF. Scudder Investments
(U.K.) Limited, an affiliate of Scudder Kemper, is the sub-adviser for the
Kemper International Portfolio and the Kemper Global Income Portfolio. Dreman
Value Management, L.L.C. is the sub-adviser for the Kemper-Dreman Financial
Services Portfolio and Kemper-Dreman High Return Equity Portfolio. Scudder
Kemper is the investment manager of the Guarantee Period Accounts pursuant to an
investment advisory agreement between the Company and Scudder Kemper. Bankers
Trust Company is the sub-adviser for the Kemper Index 500 Portfolio. Eagle Asset
Management, Inc. ("EAM") is the sub-adviser for the KVS Focused Large Cap Growth
Portfolio and Janus Capital Corporation ("JCC") is the sub-adviser for the
KVS Growth Opportunities and KVS Growth And Income Portfolios pursuant to
sub-advisory agreements between Scudder Kemper and EAM and JCC. The investment
manager for the Alger American Leveraged AllCap and Alger American Balanced
Portfolios is Fred Alger Management, Inc. The Dreyfus Corporation serves as the
investment adviser to the Dreyfus MidCap Stock Portfolio and the Dreyfus
Socially Responsible Growth Fund. NCM Capital Management Group, Inc. provides
sub-investment advisory services for the Dreyfus Socially Responsible Growth
Fund.
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. As of the date of this Prospectus, transfers may be made to a maximum
of seventeen variable Sub-Accounts in addition to the Kemper Money Market
Portfolio during the life of the Contract. You will incur no current taxes on
transfers while your money remains in the Contract. 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."
21
<PAGE>
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender your Contract or make withdrawals any time before the annuity
payout phase begins. 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. (Similarly, no surrender charge will
apply if an amount is withdrawn based on the Annuitant's life expectancy if the
Owner is a trust or other nonnatural person.) A 10% federal tax penalty may
apply to all amounts deemed to be income if you are under age 59 1/2. Additional
amounts may be withdrawn at any time but payments that have not been invested in
the Contract for more than six years may be subject to a surrender charge. (A
Market Value Adjustment, which may increase or decrease the value of the
account, may apply to any withdrawal made from a Guarantee Period Account prior
to the expiration of the Guarantee Period.)
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If 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, decreased proportionately to reflect withdrawals (for each
withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal, multiplied by the
withdrawal amount, and divided by the Accumulated Value immediately prior to
the withdrawal).
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, compounded daily at the annual rate of 5% (except in Hawaii
and New York where (b) equals gross payments) starting on the date each
payment was applied, decreased proportionately to reflect withdrawals; or
- - The death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
This enhanced guaranteed death benefit works in the following way assuming no
withdrawals are made. On the first anniversary, the death benefit will be equal
to
22
<PAGE>
the greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals gross payments). The higher of
(a) or (b) will then be locked in until the second anniversary, at which time
the death benefit will be equal to the greatest of (a) the Contract's then
current Accumulated Value increased by any positive Market Value Adjustment;
(b) gross payments compounded daily at the annual rate of 5% (5% compounding
does not apply in Hawaii and New York) or (c) the locked-in value of the death
benefit at the first anniversary. The greatest of (a), (b) or (c) will be locked
in until the next Contract anniversary. This calculation will then be repeated
on each anniversary date while the Contract remains in force and prior to the
Annuity Date. As noted above, the values of (b) and (c) will be decreased
proportionately if withdrawals are taken.
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 before the Annuity Date, the death benefit
will equal the Accumulated Value of the Contract increased by any positive
Market Value Adjustment.
(If the Annuitant dies after the Annuity Date but before all guaranteed annuity
benefit payments have been made, the remaining payments will be paid to the
beneficiary at least as rapidly as under the annuity option in effect. See "G.
Death Benefit.")
WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
At each Contract anniversary or upon surrender, if the Accumulated Value is less
than $50,000, the Company will deduct a $35 Contract fee (a lower fee of $30 may
apply in some states) from the Contract. There will be no Contract fee if the
Accumulated Value is $50,000 or more. The Contract fee is waived for a Contract
issued to and maintained by a trustee of a 401(k) plan.
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity options, you may be subject to a surrender
charge. If applicable, this charge will be between 2% and 7% of payments
withdrawn, based on when the payments were 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. The
23
<PAGE>
Company does not currently charge for additional transfers, but reserves the
right to assess a charge, guaranteed never to exceed $25 per transfer, to
reimburse it for the expense of processing these additional transfers.
The Company will deduct, on a daily basis, an annual mortality and expense risk
charge and administrative expense charge equal to 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" under "A. Variable Account Deductions" and in the Underlying Portfolios
prospectuses which accompany this Prospectus.
Subject to state availability, the Company offers the following optional Riders
that may be elected by the Owner. A separate monthly charge is made for each
Rider which is deducted from the Accumulated Value at the end of each month
within which the Rider has been in effect. The applicable charge is assessed by
multiplying the Accumulated Value on the last day of each month and on the date
the Rider is terminated by 1/12th of the following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with a
ten-year waiting period............................ 0.25%
Minimum Guaranteed Annuity Payout Rider with a
fifteen-year waiting period........................ 0.15%
Enhanced Death Benefit Rider......................... 0.25%
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," "Enhanced Death Benefit Rider" under "G.
Death Benefit" and "M. Optional Minimum Guaranteed Annuity Payout Rider" under
"DESCRIPTION OF THE CONTRACT."
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any amounts allocated to the Sub-
Accounts (plus any fees or charges that may have been deducted). However, if
state law requires or if your Contract was issued as an Individual Retirement
Annuity (IRA), you will generally receive a refund of your entire payment. (In
certain states this refund may be the greater of (1) your entire payment or (2)
the
24
<PAGE>
amounts allocated to the Fixed and Guarantee Period Accounts plus the
Accumulated Value of amounts in the Sub-Accounts, plus any fees or charges
previously deducted.) See "B. Right to Cancel Individual Retirement Annuity" and
"C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- - 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 accumulated value among your current investments
without any tax consequences.
- - You may cancel your Contract within ten days of delivery (or longer if
required by state law).
25
<PAGE>
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS
AND THE UNDERLYING PORTFOLIOS
The Companies. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1998,
Allmerica Financial had over $14 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is an indirect wholly owned subsidiary of First Allmerica
Financial Life Insurance Company which, in turn, is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica"), organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries had over $27 billion in combined assets and over $48 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its present
name. First Allmerica is a wholly owned subsidiary of AFC. First Allmerica's
principal office ("Principal Office") is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
26
<PAGE>
The Variable Accounts. Each Company maintains a separate investment account
called Separate Account KGC (the "Variable Account") with 34 Sub-Accounts. The
Variable Accounts of Separate Account KGC were authorized by votes of the Board
of Directors of the Companies on June 13, 1996. Each Variable Account meets the
definition of a "separate account" under federal securities laws and is
registered with the SEC as a unit investment trust under the 1940 Act. This
registration does not involve the supervision or management of investment
practices or policies of the Variable Accounts by the SEC.
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 Kemper
Variable Series, Scudder Variable Life Investment Fund, The Alger American Fund,
Dreyfus Investment Portfolios or The Dreyfus Socially Responsible Growth Fund,
Inc. Each Sub-Account is administered and accounted for as part of the general
business of the Company. The income, capital gains, or capital losses of each
Sub-Account, however, are allocated to each Sub-Account, without regard to any
other income, capital gains or capital losses of the Company. Obligations under
the Contracts are obligations of the Company. Under Delaware and Massachusetts
law, the assets of the Variable Account may not be charged with any liabilities
arising out of any other business of the Company.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. The Company also
offers other variable annuity contracts investing in the Variable Account which
are not discussed in this Prospectus. In addition, the Variable Account may
invest in other underlying portfolios which are not available to the Contracts
described in this Prospectus.
Kemper Variable Series. Kemper Variable Series ("KVS"), is a series-type mutual
fund registered with the SEC as an open-end, management investment company.
Registration of KVS does not involve supervision of its management, investment
practices or policies by the SEC. KVS is designed to provide an investment
vehicle for certain variable annuity contracts and variable life insurance
policies. Shares of the Portfolios of KVS are sold only to insurance company
separate accounts. Scudder Kemper Investments, Inc. serves as the investment
adviser of KVS.
Scudder Variable Life Investment Fund. Scudder Variable Life Investment Fund
("Scudder VLIF") is an open-end, diversified management investment company
established as a Massachusetts business trust on March 15, 1985, and registered
with the SEC under the 1940 Act. Scudder Kemper Investments, Inc. serves as the
investment adviser of Scudder VLIF.
27
<PAGE>
The Alger American Fund. The Alger American Fund ("Alger"), is an open-end,
diversified management investment company established as a Massachusetts
business trust on April 6, 1988 and registered with the SEC under the 1940 Act.
Fred Alger Management, Inc. is the investment manager of Alger.
Dreyfus Investment Portfolios. The Dreyfus Investment Portfolios was organized
as an investment business trust under Massachusetts law pursuant to an Agreement
and Declaration of Trust dated May 14, 1993, is registered with the SEC as an
open-end, management investment company and commenced operations May 1, 1998.
The Dreyfus Corporation serves as the investment adviser to the Dreyfus
Investment Portfolios.
The Dreyfus Socially Responsible Growth Fund, Inc. The Dreyfus Socially
Responsible Growth Fund, Inc. (the "Dreyfus Socially Responsible Growth Fund")
was incorporated under Maryland law on July 20, 1992, commenced operations on
October 7, 1993 and is registered with the SEC as an open-end, diversified,
management investment company. The Dreyfus Corporation serves as the investment
adviser to the Dreyfus Socially Responsible Fund.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Portfolios is set
forth below. More detailed information regarding the investment objectives,
restrictions and risks, expenses paid by the Underlying Portfolios and other
relevant information regarding the Underlying Portfolios may be found in their
respective prospectuses, which accompany this Prospectus. Please read them
carefully before investing. The Statements of Additional Information of the
Underlying Portfolios are available upon request.
KVS PORTFOLIOS:
Kemper Aggressive Growth Portfolio -- seeks capital appreciation through the use
of aggressive investment techniques.
Kemper Technology Growth Portfolio -- seeks growth of capital.
Kemper-Dreman Financial Services Portfolio -- seeks long-term capital
appreciation by investing primarily in common stocks and other equity securities
of companies in the financial services industry believed by the Portfolio's
investment manager to be undervalued.
Kemper Small Cap Growth Portfolio -- seeks maximum appreciation of investors'
capital from a portfolio primarily of growth stocks of smaller companies.
Kemper Small Cap Value Portfolio -- seeks long-term capital appreciation from a
portfolio primarily of value stocks of smaller companies.
28
<PAGE>
Kemper-Dreman High Return Equity Portfolio -- seeks to achieve a high rate of
total return.
Kemper International Portfolio -- seeks total return, a combination of capital
growth and income, principally through an internationally diversified portfolio
of equity securities.
Kemper International Growth and Income Portfolio -- seeks long-term growth of
capital and current income primarily from foreign equity securities.
Kemper Global Blue Chip Portfolio -- seeks long-term growth of capital through a
diversified worldwide portfolio of marketable securities, primarily equity
securities, including common stocks, preferred stocks and debt securities
convertible into common stocks.
Kemper Growth Portfolio -- seeks maximum appreciation of capital through
diversification of investment securities having potential for capital
appreciation.
Kemper Contrarian Value Portfolio -- seeks to achieve a high rate of total
return from a portfolio primarily of value stocks of larger companies. This
Portfolio was formerly known as the Kemper Value Portfolio.
Kemper Blue Chip Portfolio -- seeks growth of capital and of income.
Kemper Value+Growth Portfolio -- seeks growth of capital through professional
management of a portfolio of growth and value stocks. A secondary objective is
the reduction of risk over a full market cycle compared to a portfolio of only
growth stocks or only value stocks.
Kemper Index 500 Portfolio* -- seeks to match, as closely as possible, before
expenses, the performance of the Standard & Poor's 500 Composite Stock Price
Index, (the "S&P 500 Index"), which emphasizes stocks of large U.S. companies.
Kemper Horizon 20+ Portfolio -- designed for investors with approximately a 20+
year investment horizon, seeks growth of capital, with income as a secondary
objective.
Kemper Total Return Portfolio -- seeks a high total return, a combination of
income and capital appreciation, by investing in a combination of debt
securities and common stocks.
* "Standard & Poor's-Registered Trademark-," "S&P-Registered Trademark-" "S&P
500-Registered Trademark-," "Standard & Poor's 500," and "500" are trademarks of
the McGraw-Hill Companies, Inc., and have been licensed for use by Scudder
Kemper Investments, Inc. The Kemper Index 500 Portfolio is not sponsored,
endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in the fund. Additional
information may be found in the fund's Statement of Additional Information.
29
<PAGE>
Kemper Horizon 10+ Portfolio -- designed for investors with approximately a 10+
year investment horizon, seeks a balance between growth of capital and income,
consistent with moderate risk.
Kemper High Yield Portfolio -- seeks to provide a high level of current income
by investing in fixed-income securities.
Kemper Horizon 5 Portfolio -- designed for investors with approximately a five
year investment horizon, seeks income consistent with preservation of capital,
with growth of capital as a secondary objective.
Kemper Global Income Portfolio -- seeks to provide high current income
consistent with prudent total return asset management.
Kemper Investment Grade Bond Portfolio -- seeks high current income by investing
primarily in a diversified portfolio of investment grade debt securities
Kemper Government Securities Portfolio -- seeks high current return consistent
with preservation of capital from a portfolio composed primarily of U.S.
Government securities.
Kemper Money Market Portfolio -- seeks maximum current income to the extent
consistent with stability of principal from a portfolio of high quality money
market instruments that mature in 12 months or less.
KVS Focused Large Cap Growth Portfolio -- seeks growth through long-term capital
appreciation.
KVS Growth Opportunities Portfolio -- seeks long-term growth of capital in a
manner consistent with the preservation of capital.
KVS Growth And Income Portfolio -- seeks long-term capital growth and current
income.
SCUDDER VLIF PORTFOLIOS:
Scudder International Portfolio -- seeks long term growth of capital principally
from a diversified portfolio of foreign equity securities.
Scudder Global Discovery Portfolio -- seeks above average capital appreciation
over the long term by investing primarily in the equity securities of small
companies located throughout the world.
Scudder Capital Growth Portfolio -- seeks to maximize long-term capital growth
from a portfolio consisting primarily of equity securities.
30
<PAGE>
Scudder Growth and Income Portfolio -- seeks long-term growth of capital,
current income and growth of income from a portfolio consisting primarily of
common stocks and securities convertible into common stocks.
THE ALGER AMERICAN FUND PORTFOLIOS:
Alger American Leveraged AllCap Portfolio -- seeks long-term capital
appreciation.
Alger American Balanced Portfolio -- seeks current income and long-term capital
appreciation.
DREYFUS INVESTMENT PORTFOLIOS:
Dreyfus MidCap Stock Portfolio -- seeks investment results that are greater than
the total return performance of publicly traded common stocks of medium-size
domestic companies in the aggregate, as represented by the Standard & Poor's
MidCap 400 Index.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.:
Dreyfus Socially Responsible Growth Fund -- seeks to achieve the primary goal of
providing capital growth by investing principally in common stocks, or
securities convertible into common stock, of companies which, in the opinion of
the Fund's management, not only meet traditional investment standards, but also
show evidence that they conduct their business in a manner that contributes to
the enhancement of the quality of life in America. Current income is a secondary
goal.
Certain Underlying Portfolios have investment objectives and/or policies similar
to those of other Underlying Portfolios. To choose the Sub-Accounts which best
meet individual needs and objectives, carefully read the Underlying Portfolio
prospectuses. In some states, insurance regulations may restrict the
availability of particular Sub-Accounts.
INVESTMENT MANAGEMENT SERVICES
KVS PORTFOLIOS
Responsibility for overall management of KVS rests with the Board of Trustees
and officers of KVS. Responsibility for overall management of Scudder VLIF rests
with its Board of Trustees and officers. Scudder Kemper Investments, Inc.
("Scudder Kemper") is the investment manager of all the Portfolios available
under this Contract. Scudder Investments (U.K.) Limited, an affiliate of Scudder
Kemper, is a sub-adviser for the Kemper International Portfolio and the Kemper
31
<PAGE>
Global Income Portfolio. Dreman Value Management, L.L.C. serves as the sub-
adviser for the Kemper-Dreman Financial Services Portfolio and Kemper-Dreman
High Return Equity Portfolio. Bankers Trust Company is the sub-adviser for the
Kemper Index 500 Portfolio. Eagle Asset Management, Inc. serves as sub-adviser
for the KVS Focused Large Cap Growth Portfolio. Janus Capital Corporation serves
as sub-adviser for the KVS Growth Opportunities and KVS Growth And Income
Portfolios.
For its services, Scudder Kemper receives a management fee, payable monthly at
the following annual rates based on the average daily net assets of each
Portfolio: Kemper Money Market (0.50%), Kemper Total Return (0.55%), Kemper High
Yield (0.60%), Kemper Growth (0.60%), Kemper Government Securities (0.55%),
Kemper International (0.75%), Kemper Small Cap Growth (0.65%), Kemper Investment
Grade Bond (0.60%), Kemper Contrarian Value (0.75%), Kemper Small Cap Value
(0.75%), Kemper Value+Growth (0.75%), Kemper Horizon 20+ (0.60%), Kemper Horizon
10+ (0.60%), Kemper Horizon 5 (0.60%), Kemper Blue Chip (0.65%), Kemper Global
Income (0.75%) and Kemper International Growth and Income (1.00%).
The following portfolios each pay Scudder Kemper an investment management fee,
payable monthly, at the following annual rates based on the average daily net
assets of each Portfolio.
<TABLE>
<S> <C>
Kemper Aggressive Growth Portfolio 0.75% for the first $250 million
Kemper Technology Growth Portfolio 0.72% for the next $750 million
Kemper-Dreman High Return Equity 0.70% for the next $1.5 billion
Portfolio
Kemper-Dreman Financial Services 0.68% for the next $2.5 billion
Portfolio 0.65% for the next $2.5 billion
0.64% for the next $2.5 billion
0.63% for the next $2.5 billion
0.62% for amounts over $12.5 billion
Kemper Global Blue Chip Portfolio 1.00% for the first $250 million
0.95% for the next $750 million
0.90% for amounts over $1 billion
Kemper Index 500 Portfolio 0.45% for the first $200 million
0.42% for the next $550 million
0.40% for the next $1.25 billion
0.38% for the next $3 billion
0.35% for amounts over $5 billion
KVS Focused Large Cap Growth Portfolio 0.950% for the first $250 million
KVS Growth Opportunities Portfolio 0.925% for the next $250 million
KVS Growth And Income Portfolio 0.900% for the next $500 million
0.875% for the next $1.5 billion
0.850% for amounts over $2.5 billion
</TABLE>
32
<PAGE>
Scudder Kemper pays Scudder Investments (U.K.) Limited for its services as sub-
adviser for the Kemper International Portfolio and the Kemper Global Income
Portfolio a sub-advisory fee, payable monthly, at the annual rate of 0.35% of
average daily net assets of the Kemper International Portfolio and 0.30% of
average daily net assets of the Kemper Global Income Portfolio.
Scudder Kemper also pays Dreman Value Management, L.L.C. a fee for its services
to the Kemper-Dreman Financial Services Portfolio and Kemper-Dreman High Return
Equity Portfolio. A sub-advisory fee is payable monthly, at the annual rate of
0.24% of the first $250 million of each Portfolio's average daily net assets,
0.23% of average daily net assets between $250 million and $1 billion, 0.224% of
average daily net assets between $1 billion and $2.5 billion, 0.218% of average
daily net assets between $2.5 billion and $5 billion, 0.208% of average daily
net assets between $5 billion and $7.5 billion, 0.205% of average daily net
assets between $7.5 billion and $10 billion, 0.202% of average daily net assets
between $10 billion and $12.5 billion and 0.198% of each Portfolio's average
daily net assets over $12 billion.
Scudder Kemper also pays Bankers Trust Company a sub-advisory fee for its
services to the Kemper Index 500 Portfolio. A sub-advisory fee is payable
monthly at the following annual rates:
<TABLE>
<CAPTION>
Average Daily Net Assets of the Portfolio Annual Sub-adviser Fee Rate
- ----------------------------------------- ---------------------------
<S> <C>
$0-$200 million...................... 0.08%
$200 million-$750 million............ 0.05%
On the balance over $750 million..... 0.025%
</TABLE>
Scudder Kemper also pays Eagle Asset Management, Inc. a sub-advisory fee for its
services based on the average daily net assets of the KVS Focused Large Cap
Growth Portfolio, payable monthly at the following annual rates:
<TABLE>
<CAPTION>
Average Daily Net Assets of the Portfolio Annual Sub-adviser Fee Rate
- ----------------------------------------- ---------------------------
<S> <C>
$0-$50 million....................... 0.45%
$50 million-$300 million............. 0.40%
On the balance over $300 million..... 0.30%
</TABLE>
Scudder Kemper also pays Janus Capital Corporation a sub-advisory fee for its
services based on the combined average daily net assets of the KVS Growth
Opportunities and KVS Growth And Income Portfolios, payable monthly at the
following annual rates:
<TABLE>
<CAPTION>
Combined Average Daily Net Assets of the
Portfolios Annual Sub-adviser Fee Rate
- ---------------------------------------- ---------------------------
<S> <C>
$0-$100 million..................... 0.55%
$100 million-$500 million........... 0.50%
On the balance over $500 million.... 0.45%
</TABLE>
33
<PAGE>
SCUDDER VLIF PORTFOLIOS
For its investment management services to the Scudder Global Discovery, Scudder
Growth and Income, Scudder International and Scudder Capital Growth Portfolios,
Scudder Kemper receives compensation monthly at the following annual rates for
each Portfolio:
<TABLE>
<CAPTION>
Percent of the Average Daily Net Asset
Portfolio Values of Each Portfolio
- --------- --------------------------------------
<S> <C>
Scudder Global Discovery 0.975%
Scudder Growth and Income 0.475%
Scudder International 0.875% for the first $500,000,000
0.725% over $500,000,000
Scudder Capital Growth 0.475% for the first $500,000,000
0.450% for the next $500,000,000
0.425% over $1,000,000,000
</TABLE>
For more information, see the KVS and Scudder VLIF prospectuses and SAIs.
THE ALGER AMERICAN FUND PORTFOLIOS
Under a management agreement, Fred Alger Management, Inc. receives an annual fee
of 0.85% and 0.75%, respectively, from the Alger American Leveraged AllCap and
Alger American Balanced Portfolios based on each Portfolio's average daily net
assets. This fee is computed daily and paid monthly.
DREYFUS INVESTMENT PORTFOLIOS
A management fee is payable monthly to The Dreyfus Corporation at the annual
rate of 0.75% of the Dreyfus MidCap Stock Portfolio's average daily net assets.
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
A management fee is payable monthly to The Dreyfus Corporation and a sub-
investment advisory fee is payable monthly to NCM Capital Management
Group, Inc. at the aggregate annual rate of 0.75% of the value of the Dreyfus
Socially Responsible Growth Fund's average daily net assets.
Management fee waivers and/or reimbursements may be in effect for certain or all
of the Underlying Portfolios. Also see "Annual Underlying Portfolio Expenses"
under the SUMMARY OF FEES AND EXPENSES section.
34
<PAGE>
DESCRIPTION OF THE CONTRACT
A. Payments
The Company issues a Contract when its underwriting requirements, which include
receipt of the initial payment and allocation instructions by the Company at its
Principal Office, are met. These requirements also may include the proper
completion of an application; however, where permitted, the Company may issue a
Contract without completion of an application for certain classes of annuity
contracts.
Payments are to be made payable to the Company. A net payment is equal to the
payment received less the amount of any applicable premium tax. The initial net
payment is credited to the Contract and allocated among the requested accounts
as of the date that all issue requirements are properly met. If all issue
requirements are not completed within five business days of the Company's
receipt of the initial payment, the payment will be returned immediately unless
the Owner specifically consents to the holding of it pending completion of the
outstanding issue requirements. Subsequent payments will be credited as of the
Valuation Date received at the Principal Office, on the basis of the next
accumulation unit value determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date,
subject to certain minimums. Currently, the initial payment must be at least
$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 Kemper 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. As
of the date of this Prospectus, payments may be allocated to a maximum of
seventeen variable Sub-Accounts during the life of the Contract in addition to
the Kemper Money Market Portfolio. There are no restrictions on the number of
times the Fixed Account and the Guarantee Period Accounts may be used over the
life of the Contract.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
35
<PAGE>
be honored. The Company will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone may include requirements that callers on
behalf of an Owner identify themselves by name and identify the Annuitant by
name, date of birth and social security number or PIN number. All transfer
instructions by telephone are tape recorded.
B. Right to Cancel Individual Retirement Annuity
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased or to the
Company's Principal Office at 440 Lincoln Street, Worcester, MA 01653. Mailing
or delivery must occur on or before ten days after receipt of the Contract for
cancellation to be effective.
Within seven days the Company will provide a refund equal to the gross
payment(s) received. In some states, however, the refund may equal the greater
of (a) gross payments or (b) any amounts allocated to the Fixed Account and the
Guarantee Period Accounts plus the Accumulated Value of amounts allocated to the
Variable Account plus any amounts deducted under the Contract or by the
Underlying Portfolios for taxes, charges or fees. At the time the Contract is
issued, the "Right to Examine" provision on the cover of the Contract will
specifically indicate whether the refund will be equal to gross payments or
equal to the greater of (a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. Right to Cancel All Other Contracts
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the payment received, including fees, and any amount
allocated to the Variable Account, and (2) the Accumulated Value of amounts
allocated to the Variable Account as of the date the request is received. If the
Contract was purchased as an IRA or issued in a state that requires a full
refund of the initial payment(s), the IRA cancellation right described above
will be used.
36
<PAGE>
At the time the Contract is issued, the "Right to Examine" provision on the
cover of the Contract will specifically indicate what the refund will be and the
time period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. Transfer Privilege
At any time prior to the Annuity Date, an Owner may transfer amounts among
accounts subject to the seventeen variable Sub-Account restriction discussed in
"A. Payments." Transfer values will be based on the Accumulated Value next
computed after receipt of the transfer request. The Company will make transfers
pursuant to written or telephone requests. As discussed in "A. Payments," a
properly completed authorization form must be on file before telephone requests
will be honored. In Oregon and Massachusetts, payments and transfers to the
Fixed Account are subject to certain restrictions. See APPENDIX A, "MORE
INFORMATION ABOUT THE FIXED ACCOUNT."
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Sub-Account which invests in the Kemper Money
Market Portfolio. Transfers from a Guarantee Period Account prior to the
expiration of the Guarantee Period will be subject to a Market Value Adjustment.
The Owner may authorize an independent third party to transact allocations and
transfers in accordance with an asset allocation strategy or other investment
strategy. The Company may provide administrative or other support services to
these independent third parties, however, the Company does not engage any third
parties to offer allocation or other investment services under this Contract,
does not endorse or review any allocation or transfer recommendations and is not
responsible for the investment results of such allocations or transfers
transacted on the Owner's behalf. In addition, the Company reserves the right to
discontinue services or limit the number of Portfolios that it may provide such
services for. The Company does not charge the Owner for providing additional
support services.
Automatic Transfers (Dollar Cost Averaging) and Automatic Account Rebalancing
Options. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-
37
<PAGE>
monthly, quarterly, semi-annually or annually) from the Sub-Account investing in
the Kemper Money Market Portfolio or the Kemper Government Securities Portfolio,
or from the Fixed Account (the source account) to one or more of the
Sub-Accounts. Automatic transfers may not be made into the Fixed Account, the
Guarantee Period Accounts or, if applicable, the Portfolio being used as the
source account. If an automatic transfer would reduce the balance in the source
account to less than $100, the entire balance will be transferred
proportionately to the chosen Portfolios. Automatic transfers will continue
until the amount in the source account on a transfer date is zero or the Owner's
request to terminate the option is received by the Company. If additional
amounts are allocated to the source account after its balance has fallen to
zero, this option will not restart automatically, and the Owner must provide a
new request to the Company.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments which are deposited into the Fixed Account and which utilize
the Fixed Account as the source account for the payment from which to process
automatic transfers. For more information see APPENDIX A, "MORE INFORMATION
ABOUT THE FIXED ACCOUNT."
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, bi-monthly, quarterly, semi-annual or annual basis in accordance with
specified percentage allocations. As frequently as requested, the Company will
review the percentage allocations in the Portfolios and, if necessary, transfer
amounts to ensure conformity with the designated percentage allocation mix. If
the amount necessary to re-establish the mix on any scheduled date is less than
$100, no transfer will be made. Automatic Account Rebalancing will continue
until the Owner's request to terminate or change the option is received by the
Company. As such, subsequent payments allocated in a manner different from the
percentage allocation mix in effect on the date the payment is received will be
reallocated in accordance with the existing mix on the next scheduled date
unless the Owner's timely request to change the mix or terminate the option is
received by the Company.
The Company reserves the right to limit the number of Sub-Accounts that may be
used for automatic transfers and rebalancing, and to discontinue either option
upon advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Contract year under a
request, count as one transfer for purposes of the 12 transfers guaranteed to be
free of a transfer charge in each Contract year. Currently, Dollar Cost
Averaging and Automatic Account Rebalancing may not be in effect simultaneously.
Either option may be elected at no additional charge when the Contract is
purchased or at a later date.
38
<PAGE>
E. Surrender
At any time prior to the Annuity Date, an Owner may surrender the Contract and
receive its Surrender Value, less any tax withholding. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The Surrender Value will be calculated based
on the Contract's Accumulated Value as of the Valuation Date on which the
request and the Contract are received at the Principal Office.
Before the Annuity Date, a surrender charge may be deducted when a Contract is
surrendered if payments have been credited to the Contract during the last six
full Contract years. See "CHARGES AND DEDUCTIONS." The Contract fee will be
deducted upon surrender of the Contract.
After the Annuity Date, only Contracts annuitized under a commutable period
certain option may be surrendered. The amount payable is the commuted value of
any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No surrender charge is imposed
after the Annuity Date.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has, by order, permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of Portfolio
securities or valuation of assets of each separate account is not reasonably
practicable.
The 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."
39
<PAGE>
F. Withdrawals
At any time prior to the Annuity Date, an Owner may withdraw a portion of the
Contract's Accumulated Value, subject to the limits stated below. The Owner must
submit a signed, written request for withdrawals, satisfactory to the Company,
to the Principal Office. The request must indicate the dollar amount the Owner
wishes to receive and the accounts from which such amount is to be withdrawn.
The Company will then withdraw an amount equal to the amount requested by the
Owner plus any applicable surrender charge, as described under "CHARGES AND
DEDUCTIONS." In addition, amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment, as described under "GUARANTEE PERIOD ACCOUNTS."
Where allocations have been made to more than one 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.
The minimum withdrawal amount is $100. Except in New York where no specific
balance is required, no withdrawal will be permitted if the Accumulated Value
remaining under the Contract would be reduced to less than $1,000. Withdrawals
will be paid in accordance with the time limitations described under "E.
Surrender."
After the Annuity Date, withdrawals are allowed only if the Contract is
annuitized under a commutable period certain option. A withdrawal after the
Annuity Date will result in cancellation of a number of Annuity Units equivalent
in value to the amount withdrawn.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see "FEDERAL TAX
CONSIDERATIONS," "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
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
40
<PAGE>
designated Sub-Account and/or the Fixed Account. Systematic withdrawals then
will begin on the date indicated on the application. If elected after the issue
date, the Owner may elect, by written request, a specific dollar amount and the
percentage of this amount to be taken from each designated Sub-Account and/or
the Fixed Account, or the Owner may elect to withdraw a specific percentage of
the Accumulated Value calculated as of the withdrawal dates, and may designate
the percentage of this amount which should be taken from each account. The first
withdrawal will take place on the date the written request is received at the
Principal Office or, if later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals may be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
Life Expectancy Distributions. Prior to the Annuity Date, an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to the Company's life expectancy distribution ("LED") option
by returning a properly signed LED request form to the Principal Office.
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under contracts
issued in Hawaii and New York, the LED option will terminate automatically on
the maximum Annuity Date permitted under the Contract, at which time an Annuity
Option must be selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge based on the
Owner's then life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) The numerator of the fraction is 1 (one) and the denominator of
the fraction is the remaining life expectancy of the Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during the year. Under the Company's LED option, the
amount withdrawn from the Contract changes each year, because life expectancy
changes each year that a person lives. For example, actuarial tables indicate
that a person age 70 has a life expectancy of 16 years, but a person who attains
age 86 has a life expectancy of another 6.5 years. Where the Owner is a trust or
other nonnatural person, the Owner may elect the LED option based on the
Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Contract and may be subject to a 10% federal
tax penalty. Owners seeking distributions over their life under this definition
41
<PAGE>
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contracts in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the Company's LED amount, a surrender charge may apply to the
amount in excess of the LED amount.)
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. Death Benefit
If the Annuitant dies (or an Owner predeceases the Annuitant) before the Annuity
Date while the Contract is in force, the Company will pay the beneficiary a
death benefit, except when a spousal beneficiary chooses to continue the
Contract as provided below in "H. The Spouse of the Owner as Beneficiary."
Death of 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 by any positive Market
Value Adjustment, or
(b) gross payments decreased proportionately to reflect withdrawals. For each
withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal multiplied by the
withdrawal amount and divided by the Accumulated Value immediately prior
to the withdrawal.
Enhanced Death Benefit Rider. At the time of application for the Contract, the
Owner may elect an optional Enhanced Death Benefit Rider. Under the Enhanced
Death Benefit Rider, 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,
(b) gross payments compounded daily at the annual rate of 5%, starting on the
date each payment is applied, decreased proportionately to reflect
withdrawals (except in Hawaii and New York where (b) equals gross payments
decreased proportionately to reflect withdrawals) (for each withdrawal,
the proportionate reduction is calculated as the death benefit
42
<PAGE>
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 death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This enhanced guaranteed death benefit works in the following way assuming no
withdrawals are made. On the first anniversary, the death benefit will be equal
to the greater of (a) the Accumulated Value (increased by any positive Market
Value Adjustment) or (b) gross payments compounded daily at the annual rate of
5% (except in Hawaii and New York where (b) equals gross payments). The higher
of (a) or (b) will then be locked in until the second anniversary, at which time
the death benefit will be equal to the greatest of (a) the Contract's then
current Accumulated Value increased by any positive Market Value Adjustment;
(b) gross payments compounded daily at the annual rate of 5% (5% compounding
does not apply in Hawaii and New York) or (c) the locked-in value of the death
benefit at the first anniversary. The greatest of (a), (b) or (c) will be locked
in until the next Contract anniversary. This calculation will then be repeated
on each anniversary date while the Contract remains in force and prior to the
Annuity Date. As noted above, the values of (b) and (c) will be decreased
proportionately if withdrawals are taken. See APPENDIX E, "THE DEATH BENEFIT"
for specific examples of death benefit calculations.
A separate charge is deducted for the optional Enhanced Death Benefit Rider. On
the last day of each month and on the date the Rider is terminated, a charge
equal to 1/12th of an annual rate of 0.25% is made against the Accumulated Value
of the Contract at that time. The charge is 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 the standard or enhanced 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
43
<PAGE>
the receipt of due proof of death at the Principal Office unless the Owner has
specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Kemper Money Market Portfolio. The excess, if any, of the enhanced death
benefit over the Accumulated Value also will be added to the Kemper Money Market
Portfolio. The beneficiary may, by written request, effect transfers and
withdrawals during the deferral period and prior to annuitization under (2), but
may not make additional payments. The death benefit will reflect any earnings or
losses experienced during the deferral period. If there are multiple
beneficiaries, the consent of all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
Death of the Annuitant On or After the Annuity Date. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
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 Sub-Account investing in the Kemper Money Market Portfolio;
and (2) the excess, if any, of the death benefit over the Contract's Accumulated
Value also will be transferred to the Sub-Account investing in the Kemper Money
Market Portfolio. 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
44
<PAGE>
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 filed
at the Principal Office. The Company will not assume responsibility for
determining the validity of any assignment. If an assignment of the Contract is
in effect on the Annuity Date, the Company reserves the right to pay to the
assignee, in one sum, that portion of the Surrender Value of the Contract to
which the assignee appears to be entitled. The Company will pay the balance, if
any, in one sum to the Owner in full settlement of all liability under the
Contract. The interest of the Owner and of any beneficiary will be subject to
any assignment.
For important tax liability which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
J. Electing the Form of Annuity and Annuity Date
The Owner selects the Annuity Date. To the extent permitted by state law, the
Annuity Date may be the first day of any month: (1) before the Annuitant's 85th
birthday, if the Annuitant's age on the issue date of the Contract is 75 or
under, or (2) within ten years from the issue date of the Contract and before
the Annuitant's 90th birthday, if the Annuitant's age on the issue date is
between 76 and 90. The Owner may elect to change the Annuity Date by sending a
request to the Principal Office at least one month before the Annuity Date. To
the extent permitted by state law, the new Annuity Date must be the first day of
any month occurring before the Annuitant's 90th birthday, and must be within the
life expectancy of the Annuitant. The Company shall determine such life
expectancy at the time a change in Annuity Date is requested. In no event will
the maximum annuitization age exceed 90. The Code and the terms of qualified
plans impose limitations on the age at which annuity benefit payments may
commence and the type of annuity option selected. See "FEDERAL TAX
CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity payout option under which annuity benefit payments are to be
made, and (2) to determine whether payments are to be made on a fixed basis, a
45
<PAGE>
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the Accounts
selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account, and the annuity benefit payments will be fixed
in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
Under a variable annuity payout option, a payment equal to the value of the
fixed number of Annuity Units in the Sub-Accounts is made monthly, quarterly,
semi-annually or annually. Since the value of an Annuity Unit in a Sub-Account
will reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity payout option selected must produce an initial payment of at least
$50 (a lower amount may be required in some states). The Company reserves the
right to increase this minimum amount. If the annuity payout option selected
does not produce an initial payment which meets this minimum, a single payment
will be made. Once the Company begins making annuity benefit payments, the
Annuitant cannot make withdrawals or surrender the annuity benefit, except where
the Annuitant has elected a commutable period certain option. Beneficiaries
entitled to receive remaining payments under either a commutable or
noncommutable "period certain" may elect instead to receive a lump sum
settlement. See "K. Description of Variable Annuity Payout Options."
If the Owner does not elect an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Contract.
K. Description of Variable Annuity Payout Options
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the Sub-
Accounts investing in the Kemper Investment Grade Bond, Kemper Value+Growth,
Kemper Horizon 10+ and Kemper Horizon 5 Portfolios. The Company also provides
these same options funded through the Fixed Account (fixed-amount annuity
option). Regardless of how payments were allocated during the accumulation
period, any of the variable annuity payout options or
46
<PAGE>
the fixed-amount annuity payout 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. This variable annuity is payable during the payee's life. It would be
possible under this option for the payee to receive only one annuity benefit
payment if the payee dies prior to the due date of the second annuity benefit
payment, two annuity benefit payments if the payee dies before the due date of
the third annuity benefit payment, and so on. Payments will continue, however,
during the lifetime of the payee, 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 at annuitization
divided by the dollar amount of the first payment, and
(2) is the number of payments paid prior to the death of the 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.
47
<PAGE>
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30 (period certain for less
than ten years, not available in Oregon). This option may be commutable, that
is, the payee reserves the right to receive a lump sum in place of installments,
or it becomes noncommutable. 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 computing payments under this option, the Company deducts a
charge for annuity rate guarantees, which includes a factor for mortality risks.
Although not contractually required to do so, the Company currently follows a
practice of permitting persons receiving payments under the period certain
option to elect to convert to a variable annuity involving a life contingency.
The Company may discontinue or change this practice at any time, but such a
change will not effect elections made prior to the date of any change in this
practice. See "FEDERAL TAX CONSIDERATIONS" for a discussion of the possible
adverse tax consequences of selecting a period certain option.
L. Annuity Benefit Payments
Determination of the First Variable Annuity Benefit Payment. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "N. NORRIS Decision" below) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Contract provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Owners of the same class.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- - For life annuity options and noncommutable period certain options of ten years
or more (six or more years under New York Contracts), the dollar amount is
determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if
any) divided by $1,000, by (2) the applicable amount of the first monthly
payment per $1,000 of value.
- - For commutable period certain options and any period certain option of less
than ten years (less than six years under New York Contracts), the dollar
amount is determined by multiplying (1) the Surrender Value less premium
taxes, if any, applied under that option (after application of any Market
Value Adjustment and less premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value.
48
<PAGE>
- - For a death benefit annuity, the annuity value will be the amount of the death
benefit.
The first periodic annuity benefit payment is based upon the Accumulated Value
as of a date not more than four weeks preceding the date that the first annuity
benefit payment is due. The Company transmits variable annuity benefit payments
for receipt by the payee by the first of a month. Variable annuity benefit
payments are currently based on unit values as of the 15th day of the preceding
month.
The Annuity Unit. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account initially was set at
$1.00. The value of an Annuity Unit under a Sub-Account on any Valuation Date
thereafter is equal to the value of such unit on the immediately preceding
Valuation Date, multiplied by the net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Contract.
Determination of the Number of Annuity Units. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
Dollar Amount of Subsequent Variable Annuity Benefit Payments. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected Sub-Account(s). The
dollar amount of each subsequent variable annuity benefit payment is determined
by multiplying the fixed number of Annuity Units (derived from the dollar amount
of the first payment, as described above) with respect to a Sub-Account by the
value of an Annuity Unit of that Sub-Account on the applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
49
<PAGE>
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See
"M. Optional Minimum Guaranteed Annuity Payout Rider," below.
M. Optional Minimum Guaranteed Annuity Payout Rider
An optional Minimum Guaranteed Annuity Payout Rider is available in most
jurisdictions for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed lifetime income during the
annuity payout phase, subject to the conditions described below. On each
Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized if the Rider is
exercised. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rate of 3 1/2%. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded daily
at the annual rate of 5% plus gross payments made thereafter compounded
daily at the annual rate of 5%, starting on the date each payment is
applied, reduced proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the Rider
effective date, as determined after positive adjustments have been made
for subsequent payments and any positive Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal, by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
50
<PAGE>
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Contract
issue or at any time thereafter, however, if the Rider is not elected within
thirty days after Contract issue or within thirty days after a Contract
anniversary date, the effective date of the Rider will be the following
Contract anniversary date.
- - The Owner may not elect a Rider with a ten-year waiting period if at the time
of election the Annuitant has reached his or her 78th birthday. The Owner may
not elect a Rider with a fifteen-year waiting period if at the time of
election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider within
thirty days after any Contract anniversary following the expiration of a ten
or fifteen-year waiting period from the effective date of the Rider.
- - The Owner may only annuitize under a fixed annuity payout option involving a
life contingency as provided under "K. Description of Variable Annuity Payout
Options."
- - The Owner may only annuitize at the guaranteed annuity purchase rates listed
under the Annuity Option Tables in the Contract.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- - The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider prior
to the seventh Contract anniversary after the effective date of the Rider,
unless such termination occurs on or within thirty days after any Contract
anniversary and in conjunction with the repurchase of a Minimum Guaranteed
Annuity Payout Rider with a waiting period of equal or greater length at its
then current price, if available.
- - After the seventh Contract anniversary from the effective date of the Rider
the Owner may terminate the Rider at any time.
- - The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of a
Contract anniversary.
- - Other than in the event of a repurchase, once terminated the Rider may not be
purchased again.
- - The Rider will terminate upon surrender of the Contract or the date that a
death benefit is payable if the Contract is not continued under "H. The Spouse
of the Owner as Beneficiary" (see "DESCRIPTION OF THE CONTRACT").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider based on a
51
<PAGE>
variety of assumptions, including varying rates of return on the value of the
Contract during the accumulation phase, annuity payout periods, annuity payout
options and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed
rates of return are for purposes of illustration only and are not intended as a
representation of past or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of a Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With Payments Guaranteed For 10 Years. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that would be received under the Minimum Guaranteed Annuity Payout Rider. The
minimum guaranteed benefit base amounts are the values that will be annuitized.
Minimum guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
Contract Minimum Minimum
Anniversary Guaranteed Guaranteed
at Exercise Benefit Base Annual Income(1)
- ----------- ------------ ----------------
<S> <C> <C>
10 $162,889 $12,153
15 $207,892 $17,695
</TABLE>
(1)Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed for 10 Years are available. See "K. Description
of Variable Annuity Payout Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
NOTE: Adding the Minimum Guaranteed Annuity Payout Rider after the issue date or
repurchasing the benefit will impact the Program to Protect Principal and
Provide Growth Potential offered under the GPA Accounts since the Minimum
Guaranteed Annuity Payout Rider charges are deducted on a pro-rata basis from
all accounts including the GPA Accounts. (See "Program to Protect Principal and
Provide Growth Potential" under "GUARANTEE PERIOD ACCOUNTS.")
N. NORRIS Decision
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options
52
<PAGE>
based on sex-distinct actuarial tables are not permissible under Title VII of
the Civil Rights Act of 1964. The ruling requires that benefits derived from
contributions paid into a plan after August 1, 1983 be calculated without regard
to the sex of the employee. Annuity benefits attributable to payments received
by the Company under a Contract issued in connection with an employer-sponsored
benefit plan affected by the Norris decision will be based on the greater of
(1) the Company's unisex non-guaranteed current annuity option rates, or
(2) the guaranteed unisex rates described in such Contract, regardless of
whether the Annuitant is male or female.
O. Computation of Values
The Accumulation Unit. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received in good order at the Company's
Principal Office. The number of Accumulation Units resulting from each payment
will remain fixed unless changed by a subsequent split of Accumulation Unit
value, a transfer, a withdrawal, or surrender. The dollar value of an
Accumulation Unit of each Sub-Account varies from Valuation Date to Valuation
Date based on the investment experience of that Sub-Account, 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 ACCOUNTS."
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.
53
<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 equal to 0.15% on an annual basis of the daily
value of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor. For an illustration of Accumulation Unit calculation using a
hypothetical example see the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Portfolios are described in the prospectuses and SAIs of the Underlying
Portfolios.
A. Variable Account Deductions
Mortality and Expense Risk Charge. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The charge is imposed during both the accumulation phase and the
annuity payout phase. The mortality risk arises from the Company's guarantee
that it will make annuity benefit payments in accordance with annuity rate
provisions established at the time the Contract is issued for the life of the
Annuitant (or in accordance with the annuity payout option selected), no matter
how long the Annuitant (or other payee) lives and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity payout phase on all Contracts, including those that do not involve a
life contingency, even though the Company does not bear direct mortality risk
with
54
<PAGE>
respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
The mortality and expense risk charge is assessed daily at an annual rate of
0.95% of each Sub-Account's assets. This charge may not be increased. Since
mortality and expense risks involve future contingencies which are not subject
to precise determination in advance, it is not feasible to identify specifically
the portion of the charge which is applicable to each. The Company estimates
that a reasonable allocation might be 0.55% for mortality risk and 0.40% for
expense risk.
Administrative Expense Charge. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.15% of the average daily net assets of the
Sub-Account. 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 below under "B. Contract Fee") and
for the administrative expense charge are designed to reimburse the Company for
the cost of administration and related expenses and are not expected to be a
source of profit. The administrative functions and expense assumed by the
Company in connection with the Variable Account and the Contract include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expense of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
Other Charges. Because the Sub-Accounts hold shares of the 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 prospectuses and SAIs of
the Underlying Portfolios contain additional information concerning expenses of
the Portfolios.
55
<PAGE>
B. Contract Fee
A $35 Contract fee (a lower fee may apply in certain states) currently is
deducted on the Contract anniversary date and upon full surrender of the
Contract if the Accumulated Value is less than $50,000 on the date assessed. The
Contract fee is waived for Contracts 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 optional benefit riders that
may be elected by the Owner. A separate monthly charge is made for each rider
selected. On the last day of each month and on the date the Rider is terminated,
a charge equal to 1/12th of the applicable annual rate (see table below) is made
against the Accumulated Value of the Contract at that time. The charge is made
through a pro-rata reduction of the Accumulated Value of the Sub-Accounts, the
Fixed Account and the Guarantee Period Accounts (based on the relative value
that the Accumulation Units of the Sub-Accounts, the dollar amounts in the Fixed
Account and the dollar amounts in the Guarantee Period Accounts bear to the
total Accumulated Value).
56
<PAGE>
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the Rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with
ten-year waiting period............................. 0.25%
Minimum Guaranteed Annuity Payout Rider with
fifteen-year waiting period......................... 0.15%
Enhanced Death Benefit Rider......................... 0.25%
Living Benefits Rider................................ 0.05%
Disability Rider..................................... 0.05%
</TABLE>
For a description of the Riders, see "Living Benefits Rider" and "Disability
Rider" below, and "G. Death Benefit" and "M. Optional Minimum Guaranteed Annuity
Payout Rider" under "DESCRIPTION OF THE CONTRACT," above.
Living Benefits Rider. (Due to state law restrictions, this Rider is not
available in New York or New Jersey). 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
in-patient care which is prescribed in writing by a licensed "physician" and
based on physical limitations which prohibit daily living in a non-institutional
setting; "fatal illness" means a condition diagnosed by a licensed physician
which is expected to result in death within two years of the diagnosis; and
"physician" means a person other than the Owner, Annuitant or a member of one of
their families who is state licensed to give medical care or treatment, and is
acting within the scope of that license.
Where surrender charges have been waived under this rider, no additional
payments under the Contract will be accepted.
57
<PAGE>
On the last day of each month and on the date the rider is terminated, a charge
equal to 1/12th of an annual rate of 0.05% 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. Under New York contracts, the disability also must
exist for a continuous period of at least four months. 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 surrender 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 1/12th 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.
D. Premium Taxes
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%. The Company makes a
charge for state and municipal premium taxes, when applicable, and deducts the
amount paid as a premium tax charge. The current practice of the Company is to
deduct the premium tax charge in one of two ways:
(1) if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit payments
begin (the Company reserves the right instead to deduct the premium tax
charge for these Contracts at the time the payments are received); or
(2) the premium tax charge is deducted in total when annuity benefit payments
begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law. If no amount for premium tax was deducted
58
<PAGE>
at the time the payment was received, but subsequently tax is determined to be
due prior to the Annuity Date, the Company reserves the right to deduct the
premium tax from the Contract value at the time such determination is made.
E. Surrender Charge
No charge for sales expense is deducted from payments at the time the payments
are made. A surrender 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 surrender charge, the Accumulated Value is
divided into three categories: (1) New Payments -- payments received by the
Company during the six years preceding the date of the surrender; (2) Old
Payments -- accumulated payments invested in the Contract for more than six
years; and (3) Earnings -- the amount of Contract Value in excess of all
payments that have not been surrendered previously. See "Withdrawal Without
Surrender Charge" below. For purposes of determining the amount of any surrender
charge, surrenders will be deemed to be taken first from amounts available as a
Withdrawal Without Surrender Charge, if any; then from Old Payments, and then
from New Payments. Amounts available as a Withdrawal Without Surrender Charge,
followed by Old Payments, may be withdrawn from the Contract at any time without
the imposition of a surrender charge. If a withdrawal is attributable all or in
part to New Payments, a surrender charge may apply.
An Owner may withdraw 15% of the Accumulated Value in any calendar year, without
assessment of a Withdrawal Charge. If the Owner withdraws an amount in excess of
the Withdrawal Without Surrender Charge amount in any calendar year, the excess
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 surrender charge may be imposed. This charge never will be applied to
earnings. The amount of the charge will depend upon the number of years that any
New Payments, to which the withdrawal is attributed have remained credited under
the Contract. Amounts withdrawn are deducted first from Old Payments. Then, for
the purpose of calculating surrender charges for New Payments, all amounts
withdrawn are assumed to be deducted first from the oldest New Payment and then
from the next oldest New Payment and so on, until all New Payments have been
exhausted pursuant to the first-in-first-out ("FIFO") method of accounting. (See
"FEDERAL TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for
income tax purposes.)
59
<PAGE>
The Surrender Charge is as follows:
<TABLE>
<CAPTION>
Years From Charge as Percentage of
Date of New
Payment Payments Withdrawn
- ----------- -----------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
More than 6 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the surrender
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total surrender charge exceed a maximum
limit of 7% of total gross New Payments. Such total charge equals the aggregate
of all applicable surrender charges for surrender, withdrawals and
annuitization.
Reduction or Elimination of Surrender Charge and Additional Amounts
Credited. From time to time, where permitted by state law, the Company may
allow a reduction in or elimination of the surrender charges, the period during
which the charges apply, or both, and/or credit additional amounts on Contracts,
when Contracts are sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider factors such as the following:
(1) the size and type of group or class, and the persistency expected from that
group or class; (2) the total amount of payments to be received and the manner
in which payments are remitted; (3) the purpose for which the Contracts are
being purchased and whether that purpose makes it likely that costs and expenses
will be reduced; (4) other transactions where sales expenses are likely to be
reduced; or (5) the level of commissions paid to selling broker-dealers or
certain financial institutions with respect to Contracts within the same group
or class (for example, broker-dealers who offer this Contract in connection with
financial planning services offered on a fee-for-service basis). The Company
also may reduce or waive the surrender charge, and/or credit additional amounts
on the Contract where either the Owner or the Annuitant on the issue date is
within the following class of individuals ("eligible persons"): employees and
registered representatives of any broker-dealer which has entered into a Sales
Agreement with the Company to sell the Contract; employees of the Company, its
affiliates or subsidiaries; officers, directors, trustees and employees of any
of the 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, if permitted by state law, surrender charges may be
waived under Section
60
<PAGE>
403(b) Contracts where the amount withdrawn is being contributed to a life
insurance policy issued by the Company as part of the individual's Section
403(b) plan.
Any reduction or elimination in the amount or duration of the surrender charge
will not discriminate unfairly among purchasers of the Contract. The Company
will not make any changes to this charge where prohibited by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the surrender
charge is modified to effect certain exchanges of existing contracts issued by
the Company for this Contract. See "EXCHANGE OFFER" in the SAI.
Withdrawal Without Surrender Charge. In each calendar year, including the
calendar year in which the Contract is issued, the Company will waive the
surrender charge, if any, on an amount ("Withdrawal Without Surrender Charge")
equal to the greater of (1) or (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 surrender 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 Withdrawal Without Surrender Charge 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 last-in-first-out ("LIFO") basis. If more than one
withdrawal is made during the year, on each subsequent withdrawal the Company
will waive the surrender charge, if any, until the entire Withdrawal Without
Surrender Charge has been withdrawn. Amounts withdrawn from a Guarantee Period
Account prior to the end of the applicable Guarantee Period may be subject to a
Market Value Adjustment.
Surrenders. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Contract, net of the
61
<PAGE>
applicable surrender 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
surrender charge on an amount equal to the highest Withdrawal Without Surrender
Charge Amount, described above.
Where an Owner who is a trustee under a pension plan surrenders, in whole or in
part, a Contract on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Contract to
other contracts issued by the Company and owned by the trustee, with no
deduction for any otherwise applicable surrender charge. Any such reallocation
will be at the unit values for the Sub-Accounts as of the Valuation Date on
which a written, signed request is received at the Principal Office.
For further information on surrender and withdrawals, including minimum limits
on amount withdrawn and amount remaining under the Contract in the case of
withdrawals, and important tax considerations, see "E. Surrender" and "F.
Withdrawals" under "DESCRIPTION OF THE CONTRACT," and see "FEDERAL TAX
CONSIDERATIONS."
Charge at the Time Annuity Benefit Payments Begin. If the Owner chooses a
commutable period certain option or a noncommutable period certain option for
less than ten years (less than six years under New York contracts), a surrender
charge will be deducted from the Accumulated Value of the Contract if the
Annuity Date occurs at any time when a surrender charge would still apply had
the Contract been surrendered on the Annuity Date. (See discussion of period
certain variable annuity under "K. Description of Variable Annuity Payout
Options.")
No surrender charge is imposed at the time of annuitization in any Contract year
under an option involving a life contingency or for any noncommutable period
certain option for ten or more years (six or more years under New York
contracts). A Market Value Adjustment, however, may apply. See "GUARANTEE PERIOD
ACCOUNTS."
If an owner of a fixed annuity contract issued by the Company wishes to elect a
variable annuity payout option, the Company may permit such owner to exchange,
at the time of annuitization, the fixed contract for a Contract offered in this
Prospectus. The proceeds of the fixed contract, minus any surrender charge
applicable under the fixed contract if a period certain option is chosen, will
be applied towards the variable annuity option desired by the owner. The number
of Annuity Units under the option will be calculated using the Annuity Unit
values as of the 15th of the month preceding the Annuity Date.
62
<PAGE>
F. 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 to reimburse it for
the expense of processing transfers. For more information, see "D. Transfer
Privilege" under "DESCRIPTION OF THE CONTRACT."
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Fixed Account are not
registered as an investment company under the provisions of the Securities Act
of 1933 (the "1933 Act") or the 1940 Act. Accordingly, the staff of the SEC has
not reviewed the disclosures in this Prospectus relating to the Guarantee Period
Accounts or the Fixed Account. Nevertheless, disclosures regarding the Guarantee
Period Accounts and the Fixed Account of the Contract or any benefits offered
under these accounts may be subject to the provisions of the 1933 Act relating
to the accuracy and completeness of statements made in the Prospectus.
Investment Options. In most jurisdictions, there currently are nine Guarantee
Periods available under the Contract with durations of two, three, four, five,
six, seven, eight, nine and ten years. Each Guarantee Period Account established
for the Owner is accounted for separately in a non-unitized segregated account,
except in California where it is accounted for in the Company's General Account.
Each Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions; however, once an interest rate is
in effect for a Guarantee Period Account, the Company may not change it during
the duration of the Guarantee Period. In no event will the Guaranteed Interest
Rate be less than 3%.
To the extent permitted by law, the Company reserves the right at any time to
offer Guarantee Periods with durations that differ from those which were
available when a Contract initially was issued and to stop accepting new
allocations, transfers or renewals to a particular Guarantee Period. Owners may
allocate net payments or make transfers from any of the Sub-Accounts, the Fixed
Account or an existing Guarantee Period Account to establish a new Guarantee
Period Account at any time prior to the Annuity Date. Transfers from a Guarantee
Period Account on any date other than on the day following the expiration of
that Guarantee Period will be subject to a Market Value Adjustment. The Company
establishes a separate investment account each time the Owner allocates or
transfers amounts to a Guarantee Period Account except that amounts allocated
63
<PAGE>
to the same Guarantee Period on the same day will be treated as one Guarantee
Period Account. The minimum that may be allocated to establish a Guarantee
Period Account is $1,000. If less than $1,000 is allocated, the Company reserves
the right to apply that amount to the Sub-Account investing in the Kemper Money
Market Portfolio. The Owner may allocate amounts to any of the Guarantee Periods
available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration unless
(1) less than $1,000 would remain in the Guarantee Period Account on 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 Sub-Account investing in the Kemper Money
Market Portfolio. Where amounts have been renewed automatically in a new
Guarantee Period, it is the Company's current practice to give the Owner an
additional 30 days to transfer out of the Guarantee Period Account without
application of a Market Value Adjustment. Under Contracts issued in New York,
the Company will transfer monies out of the Guarantee Period Account without
application of a Market Value Adjustment if the Owner's request is received
within ten days of the renewal date.
Market Value Adjustment. No Market Value Adjustment will be applied to
transfers, withdrawals or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit, 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
64
<PAGE>
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 the minimum guaranteed rate of 3% such that the amount
that will be added to the Guarantee Period Account is limited to the difference
between the amount earned and the 3% minimum guaranteed earnings. For examples
of how the Market Value Adjustment works, see APPENDIX D, "SURRENDER CHARGES AND
THE MARKET VALUE ADJUSTMENT."
Program to Protect Principal and Provide Growth Potential. Under this feature,
the Owner elects a Guarantee Period and one or more Sub-Accounts. The Company
then will compute the proportion of the initial payment that must be allocated
to the Guarantee Period selected, assuming no transfers or withdrawals
(including withdrawals made as part of a pro rata deduction for charges on a
Minimum Guaranteed Annuity Payout Rider purchased or repurchased after issue),
in order to ensure that on the last day of the Guarantee Period it will equal
the amount of the entire initial payment. The required amount then will be
65
<PAGE>
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 surrender charge applies to
the withdrawal, it will be calculated as set forth under "D. Surrender 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
66
<PAGE>
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract,
and therefore the income on the Contract, for any taxable year of the Owner,
would be treated as ordinary income received or accrued by the Owner. It is
anticipated that the Portfolios in this Contract will comply with the current
diversification requirements. In the event that future IRS regulations and/or
rulings would require Contract modifications in order to remain in compliance
with the diversification standards, the Company will make reasonable efforts to
comply, and it reserves the right to make such changes as it deems appropriate
for that purpose.
In addition, traditionally in order for a variable annuity contract to qualify
for tax deferral, the Company, and not the variable contract owner, must be
considered to be the owner for tax purposes of the assets in the segregated
asset account underlying the variable annuity contract. In certain
circumstances, however, variable annuity contract owners may now be considered
the owners of these assets for federal income tax purposes. Specifically, the
IRS has stated in published rulings that a variable annuity contract owner may
be considered the owner of segregated account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations do not provide guidance governing the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the contract owner), rather than the
insurance company, to be treated as the owner of the assets in the account. This
announcement also states that guidance would be issued by way of regulations or
rulings on the "extent to which policyholders may direct their investments to
particular sub-accounts without being treated as owners of the underlying
assets." As of the date of this Prospectus, no such guidance has been issued.
The Company therefore additionally reserves the right to modify the Contract as
necessary in order to attempt to
67
<PAGE>
prevent a contract owner from being considered the owner of a pro rata share of
the assets of the segregated asset account underlying the variable annuity
contracts.
A. Qualified and Non-Qualified Contracts
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary according to whether they are made from a qualified contract or a
non-qualified contract. For more information on the tax provisions applicable to
qualified Contracts, see "D. Provisions Applicable to Qualified Employer Plans."
B. Taxation of the Contracts in General
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Nonnatural Owners" below), be considered an annuity
contract under Section 72 of the Code. Please note, however if the Owner chooses
an Annuity Date beyond the Annuitant's 85th birthday, it is possible that the
Contract may not be considered an annuity for tax purposes, and therefore the
Owner may be taxed on the annual increase in Accumulated Value. The Owner should
consult tax and financial advisors for more information. This section governs
the taxation of annuities. The following discussion concerns annuities subject
to Section 72.
Withdrawals Prior to Annuitization. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. 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.
68
<PAGE>
Annuity Payouts After Annuitization. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the investment in the Contract bears to
the expected return under the Contract. The portion of the payment in excess of
this excludable amount is taxable as ordinary income. Once all the investment in
the Contract is recovered, the entire payment is taxable. If the Annuitant dies
before the total investment in the Contract is recovered, a deduction for the
difference is allowed on the Annuitant's final tax return.
Penalty on Distribution. A 10% penalty tax may be imposed on the withdrawal of
investment gains if the withdrawal is made prior to age 59 1/2. The penalty tax
will not be imposed on withdrawals taken on or after age 59 1/2, or if the
withdrawal follows the death of the owner (or, if the owner is not an
individual, the death of the primary annuitant, as defined in the Code) or, in
the case of the owner's "total disability" (as defined in the Code).
Furthermore, under Section 72 of the Code, this penalty tax will not be imposed,
irrespective of age, if the amount received is one of a series of "substantially
equal" periodic payments made at least annually for the life or life expectancy
of the payee. This requirement is met when the owner elects to have
distributions made over the owner's life expectancy, or over the joint life
expectancy of the owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the owner's age 59 1/2 or five years, will subject
the owner to the 10% penalty tax on the prior distributions. In addition to the
exceptions above, the penalty tax will not apply to withdrawals from a qualified
contract made to an employee who has terminated employment after reaching age
55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under any LED-type option prior to age 59 1/2. Subsequent Private Letter
Rulings, however, have treated LED-type withdrawal programs as effectively
avoiding the 10% penalty tax. The position of the IRS on this issue is unclear.
69
<PAGE>
Assignments or Transfers. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
Nonnatural Owners. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
Deferred Compensation Plans of State and Local Governments and Tax-Exempt
Organizations. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer and are subject to the claims of the employer's general creditors.
C. Tax Withholding
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
70
<PAGE>
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. Provisions Applicable to Qualified Employer Plans
The tax rules applicable to qualified employer plans, as defined by the Code,
are complex and vary according to the type of plan. Benefits under a qualified
plan may be subject to that plan's terms and conditions irrespective of the
terms and conditions of any annuity contract used to fund such benefits. As
such, the following is simply a general description of various types of
qualified plans that may use the Contract. Before purchasing any annuity
contract for use in funding a qualified plan, more specific information should
be obtained.
A qualified Contract may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to the Owner of a
non-qualified Contract. Individuals purchasing a qualified Contract should
carefully review any such changes or limitations which may include restrictions
to ownership, transferability, assignability, contributions and distributions.
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit Sharing
Plans. Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of tax-favored retirement
plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962,
as amended, permits self-employed individuals to establish similar plans for
themselves and their employees. Employers intending to use qualified Contracts
in connection with such plans should seek competent advice as to the suitability
of the Contract to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). Note: this term covers all IRAs permitted
under Section 408(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to cancel the Contract as described
in this Prospectus. See
71
<PAGE>
"B. Right to Cancel Individual Retirement Annuity." Eligible employers that meet
specified criteria may establish simplified employee pension plans (SEP-IRAs) or
SIMPLE IRA plans for their employees using IRAs. Employer contributions that may
be made to such plans are larger than the amounts that may be contributed to
regular IRAs, and may be deductible to the employer.
Tax-Sheltered Annuities ("TSAs"). Under the provisions of Section 403(b) of the
Code, payments made to annuity contracts purchased for employees under annuity
plans adopted by public school systems and certain organizations which are tax
exempt under Section 501(c)(3) of the Code are excludable from the gross income
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA Contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the Contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA Contract after
December 31, 1988, may not begin before the employee attains age 59 1/2,
separates from service, dies or becomes disabled. In the case of hardship, an
Owner may withdraw amounts contributed by salary reduction, but not the earnings
on such amounts. Even though a distribution may be permitted under these
rules (e.g., for hardship or after separation from service), it may be subject
to a 10% penalty tax as a premature distribution, in addition to income tax.
Texas Optional Retirement Program. Distributions under a TSA Contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Portfolios. At least annually, but possibly as frequent as
quarterly, the Company will furnish a statement to the Owner containing
information about his or her Contract, including Accumulation Unit Values and
other information as required by applicable law, rules and regulations. The
Company will also send a confirmation statement to Owners each time a
transaction is made affecting the Contract Value. (Certain transactions made
under recurring payment plans such as Dollar Cost Averaging may in the future be
confirmed quarterly rather than by immediate confirmations.) The Owner should
review the information in all statements carefully. All errors or corrections
must be reported to the Company immediately to assure proper crediting to the
Contract.
72
<PAGE>
The Company will assume that all transactions are accurately reported on
confirmation statements and quarterly/annual statements unless the Owner
notifies the Principal Office in writing within 30 days after receipt of the
statement.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro-rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated to the Kemper Money Market Portfolio
instead.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
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
73
<PAGE>
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 the Underlying Portfolios do not currently
foresee any such disadvantages to either variable life insurance owners or
variable annuity owners, the Company and the trustees of the Underlying
Portfolios intend to monitor events in order to identify any material conflicts
between such Owners and to determine what action, if any, should be taken in
response thereto. If the trustees were to conclude that separate portfolios
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Contract to reflect the substitution or
change, and will notify Owners of all such changes. If the Company deems it to
be in the best interest of Owners, and subject to any approvals that may be
required under applicable law, the Variable Account or any Sub-Accounts may be
operated as a management company under the 1940 Act, may be deregistered under
the 1940 Act if registration no longer is required, or may be combined with
other sub-accounts or other separate accounts of the Company.
The Company reserves the right, subject to compliance with applicable law and to
the provisions of the Participation Agreements, to (1) transfer assets from the
Variable Account or Sub-Account to another of the Company's variable accounts or
sub-accounts having assets of the same class, (2) to operate the Variable
Account or any Sub-Account as a management investment company under the 1940 Act
or in any other form permitted by law, (3) to deregister the Variable Account
under the 1940 Act in accordance with the requirements of the 1940 Act, (4) to
substitute the shares of any other registered investment company for the
Portfolio shares held by a Sub-Account, in the event that Portfolio shares are
unavailable for investment, or if the Company determines that further investment
in such Portfolio shares is inappropriate in view of the purpose of the Sub-
Account, (5) to change the methodology for determining the net investment
factor, and (6) to change the names of the Variable Account or of the Sub-
Accounts. In no event will the changes described be made without notice to
Owners in accordance with the 1940 Act.
74
<PAGE>
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation. Any such changes will apply uniformly to all
Contracts that are affected. You will be given written notice of such changes.
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").
75
<PAGE>
The Company pays commissions, not to exceed 7.0% of purchase payments, to
broker-dealers that sell the Contract. Alternative commission schedules are
available with lower initial commission amounts based on payments, plus ongoing
annual compensation of up to 1% of Contract value. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
broker-dealers based on sales volumes, the assumption of wholesaling functions,
or other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature, and
similar services.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated surrender charges and profits from the Company's
General Account, which may include amounts derived from mortality and
expense risk charges. Commissions paid on the Contract, including additional
incentives or payments, do not result in any additional charge to Owners or to
the Variable Account. Any surrender charges assessed on a Contract will be
retained by the Company.
Owners may direct any inquiries to their financial representative or to
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, MA 01653, telephone
1-800-782-8380.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
has completed the process of modifying or replacing existing software and
believes that this action will resolve the Year 2000 issue. However, should
there be serious unanticipated interruptions from unknown sources, the Year 2000
76
<PAGE>
issue could have a material adverse impact on the operations of the Company.
Specifically, the Company could experience, among other things, an interruption
in its ability to collect and process premiums, process claim payments,
safeguard and manage its invested assets, accurately maintain policyholder
information, accurately maintain accounting records, and perform customer
service. Any of these specific events, depending on duration, could have a
material adverse impact on the results of operations and the financial position
of the Company.
The Company is engaged in formal communications with all of its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issue. The Company's
total Year 2000 project cost and estimates to complete the project include the
estimated costs and time associated with the Company's involvement on a third
party's Year 2000 program, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have material adverse effect on the Company. The
Company does not believe that it has material exposure to contingencies related
to the Year 2000 issue for the products it has sold. Although the Company does
not believe that there is a material contingency associated with the Year 2000
issue, there can be no assurance that exposure for material contingencies will
not arise.
The cost of the Year 2000 project is being expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $59
million related to the assessment, plan development and substantial completion
of the Year 2000 project through June 30, 1999. The total remaining cost of the
project is estimated between $10-$20 million.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, DC, upon payment of the SEC's prescribed fees.
77
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account generally are not subject to regulation under the
provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the Contract and the Fixed Account may be subject to the provisions
of the 1933 Act concerning the accuracy and completeness of statements made in
this Prospectus. The disclosures in this APPENDIX A have not been reviewed by
the SEC.
The Fixed Account is part of the Company's General Account which is made up of
all of the general assets of the Company other than those allocated to separate
accounts. Allocations to the Fixed Account become part of the assets of the
Company, and are used to support insurance and annuity obligations. A portion or
all of net payments may be allocated to accumulate at a fixed rate of interest
in the Fixed Account. Such net amounts are guaranteed by the Company as to
principal and a minimum rate of interest. Under the Contract, the minimum
interest which may be credited on amounts allocated to the Fixed Account is 3%
compounded annually. Additional "Excess Interest" may or may not be credited at
the sole discretion of the Company.
If the Contract is surrendered, or if an Excess Amount is withdrawn while the
Contract is in force and before the Annuity Date, a surrender charge is imposed
if such event occurs before the payments attributable to the surrender or
withdrawal have been credited to the Contract for at least six full Contract
years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If the Contract is issued prior to the Annuitant's 60th birthday, allocations
to the Fixed Account will be permitted until the Annuitant's 61st birthday. On
and after the Annuitant's 61st birthday, no additional Fixed Account
allocations will be accepted. If the Contract is issued on or after the
Annuitant's 60th birthday, up through and including the Annuitant's 81st
birthday, Fixed Account allocations will be permitted during the first
Contract year. On and after the first Contract anniversary, no additional
allocations to the Fixed Account will be permitted. If a Contract is issued
after the Annuitant's 81st birthday, no payments to the Fixed Account will be
permitted at any time.
In Oregon no additional allocations will be accepted into the Fixed Account on
or after the third Contract anniversary. Further, no payments to the Fixed
Account will be permitted if the Contract is issued after the Annuitant's 81st
birthday.
A-1
<PAGE>
If an allocation designated as a Fixed Account allocation is received at the
Principal Office during a period when the Fixed Account is not available due to
the limitations outlined above, the monies will be allocated to the Kemper Money
Market Portfolio.
To the extent permitted by state law, the Company reserves the right, from time
to time, to credit an enhanced interest rate to certain initial and/or
subsequent payments ("eligible payments") which are deposited into the Fixed
Account under an Automatic Transfer Option (dollar cost averaging election) that
uses the Fixed Account as the source account from which automatic transfers are
then processed. The following are not considered eligible payments: amounts
transferred into the Fixed Account from the Variable Account and/or the
Guarantee Period Accounts; amounts already in the Fixed Account at the time an
eligible payment is deposited and amounts transferred to the Contract from
another annuity contract issued by the Company. The Company reserves the right
to extend the period of time that the enhanced rate will apply. For more
information please contact your financial representative or call 1-800-792-8380.
A-2
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
The Contract was first offered to the public by Allmerica Financial Life
Insurance and Annuity Company in 1996 and by First Allmerica Financial Life
Insurance Company in 1997. The Company, however, may advertise "total return"
and "average annual total return" performance information based on (1) the
periods that the Sub-Accounts have been in existence and (2) the periods that
the Underlying Portfolios have been in existence. Performance results in Tables
1A and 2A are calculated with all charges assumed to be those applicable to the
Contract, the Sub-Accounts and the Underlying Portfolios and also assume that
the Contract is surrendered at the end of the applicable period. Performance
results in Tables 1B and 2B do not include the Contract fee and assume that the
Contract is not surrendered at the end of the applicable period. Both the total
return and yield figures are based on historical earnings and are not intended
to indicate future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by certain charges, and expressed as a percentage of
the investment.
The average annual total return represents the average annual percentage change
in the value of an investment in a Sub-Account over a given period of time.
Average annual total return represents averaged figures as opposed to the actual
performance of a Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Kemper Money Market Portfolio
refers to the income generated by an investment in the Sub-Account over a seven-
day period (which period will be specified in the advertisement). This income is
then "annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The effective yield calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Portfolio other than the Kemper Money
Market Portfolio refers to the annualized income generated by an investment in
the Sub-Account over a specified 30-day or one-month period. The yield is
calculated by assuming that the income generated by the investment during that
30-day or one-month period is generated each period over a 12-month period and
is shown as a percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
B-1
<PAGE>
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.10%, the
Underlying Portfolio charges, the $35 annual Contract fee and the surrender
charge which would be assessed if the investment were completely withdrawn at
the end of the specified period. The calculation is not adjusted to reflect the
deduction of any rider charges. Quotations of supplemental average total
returns, as shown in Table 1B, are calculated in exactly the same manner and for
the same periods of time except that it does not reflect the Contract fee and
assumes that the Contract is not surrendered at the end of the periods shown.
The performance shown in Tables 2A and 2B of Appendix B and C is calculated in
exactly the same manner as those in Tables 1A and 1B of Appendix B and C
respectively; however, the period of time is based on the Underlying Portfolios'
lifetime, which may predate the Sub-Account's inception date. These performance
calculations are based on the assumption that the Sub-Account corresponding to
the applicable Underlying Portfolio was actually in existence throughout the
stated period and that the contractual charges and expenses during that period
were equal to those currently assessed under the Contract.
Performance Tables for Contracts issued by Allmerica Financial Life Insurance
and Annuity Company can be found in Appendix B. Performance Tables for Contracts
issued by First Allmerica Financial Life Insurance Company can be found in
Appendix C. For more detailed information about these performance calculations,
including actual formulas, see the Statement of Additional Information.
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during the time period on which the
calculations are based. Performance information should be considered in light of
the investment objectives and policies and risk characteristics of the
Underlying Portfolio in which the Sub-Account invests and the market conditions
during the given time period, and should not be considered as a representation
of what may be achieved in the future.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper, Inc., a widely used independent research firm which
B-2
<PAGE>
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain
contract features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Portfolios.
B-3
<PAGE>
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(Assuming COMPLETE Withdrawal of the Investment)
<TABLE>
<CAPTION>
For Since
Sub-Account Investing in Sub-Account Year Ended Inception of
Underlying Portfolio Inception Date 12/31/98 Sub-Account
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth.......... N/A N/A N/A
Kemper Technology Growth.......... N/A N/A N/A
Kemper-Dreman Financial
Services......................... 5/4/98 N/A -8.72%
Kemper Small Cap Growth........... 1/8/97 9.86% 21.29%
Kemper Small Cap Value............ 1/8/97 -17.87% -0.72%
Kemper-Dreman High Return Equity.. 5/5/98 N/A -3.30%
Kemper International.............. 1/14/97 1.98% 6.18%
Kemper International Growth and
Income........................... 5/19/98 N/A -14.52%
Kemper Global Blue Chip........... 6/4/98 N/A -5.42%
Kemper Growth..................... 1/29/97 6.83% 13.86%
Kemper Contrarian Value........... 1/29/97 10.45% 20.00%
Kemper Blue Chip.................. 5/1/97 5.74% 10.62%
Kemper Value+Growth............... 1/28/97 11.59% 18.26%
Kemper Index 500.................. N/A N/A N/A
Kemper Horizon 20+................ 2/6/97 5.08% 12.48%
Kemper Total Return............... 1/28/97 6.89% 13.18%
Kemper Horizon 10+................ 2/18/97 3.49% 8.60%
Kemper High Yield................. 1/14/97 -6.02% 2.18%
Kemper Horizon 5.................. 3/19/97 2.06% 7.89%
Kemper Global Income.............. 5/1/97 3.22% 3.75%
Kemper Investment Grade Bond...... 2/12/97 0.33% 4.20%
Kemper Government Securities...... 3/14/97 -0.49% 4.24%
Kemper Money Market............... 1/3/97 -2.27% 1.31%
KVS Focused Large Cap Growth...... N/A N/A N/A
KVS Growth Opportunities.......... N/A N/A N/A
KVS Growth And Income............. N/A N/A N/A
Scudder International............. 5/12/98 N/A -7.00%
Scudder Global Discovery.......... 5/26/98 N/A -6.11%
</TABLE>
B-4
<PAGE>
<TABLE>
<CAPTION>
For Since
Sub-Account Investing in Sub-Account Year Ended Inception of
Underlying Portfolio Inception Date 12/31/98 Sub-Account
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Scudder Capital Growth............ 5/12/98 N/A -0.88%
Scudder Growth and Income......... 5/18/98 N/A -10.50%
Alger American Leveraged AllCap... N/A N/A N/A
Alger American Balanced........... N/A N/A N/A
Dreyfus MidCap Stock.............. N/A N/A N/A
Dreyfus Socially Responsible
Growth........................... N/A N/A N/A
</TABLE>
B-5
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL
TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(Assuming NO Withdrawal of the Investment and NO Contract Fees)
<TABLE>
<CAPTION>
For Since
Sub-Account Investing in Sub-Account Year Ended Inception of
Underlying Portfolio Inception Date 12/31/98 Sub-Account
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth.......... N/A N/A N/A
Kemper Technology Growth.......... N/A N/A N/A
Kemper-Dreman Financial
Services......................... 5/4/98 N/A -2.92%
Kemper Small Cap Growth........... 1/8/97 17.07% 24.02%
Kemper Small Cap Value............ 1/8/97 -12.22% 2.36%
Kemper-Dreman High Return Equity.. 5/5/98 N/A 2.87%
Kemper International.............. 1/14/97 8.82% 9.42%
Kemper International Growth and
Income........................... 5/19/98 N/A -9.11%
Kemper Global Blue Chip........... 6/4/98 N/A 0.56%
Kemper Growth..................... 1/29/97 13.84% 16.84%
Kemper Contrarian Value........... 1/29/97 17.96% 23.10%
Kemper Blue Chip.................. 5/1/97 12.60% 14.13%
Kemper Value+Growth............... 1/28/97 18.86% 21.16%
Kemper Index 500.................. N/A N/A N/A
Kemper Horizon 20+................ 2/6/97 11.80% 15.36%
Kemper Total Return............... 1/28/97 13.88% 16.15%
Kemper Horizon 10+................ 2/18/97 10.11% 11.63%
Kemper High Yield................. 1/14/97 0.34% 5.35%
Kemper Horizon 5.................. 3/19/97 8.55% 11.06%
Kemper Global Income.............. 5/1/97 9.77% 7.08%
Kemper Investment Grade Bond...... 2/12/97 6.75% 7.22%
Kemper Government Securities...... 3/14/97 5.86% 7.37%
Kemper Money Market............... 1/3/97 3.99% 4.10%
KVS Focused Large Cap Growth...... N/A N/A N/A
KVS Growth Opportunities.......... N/A N/A N/A
KVS Growth And Income............. N/A N/A N/A
Scudder International............. 5/12/98 N/A -1.11%
Scudder Global Discovery.......... 5/26/98 N/A -0.16%
Scudder Capital Growth............ 5/12/98 N/A 5.40%
Scudder Growth and Income......... 5/18/98 N/A -4.83%
Alger American Leveraged AllCap... N/A N/A N/A
Alger American Balanced........... N/A N/A N/A
</TABLE>
B-6
<PAGE>
<TABLE>
<CAPTION>
For Since
Sub-Account Investing in Sub-Account Year Ended Inception of
Underlying Portfolio Inception Date 12/31/98 Sub-Account
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Dreyfus MidCap Stock.............. N/A N/A N/A
Dreyfus Socially Responsible
Growth........................... N/A N/A N/A
</TABLE>
B-7
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(Assuming COMPLETE Withdrawal of Investment)
<TABLE>
<CAPTION>
Underlying For 10 Years
Sub-Account Investing in Portfolio Year Ended (or since
Underlying Portfolio Inception Date 12/31/98 5 Years inception if less)
- -------------------- -------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Kemper Aggressive
Growth............... N/A N/A N/A N/A
Kemper Technology
Growth............... N/A N/A N/A N/A
Kemper-Dreman Financial
Services............. 5/4/98 N/A N/A -8.72%
Kemper Small Cap
Growth............... 5/2/94 9.86% N/A 22.35%
Kemper Small Cap
Value................ 5/1/96 -17.87% N/A 0.40%
Kemper-Dreman High
Return Equity........ 5/4/98 N/A N/A -4.06%
Kemper International.. 1/6/92 1.98% 6.76% 8.96%
Kemper International
Growth and Income.... 5/5/98 N/A N/A -14.88%
Kemper Global Blue
Chip................. 5/5/98 N/A N/A -8.60%
Kemper Growth......... 12/9/83 6.83% 14.89% 16.66%
Kemper Contrarian
Value................ 5/1/96 10.45% N/A 22.10%
Kemper Blue Chip...... 5/1/97 5.74% N/A 10.62%
Kemper Value+Growth... 5/1/96 11.59% N/A 19.78%
Kemper Index 500...... N/A N/A N/A N/A
Kemper Horizon 20+.... 5/1/96 5.08% N/A 15.64%
Kemper Total Return... 4/6/82 6.89% 11.12% 12.81%
Kemper Horizon 10+.... 5/1/96 3.49% N/A 12.02%
Kemper High Yield..... 4/6/82 -6.02% 6.13% 8.71%
Kemper Horizon 5...... 5/1/96 2.06% N/A 9.22%
Kemper Global Income... 5/1/97 3.22% N/A 3.75%
Kemper Investment Grade
Bond................. 5/1/96 0.33% N/A 4.73%
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
Underlying For 10 Years
Sub-Account Investing in Portfolio Year Ended (or since
Underlying Portfolio Inception Date 12/31/98 5 Years inception if less)
- -------------------- -------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Kemper Government
Securities........... 9/3/87 -0.49% 5.02% 7.16%
Kemper Money Market... 4/6/82 -2.27% 3.24% 4.18%
KVS Focused Large Cap
Growth............... N/A N/A N/A N/A
KVS Growth
Opportunities........ N/A N/A N/A N/A
KVS Growth And Income... N/A N/A N/A N/A
Scudder International.. 5/1/87 10.01% 8.66% 10.73%
Scudder Global
Discovery............ 5/1/96 8.26% N/A 10.01%
Scudder Capital
Growth............... 7/16/85 14.83% 16.87% 15.61%
Scudder Growth and
Income............... 5/2/94 -0.62% N/A 18.48%
Alger American Leveraged
AllCap............... 1/25/95 48.98% N/A 37.39%
Alger American
Balanced............. 9/5/89 22.94% 14.76% 10.80%
Dreyfus MidCap Stock... 5/1/98 20.84% 20.78% 21.47%
Dreyfus Socially
Responsible Growth... 10/7/93 N/A N/A -10.36%
</TABLE>
B-9
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL
TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(Assuming NO Withdrawal of Investment and NO Contract Fees)
<TABLE>
<CAPTION>
Underlying For 10 Years
Sub-Account Investing in Portfolio Year Ended (or since
Underlying Portfolio Inception Date 12/31/98 5 Years inception if less)
- -------------------- -------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Kemper Aggressive
Growth............... N/A N/A N/A N/A
Kemper Technology
Growth............... N/A N/A N/A N/A
Kemper-Dreman Financial
Services............. 5/4/98 N/A N/A -2.92%
Kemper Small Cap
Growth............... 5/2/94 17.07% N/A 22.86%
Kemper Small Cap
Value................ 5/1/96 -12.22% N/A 2.52%
Kemper-Dreman High
Return Equity........ 5/4/98 N/A N/A 2.11%
Kemper International.. 1/6/92 8.82% 7.64% 9.32%
Kemper International
Growth and Income.... 5/5/98 N/A N/A -9.49%
Kemper Global Blue
Chip................. 5/5/98 N/A N/A -2.81%
Kemper Growth......... 12/9/83 13.84% 15.47% 16.82%
Kemper Contrarian
Value................ 5/1/96 17.96% N/A 23.92%
Kemper Blue Chip...... 5/1/97 12.60% N/A 14.13%
Kemper Value+Growth... 5/1/96 18.86% N/A 21.41%
Kemper Index 500...... N/A N/A N/A N/A
Kemper Horizon 20+.... 5/1/96 11.80% N/A 17.16%
Kemper Total Return... 4/6/82 13.88% 11.72% 12.95%
Kemper Horizon 10+.... 5/1/96 10.11% N/A 13.62%
Kemper High Yield..... 4/6/82 0.34% 7.01% 9.06%
Kemper Horizon 5...... 5/1/96 8.55% N/A 10.85%
Kemper Global Income... 5/1/97 9.77% N/A 7.08%
Kemper Investment Grade
Bond................. 5/1/96 6.75% N/A 6.52%
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
Underlying For 10 Years
Sub-Account Investing in Portfolio Year Ended (or since
Underlying Portfolio Inception Date 12/31/98 5 Years inception if less)
- -------------------- -------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Kemper Government
Securities........... 9/3/87 5.86% 5.55% 7.19%
Kemper Money Market... 4/6/82 3.99% 3.88% 4.28%
KVS Focused Large Cap
Growth............... N/A N/A N/A N/A
KVS Growth
Opportunities........ N/A N/A N/A N/A
KVS Growth And Income... N/A N/A N/A N/A
Scudder International.. 5/1/87 17.02% 9.09% 10.73%
Scudder Global
Discovery............ 5/1/96 15.12% N/A 11.60%
Scudder Capital
Growth............... 7/16/85 21.84% 17.19% 15.61%
Scudder Growth and
Income............... 5/2/94 5.68% N/A 18.83%
Alger American Leveraged
AllCap............... 1/25/95 56.10% N/A 37.81%
Alger American
Balanced............. 9/5/89 30.06% 15.13% 10.82%
Dreyfus MidCap Stock... 5/1/98 N/A N/A -3.25%
Dreyfus Socially
Responsible Growth... 10/7/93 27.96% 21.08% 21.66%
</TABLE>
B-11
<PAGE>
APPENDIX C
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(Assuming COMPLETE Withdrawal of the Investment)
<TABLE>
<CAPTION>
For Since
Sub-Account Investing in Sub-Account Year Ended Inception of
Underlying Portfolio Inception Date 12/31/98 Sub-Account
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth.......... N/A N/A N/A
Kemper Technology Growth.......... N/A N/A N/A
Kemper-Dreman Financial
Services......................... 12/30/98 N/A -6.81%
Kemper Small Cap Growth........... 10/3/97 9.80% 7.33%
Kemper Small Cap Value............ 8/26/97 -17.77% -11.99%
Kemper-Dreman High Return Equity.. 6/15/98 N/A 1.65%
Kemper International.............. 8/26/97 1.92% -0.60%
Kemper International Growth and
Income........................... N/A N/A N/A
Kemper Global Blue Chip........... N/A N/A N/A
Kemper Growth..................... 8/29/97 6.95% 7.72%
Kemper Contrarian Value........... 8/26/97 10.53% 14.48%
Kemper Blue Chip.................. 5/1/97 5.90% 9.71%
Kemper Value+Growth............... 10/6/97 11.63% 5.89%
Kemper Index 500.................. N/A N/A N/A
Kemper Horizon 20+................ 12/22/97 5.10% 7.74%
Kemper Total Return............... 11/20/97 6.92% 7.63%
Kemper Horizon 10+................ 1/9/98 N/A 5.66%
Kemper High Yield................. 8/26/97 -5.82% -1.57%
Kemper Horizon 5.................. 4/22/98 N/A -4.27%
Kemper Global Income.............. N/A N/A N/A
Kemper Investment Grade Bond...... 8/26/97 0.33% 3.86%
Kemper Government Securities...... 10/16/98 N/A -5.79%
Kemper Money Market............... 1/3/97 -2.21% -0.79%
KVS Focused Large Cap Growth...... N/A N/A N/A
KVS Growth Opportunities.......... N/A N/A N/A
KVS Growth And Income............. N/A N/A N/A
Scudder International............. N/A N/A N/A
Scudder Global Discovery.......... 6/15/98 N/A -2.99%
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
For Since
Sub-Account Investing in Sub-Account Year Ended Inception of
Underlying Portfolio Inception Date 12/31/98 Sub-Account
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Scudder Capital Growth............ 12/16/98 N/A 0.23%
Scudder Growth and Income......... 6/15/98 N/A -6.90%
Alger American Leveraged AllCap... N/A N/A N/A
Alger American Balanced........... N/A N/A N/A
Dreyfus MidCap Stock.............. N/A N/A N/A
Dreyfus Socially Responsible
Growth........................... N/A N/A N/A
</TABLE>
C-2
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL
TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(Assuming NO Withdrawal of the Investment and NO Contract Fees)
<TABLE>
<CAPTION>
For Since
Sub-Account Investing in Sub-Account Year Ended Inception of
Underlying Portfolio Inception Date 12/31/98 Sub-Account
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Kemper Aggressive Growth.......... N/A N/A N/A
Kemper Technology Growth.......... N/A N/A N/A
Kemper-Dreman Financial
Services......................... 12/30/98 N/A -0.91%
Kemper Small Cap Growth........... 10/3/97 17.07% 12.55%
Kemper Small Cap Value............ 8/26/97 -12.22% -7.97%
Kemper-Dreman High Return Equity.. 6/15/98 N/A 8.09%
Kemper International.............. 8/26/97 8.82% 3.99%
Kemper International Growth and
Income........................... N/A N/A N/A
Kemper Global Blue Chip........... N/A N/A N/A
Kemper Growth..................... 8/29/97 13.84% 12.21%
Kemper Contrarian Value........... 8/26/97 17.96% 19.34%
Kemper Blue Chip.................. 5/1/97 12.60% 10.16%
Kemper Value+Growth............... 10/6/97 18.86% 10.89%
Kemper Index 500.................. N/A N/A N/A
Kemper Horizon 20+................ 12/22/97 11.80% 13.48%
Kemper Total Return............... 11/20/97 13.88% 13.17%
Kemper Horizon 10+................ 1/9/98 N/A 12.41%
Kemper High Yield................. 8/26/97 0.34% 2.63%
Kemper Horizon 5.................. 4/22/98 N/A 1.84%
Kemper Global Income.............. N/A N/A N/A
Kemper Investment Grade Bond...... 8/26/97 6.75% 8.09%
Kemper Government Securities...... 10/16/98 N/A 0.18%
Kemper Money Market............... 1/3/97 3.99% 4.02%
KVS Focused Large Cap Growth...... N/A N/A N/A
KVS Growth Opportunities.......... N/A N/A N/A
KVS Growth And Income............. N/A N/A N/A
Scudder International............. N/A N/A N/A
Scudder Global Discovery.......... 6/15/98 N/A 3.25%
Scudder Capital Growth............ 12/16/98 N/A 6.59%
Scudder Growth and Income......... 6/15/98 N/A -0.90%
Alger American Leveraged AllCap... N/A N/A N/A
Alger American Balanced........... N/A N/A N/A
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
For Since
Sub-Account Investing in Sub-Account Year Ended Inception of
Underlying Portfolio Inception Date 12/31/98 Sub-Account
- -------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Dreyfus MidCap Stock.............. N/A N/A N/A
Dreyfus Socially Responsible
Growth........................... N/A N/A N/A
</TABLE>
C-4
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(Assuming COMPLETE Withdrawal of Investment)
<TABLE>
<CAPTION>
Underlying For 10 Years
Sub-Account Investing in Portfolio Year Ended (or since
Underlying Portfolio Inception Date 12/31/98 5 Years inception if less)
- -------------------- -------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Kemper Aggressive
Growth............... N/A N/A N/A N/A
Kemper Technology
Growth............... N/A N/A N/A N/A
Kemper-Dreman Financial
Services............. 5/4/98 N/A N/A -8.71%
Kemper Small Cap
Growth............... 5/2/94 9.80% N/A 22.30%
Kemper Small Cap
Value................ 5/1/96 -17.77% N/A 0.46%
Kemper-Dreman High
Return Equity........ 5/4/98 N/A N/A -3.99%
Kemper International.. 1/6/92 1.92% 6.73% 8.93%
Kemper International
Growth and Income.... 5/5/98 N/A N/A -14.88%
Kemper Global Blue
Chip................. 5/5/98 N/A N/A -8.60%
Kemper Growth......... 12/9/83 6.95% 14.98% 16.72%
Kemper Contrarian
Value................ 5/1/96 10.53% N/A 22.12%
Kemper Blue Chip...... 5/1/97 5.90% N/A 10.81%
Kemper Value+Growth... 5/1/96 11.63% N/A 19.88%
Kemper Index 500...... N/A N/A N/A N/A
Kemper Horizon 20+.... 5/1/96 5.10% N/A 15.65%
Kemper Total Return... 4/6/82 6.92% 11.20% 12.86%
Kemper Horizon 10+.... 5/1/96 3.50% N/A 12.04%
Kemper High Yield..... 4/6/82 -5.82% 6.30% 8.85%
Kemper Horizon 5...... 5/1/96 2.04% N/A 9.20%
Kemper Global Income... 5/1/97 3.24% N/A 3.78%
Kemper Investment Grade
Bond................. 5/1/96 0.33% N/A 4.72%
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Underlying For 10 Years
Sub-Account Investing in Portfolio Year Ended (or since
Underlying Portfolio Inception Date 12/31/98 5 Years inception if less)
- -------------------- -------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Kemper Government
Securities........... 9/3/87 -0.45% 5.03% 7.16%
Kemper Money Market... 4/6/82 -2.21% 3.27% 4.19%
KVS Focused Large Cap
Growth............... N/A N/A N/A N/A
KVS Growth
Opportunities........ N/A N/A N/A N/A
KVS Growth And Income... N/A N/A N/A N/A
Scudder International.. 5/1/87 10.02% 8.66% 10.73%
Scudder Global
Discovery............ 5/1/96 8.18% N/A 9.92%
Scudder Capital
Growth............... 7/16/85 14.84% 16.87% 15.61%
Scudder Growth and
Income............... 5/2/94 -0.72% N/A 18.45%
Alger American Leveraged
AllCap............... 1/25/95 48.99% N/A 37.39%
Alger American
Balanced............. 9/5/89 22.96% 14.76% 10.80%
Dreyfus MidCap Stock... 5/1/98 N/A N/A -10.35%
Dreyfus Socially
Responsible Growth... 10/7/93 20.86% 20.78% 21.47%
</TABLE>
C-6
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL
TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING PORTFOLIO
(Assuming NO Withdrawal of Investment and NO Contract Fees)
<TABLE>
<CAPTION>
Underlying For 10 Years
Sub-Account Investing in Portfolio Year Ended (or since
Underlying Portfolio Inception Date 12/31/98 5 Years inception if less)
- -------------------- -------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Kemper Aggressive
Growth............... N/A N/A N/A N/A
Kemper Technology
Growth............... N/A N/A N/A N/A
Kemper-Dreman Financial
Services............. 5/4/98 N/A N/A -2.92%
Kemper Small Cap
Growth............... 5/2/94 17.07% N/A 22.86%
Kemper Small Cap
Value................ 5/1/96 -12.22% N/A 2.52%
Kemper-Dreman High
Return Equity........ 5/4/98 N/A N/A 2.11%
Kemper International.. 1/6/92 8.82% 7.64% 9.32%
Kemper International
Growth and Income.... 5/5/98 N/A N/A -9.49%
Kemper Global Blue
Chip................. 5/5/98 N/A N/A -2.81%
Kemper Growth......... 12/9/83 13.84% 15.47% 16.82%
Kemper Contrarian
Value................ 5/1/96 17.96% N/A 23.92%
Kemper Blue Chip...... 5/1/97 12.60% N/A 14.13%
Kemper Value+Growth... 5/1/96 18.86% N/A 21.41%
Kemper Index 500...... N/A N/A N/A N/A
Kemper Horizon 20+.... 5/1/96 11.80% N/A 17.16%
Kemper Total Return... 4/6/82 13.88% 11.72% 12.95%
Kemper Horizon 10+.... 5/1/96 10.11% N/A 13.62%
Kemper High Yield..... 4/6/82 0.34% 7.01% 9.06%
Kemper Horizon 5...... 5/1/96 8.55% N/A 10.85%
Kemper Global Income... 5/1/97 9.77% N/A 7.08%
Kemper Investment Grade
Bond................. 5/1/96 6.75% N/A 6.53%
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
Underlying For 10 Years
Sub-Account Investing in Portfolio Year Ended (or since
Underlying Portfolio Inception Date 12/31/98 5 Years inception if less)
- -------------------- -------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C>
Kemper Government
Securities........... 9/3/87 5.86% 5.55% 7.19%
Kemper Money Market... 4/6/82 3.99% 3.88% 4.28%
KVS Focused Large Cap
Growth............... N/A N/A N/A N/A
KVS Growth
Opportunities........ N/A N/A N/A N/A
KVS Growth and Income... N/A N/A N/A N/A
Scudder International.. 5/1/87 17.02% 9.09% 10.73%
Scudder Global
Discovery............ 5/1/96 15.13% N/A 11.60%
Scudder Capital
Growth............... 7/16/85 21.84% 17.19% 15.61%
Scudder Growth and
Income............... 5/2/94 5.68% N/A 18.83%
Alger American Leveraged
AllCap............... 1/25/95 56.10% N/A 37.81%
Alger American
Balanced............. 9/5/89 30.06% 15.13% 10.82%
Dreyfus MidCap Stock... 5/1/98 N/A N/A -3.25%
Dreyfus Socially
Responsible Growth... 10/7/93 27.96% 21.08% 21.66%
</TABLE>
C-8
<PAGE>
APPENDIX D
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
Part 1: Surrender Charges
FULL SURRENDER
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge amount is equal to 15% of the current Accumulated Value. The
table below presents examples of the surrender charge resulting from a full
surrender of the Owner's Contract, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
Hypothetical Free Surrender
Account Accumulated Withdrawal Charge Surrender
Year Value Amount Percentage Charge
- --------------------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C>
1 $54,000.00 $ 8,100.00 7% $3,213.00
2 58,320.00 8,748.00 6% 2,974.32
3 62,985.60 9,447.84 5% 2,500.00
4 68,024.45 10,203.67 4% 2,000.00
5 73,466.40 11,019.96 3% 1,500.00
6 79,343.72 11,901.56 2% 1,000.00
7 85,691.21 12,853.68 0% 0.00
</TABLE>
WITHDRAWAL
Assume a Payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge amount is equal to
15% of the current Accumulated Value and there are withdrawals as detailed
below. The table below presents examples of the surrender charge resulting from
withdrawals from the Owner's Contract, based on hypothetical Accumulated Values.
<TABLE>
<CAPTION>
Hypothetical Free Surrender
Account Accumulated Withdrawal Charge Surrender
Year Value Withdrawal Amount Percentage Charge
- --------------------- ------------ ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1 $54,000.00 $ 0.00 $ 8,100.00 7% $ 0.00
2 58,320.00 0.00 8,748.00 6% 0.00
3 62,985.60 0.00 9,447.84 5% 0.00
4 68,024.45 30,000.00 10,203.67 4% 791.85
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>
D-1
<PAGE>
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 (2,555 days) from the expiration
date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers or withdrawals affecting this Guarantee Period Account have
been made.
5. Surrender charges, if any, are calculated in the same manner as shown in
the examples in Part 1.
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.10)](2555/365)-1
= (.98182)(7)-1
= -.12054
The market value adjustment = the market value factor multiplied by the
withdrawal
= -.12054 X $62,985.60
= -$7,592.11
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.07)](2555/365)-1
= (1.0093)(7)-1
= .06694
The market value adjustment = the market value factor
multiplied by the withdrawal
= .06694 X $62,985.60
= $4,216.26
D-2
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
The market value factor = [(1+i)/(1-j)](n/365)-1
= [(1+.08)/(1+.11)](2555/365)-1
= (.97297)(7)-1
= -.17454
The market value adjustment = Minimum of the market value factor
multiplied by the withdrawal or the negative of the
excess interest earned over 3%
= Minimum of (-.17454 - $62,985.60 or -$8,349.25)
= Minimum of (-$10,993.51 or -$8,349.25)
= -$8,349.25
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.06)](2555/365)-1
= (1.01887)(7)-1
=.13981
The market value adjustment = Minimum of the market value factor
multiplied by the withdrawal or the excess
interest earned over 3%
The market value factor = Minimum of (.13981 X $62,985.60 or $8,349.25)
= Minimum of ($8,806.02 or $8,349.25) = $8,349.25
D-3
<PAGE>
APPENDIX E
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
Accumulated Market Value Death Death Hypothetical
Year Value Adjustment Benefit (a) Benefit (b) Death 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).
E-1
<PAGE>
Death Benefit Assuming Withdrawals
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below. The table
below presents examples of the death benefit based on the hypothetical
Accumulated Values.
<TABLE>
<CAPTION>
Hypothetical Hypothetical
Accumulated Market Value Death Death Hypothetical
Year Value Withdrawal Adjustment Benefit (a) Benefit (b) Death 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 3,603.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 3,603.18 3,994.70
5 3,844.17 0.00 0.00 3,844.17 3,603.18 3,844.17
6 4,228.59 0.00 500.00 4,728.59 3,603.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 3,603.18 4,651.45
8 5,116.59 0.00 500.00 5,616.59 3,603.18 5,616.59
9 5,628.25 0.00 0.00 5,628.25 3,603.18 5,628.25
10 691.07 5,000.00 0.00 691.07 437.54 691.07
</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).
Part 2: Death of the Annuitant -- With 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
Accumulated Market Value Death Death Death Hypothetical
Year Value Adjustment Benefit (a) Benefit (b) Benefit (c) Death Benefit
- --------------------- ------------- ------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
1 $53,000.00 $ 0.00 $53,000.00 $52,500.00 $50,000.00 $53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
E-2
<PAGE>
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
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
Accumulated Market Value Death
Year Value Withdrawal Adjustment Benefit (a)
- ---- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
1 $53,000.00 $ 0.00 $ 0.00 $53,000.00
2 53,530.00 0.00 500.00 54,030.00
3 3,883.00 50,000.00 0.00 3,883.00
4 3,494.70 0.00 500.00 3,994.70
5 3,844.17 0.00 0.00 3,844.17
6 4,228.59 0.00 500.00 4,728.59
7 4,651.45 0.00 0.00 4,651.45
8 5,116.59 0.00 500.00 5,616.59
9 5,628.25 0.00 0.00 5,628.25
10 691.07 5,000.00 0.00 691.07
</TABLE>
<TABLE>
<CAPTION>
Hypothetical
Death Death Death
Year Benefit (b) Benefit (c) Benefit
- ---- ----------- ----------- ------------
<S> <C> <C> <C> <C>
1 $52,500.00 $50,000.00 $53,000.00
2 55,125.00 53,000.00 55,125.00
3 4,171.13 3,972.50 4,171.13
4 4,379.68 4,171.13 4,379.68
5 4,598.67 4,379.68 4,598.67
6 4,828.60 4,598.67 4,828.60
7 5,070.03 4,828.60 5,070.03
8 5,323.5 35,070.03 5,616.59
9 5,589.71 5,616.59 5,628.25
10 712.70 683.44 712.70
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment.
E-3
<PAGE>
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).
Part 3: Death of the Owner Who is Not The Annuitant (With or Without Enhanced
Death Benefit)
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
Accumulated Market Value Death
Year Value Adjustment Benefit
- --------------------- ------------- ------------- --------------
<S> <C> <C> <C>
1 $53,000.00 $ 0.00 $53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
E-4
<PAGE>
APPENDIX F
CONDENSED FINANCIAL INFORMATION
Allmerica Financial Life Insurance and Annuity Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Kemper-Dreman Financial Services Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 0.971 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,698 N/A
Kemper Small Cap Growth Portfolio
Unit Value $:
Beginning of Period.............................. 1.339 0
End of Period.................................... 1.568 1.339
Number of Units Outstanding at End of Period (in
thousands).......................................... 5,345 2,090
Kemper Small Cap Value Portfolio
Unit Value $:
Beginning of Period.............................. 1.214 0
End of Period.................................... 1.065 1.214
Number of Units Outstanding at End of Period (in
thousands).......................................... 9,791 5,115
Kemper-Dreman High Return Equity Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 1.029 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 5,903 N/A
Kemper International Portfolio
Unit Value $:
Beginning of Period.............................. 1.096 0
End of Period.................................... 1.193 1.096
Number of Units Outstanding at End of Period (in
thousands).......................................... 9,222 4,609
</TABLE>
F-1
<PAGE>
CONDENSED FINANCIAL INFORMATION
Allmerica Financial Life Insurance and Annuity Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Kemper International Growth and Income Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 0.909 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 332 N/A
Kemper Global Blue Chip Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 1.006 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 396 N/A
Kemper Growth Portfolio
Unit Value $:
Beginning of Period.............................. 1.184 0
End of Period.................................... 1.348 1.184
Number of Units Outstanding at End of Period (in
thousands).......................................... 7,034 3,144
Kemper Contrarian Value Portfolio
Unit Value $:
Beginning of Period.............................. 1.264 0
End of Period.................................... 1.491 1.264
Number of Units Outstanding at End of Period (in
thousands).......................................... 16,119 9,815
Kemper Blue Chip Portfolio
Unit Value $:
Beginning of Period.............................. 1.107 0
End of Period.................................... 1.247 1.107
Number of Units Outstanding at End of Period (in
thousands).......................................... 5,635 1,560
Kemper Value+Growth Portfolio
Unit Value $:
Beginning of Period.............................. 1.217 0
End of Period.................................... 1.447 1.217
Number of Units Outstanding at End of Period (in
thousands).......................................... 7,166 2,845
</TABLE>
F-2
<PAGE>
CONDENSED FINANCIAL INFORMATION
Allmerica Financial Life Insurance and Annuity Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Kemper Horizon 20+ Portfolio
Unit Value $:
Beginning of Period.............................. 1.173 0
End of Period.................................... 1.312 1.173
Number of Units Outstanding at End of Period (in
thousands).......................................... 2,444 846
Kemper Total Return Portfolio
Unit Value $:
Beginning of Period.............................. 1.171 0
End of Period.................................... 1.334 1.171
Number of Units Outstanding at End of Period (in
thousands).......................................... 7,446 3,260
Kemper Horizon 10+ Portfolio
Unit Value $:
Beginning of Period.............................. 1.115 0
End of Period.................................... 1.228 1.115
Number of Units Outstanding at End of Period (in
thousands).......................................... 3,942 1,431
Kemper High Yield Portfolio
Unit Value $:
Beginning of Period.............................. 1.104 0
End of Period.................................... 1.108 1.104
Number of Units Outstanding at End of Period (in
thousands).......................................... 23,809 9,516
Kemper Horizon 5 Portfolio
Unit Value $:
Beginning of Period.............................. 1.111 0
End of Period.................................... 1.206 1.111
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,507 439
Kemper Global Income Portfolio
Unit Value $:
Beginning of Period.............................. 1.021 0
End of Period.................................... 1.121 1.021
Number of Units Outstanding at End of Period (in
thousands).......................................... 435 457
</TABLE>
F-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
Allmerica Financial Life Insurance and Annuity Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Kemper Investment Grade Bond Portfolio
Unit Value $:
Beginning of Period.............................. 1.068 0
End of Period.................................... 1.140 1.068
Number of Units Outstanding at End of Period (in
thousands).......................................... 6,067 1,032
Kemper Government Securities Portfolio
Unit Value $:
Beginning of Period.............................. 1.07 0
End of Period.................................... 1.137 1.074
Number of Units Outstanding at End of Period (in
thousands).......................................... 4,590 659
Kemper Money Market Portfolio
Unit Value $:
Beginning of Period.............................. 1.042 0
End of Period.................................... 1.084 1.042
Number of Units Outstanding at End of Period (in
thousands).......................................... 4,440 2,329
Scudder International Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 0.989 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 794 N/A
Scudder Global Discovery Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 0.998 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 732 N/A
Scudder Capital Growth Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 1.054 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 758 N/A
No information is shown above for Sub-Accounts that commenced operations
after December 31, 1998.
</TABLE>
F-4
<PAGE>
CONDENSED FINANCIAL INFORMATION
Allmerica Financial Life Insurance and Annuity Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Scudder Growth and Income Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 0.952 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 1,084 N/A
</TABLE>
F-5
<PAGE>
CONDENSED FINANCIAL INFORMATION
First Allmerica Financial Life Insurance Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Kemper-Dreman Financial Services Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 0.991 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 4 N/A
Kemper Small Cap Growth Portfolio
Unit Value $:
Beginning of Period.............................. 0.989 0.000
End of Period.................................... 1.158 0.989
Number of Units Outstanding at End of Period (in
thousands).......................................... 197 21
Kemper Small Cap Value Portfolio
Unit Value $:
Beginning of Period.............................. 1.019 0.000
End of Period.................................... 0.894 1.019
Number of Units Outstanding at End of Period (in
thousands).......................................... 161 87
Kemper-Dreman High Return Equity Portfolio
Unit Value $:
Beginning of Period.............................. 1.116 0.000
End of Period.................................... 1.081 1.116
Number of Units Outstanding at End of Period (in
thousands).......................................... 20 0
Kemper International Portfolio
Unit Value $:
Beginning of Period.............................. 0.969 0.000
End of Period.................................... 1.054 0.969
Number of Units Outstanding at End of Period (in
thousands).......................................... 364 138
Kemper International Growth and Income Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 0 N/A
</TABLE>
F-6
<PAGE>
CONDENSED FINANCIAL INFORMATION
First Allmerica Financial Life Insurance Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Kemper Global Blue Chip Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 0 N/A
Kemper Growth Portfolio
Unit Value $:
Beginning of Period.............................. 1.025 0.000
End of Period.................................... 1.167 1.025
Number of Units Outstanding at End of Period (in
thousands).......................................... 67 5
Kemper Contrarian Value Portfolio
Unit Value $:
Beginning of Period.............................. 1.076 0.000
End of Period.................................... 1.269 1.076
Number of Units Outstanding at End of Period (in
thousands).......................................... 358 190
Kemper Blue Chip Portfolio
Unit Value $:
Beginning of Period.............................. 1.116 0.000
End of Period.................................... 1.230 1.116
Number of Units Outstanding at End of Period (in
thousands).......................................... 112 0
Kemper Value+Growth Portfolio
Unit Value $:
Beginning of Period.............................. 0.956 0.000
End of Period.................................... 1.136 0.956
Number of Units Outstanding at End of Period (in
thousands).......................................... 251 2
Kemper Horizon 20+ Portfolio
Unit Value $:
Beginning of Period.............................. 1.018 0.000
End of Period.................................... 1.138 1.018
Number of Units Outstanding at End of Period (in
thousands).......................................... 39 2
</TABLE>
F-7
<PAGE>
CONDENSED FINANCIAL INFORMATION
First Allmerica Financial Life Insurance Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Kemper Total Return Portfolio
Unit Value $:
Beginning of Period.............................. 1.008 0.000
End of Period.................................... 1.148 1.008
Number of Units Outstanding at End of Period (in
thousands).......................................... 375 201
Kemper Horizon 10+ Portfolio
Unit Value $:
Beginning of Period.............................. 1.000 0.000
End of Period.................................... 1.124 1.000
Number of Units Outstanding at End of Period (in
thousands).......................................... 57 0
Kemper High Yield Portfolio
Unit Value $:
Beginning of Period.............................. 1.032 0.000
End of Period.................................... 1.036 1.032
Number of Units Outstanding at End of Period (in
thousands).......................................... 105 52
Kemper Horizon 5 Portfolio
Unit Value $:
Beginning of Period.............................. 1.000 0.000
End of Period.................................... 1.018 1.000
Number of Units Outstanding at End of Period (in
thousands).......................................... 98 0
Kemper Global Income Portfolio
Unit Value $:
Beginning of Period.............................. 1.019 0.000
End of Period.................................... 1.008 1.019
Number of Units Outstanding at End of Period (in
thousands).......................................... 0 0
Kemper Investment Grade Bond Portfolio
Unit Value $:
Beginning of Period.............................. 1.040 0.000
End of Period.................................... 1.111 1.040
Number of Units Outstanding at End of Period (in
thousands).......................................... 26 13
</TABLE>
F-8
<PAGE>
CONDENSED FINANCIAL INFORMATION
First Allmerica Financial Life Insurance Company
Separate Account KGC
<TABLE>
<CAPTION>
Sub-Account 1998 1997
- ----------- -------- --------
<S> <C> <C>
Kemper Government Securities Portfolio
Unit Value $:
Beginning of Period.............................. 1.00 0.00
End of Period.................................... 0.995 1.000
Number of Units Outstanding at End of Period (in
thousands).......................................... 28 0
Kemper Money Market Portfolio
Unit Value $:
Beginning of Period.............................. 1.004 0.000
End of Period.................................... 1.013 1.004
Number of Units Outstanding at End of Period (in
thousands).......................................... 73 0
Scudder International Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 1.000 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 0 N/A
Scudder Global Discovery Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 1.033 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 127 N/A
Scudder Capital Growth Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 1.066 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 47 N/A
Scudder Growth and Income Portfolio
Unit Value $:
Beginning of Period.............................. 0.000 N/A
End of Period.................................... 0.991 N/A
Number of Units Outstanding at End of Period (in
thousands).......................................... 222 N/A
</TABLE>
No information is shown above for Sub-Accounts that commenced operations after
December 31, 1998.
F-9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
FLEXIBLE PAYMENT DEFERRED VARIABLE AND FIXED ANNUITY CONTRACTS
FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT KGC
INVESTING IN SHARES OF KEMPER VARIABLE SERIES,
SCUDDER VARIABLE LIFE INVESTMENT FUND, DREYFUS INVESTMENT
PORTFOLIOS, THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC., AND
THE ALGER AMERICAN FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE KEMPER GATEWAY CUSTOM PROSPECTUS FOR SEPARATE
ACCOUNT KGC DATED MAY 1, 1999 AS REVISED NOVEMBER 15, 1999 ("THE
PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ANNUITY CLIENT SERVICES,
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY, 440 LINCOLN STREET,
WORCESTER, MASSACHUSETTS 01653, TELEPHONE 1-800-782-8380.
DATED MAY 1, 1999 AS REVISED NOVEMBER 15, 1999
AFLIAC Kemper Gateway Custom
<PAGE>
TABLE OF CONTENTS
General Information and History...............................................2
Taxation Of The Contract, The Variable Account and The
Company..................................................................3
Services......................................................................3
Underwriters..................................................................3
Annuity Benefit Payments......................................................4
Exchange Offer................................................................6
Performance Information.......................................................8
Tax-Deferred Accumulation....................................................10
Financial Statements........................................................F-1
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 its Board of Directors on June 13, 1996. The Company is a
life insurance company organized under the laws of Delaware in July 1974. Its
Principal Office is located at 440 Lincoln Street, Worcester, Massachusetts
01653, telephone 508-855-1000. The Company is subject to the laws of the State
of Delaware governing insurance companies and to regulation by the Commissioner
of Insurance of Delaware. In addition, the Company is subject to the insurance
laws and regulations of other states and jurisdictions in which it is licensed
to operate. As of December 31, 1998, the Company had over $14 billion in assets
and over $26 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries (including the Company) had over $27 billion in combined assets and
over $48 billion in life insurance in force.
Currently, 34 Sub-Accounts of the Variable Account are available under the
Contract. Each Sub-Account invests in a corresponding investment portfolio of
Kemper Variable Series ("KVS"), Scudder Variable Life Investment Fund
("Scudder VLIF"), Dreyfus Investment Portfolios, The Dreyfus Socially
Responsible Growth Fund, Inc., or The Alger American Fund ("Alger'),
open-end, registered management investment companies.
Twenty-six different portfolios of KVS are available under the Contract: the
Kemper Aggressive Growth Portfolio, Kemper Technology Growth Portfolio,
Kemper-Dreman Financial Services Portfolio, Kemper Small Cap Growth Portfolio,
Kemper Small Cap Value Portfolio, Kemper-Dreman
2
<PAGE>
High Return Equity Portfolio, Kemper International Portfolio, Kemper
International Growth and Income Portfolio, Kemper Global Blue Chip Portfolio,
Kemper Growth Portfolio, Kemper Contrarian Value Portfolio, Kemper Blue Chip
Portfolio, Kemper Value+Growth Portfolio, Kemper Index 500 Portfolio, Kemper
Horizon 20+ Portfolio, Kemper Total Return Portfolio, Kemper Horizon 10+
Portfolio, Kemper High Yield Portfolio, Kemper Horizon 5 Portfolio, Kemper
Global Income Portfolio, Kemper Investment Grade Bond Portfolio, Kemper
Government Securities Portfolio, Kemper Money Market Portfolio KVS Growth
Opportunities Portfolio, KVS Growth And Income Portfolio and KVS Focused
Large Cap Growth Portfolio. Four portfolios of Scudder VLIF are available
under the Contract: the Scudder International Portfolio, Scudder Global
Discovery Portfolio, Scudder Capital Growth Portfolio, and Scudder Growth and
Income Portfolio. One portfolio of Dreyfus Investment Portfolios is available
under the Contract: the Dreyfus MidCap Stock Portfolio. One portfolio of The
Dreyfus Socially Responsible Growth Fund, Inc. is available under the
Contract: the Dreyfus Socially Responsible Growth Fund. Two portfolios of
Alger are available under the Contract: the Alger American Leveraged AllCap
Portfolio and the Alger American Balanced Portfolio (together, the
"Underlying Portfolios").
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any other
taxes that may become payable in the future in connection with the Contract or
the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Underlying Portfolio shares owned by the Sub-Accounts are held
on an open account basis. A Sub-Account's ownership of Underlying Portfolio
shares is reflected on the records of the Underlying Portfolio, and is not
represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, and
the financial statements of Separate Account KGC of the Company as of December
31, 1998 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
UNDERWRITERS
3
<PAGE>
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter and general distributor for the Contract pursuant to a contract with
Allmerica Investments, the Company and the Variable Account. Allmerica
Investments distributes the Contract on a best-efforts basis. Allmerica
Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts 01653, was
organized in 1969 as a wholly owned subsidiary of First Allmerica, and 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 7.0% of purchase payments, to
broker-dealers that sell the Contract. To the extent permitted by NASD rules,
promotional incentives or payments also may be provided to such entities based
on sales volumes, the assumption of wholesaling functions or other sales-related
criteria. Additional payments may be made for other services not directly
related to the sale of the Contract, including the recruitment and training of
personnel, production of promotional literature and similar services. A
Promotional Allowance of 1.0% of total payments is paid to Kemper Distributors,
Inc. for administrative and support services with respect to the distribution of
the contracts; however, Kemper Distributors, Inc. may direct the Company to pay
a portion of said allowance to broker-dealers who provide support services
directly.
Commissions paid by the Company do not result in any charge to Owners or to the
Variable Account in addition to the charges described under "CHARGES AND
DEDUCTIONS" in the Prospectus. The Company intends to recoup the commission and
other sales expense through a combination of anticipated surrender, withdrawal
and/or annuitization charges, profits from the Company's general account,
including the investment earnings on amounts allocated to accumulate on a fixed
basis in excess of the interest credited on fixed accumulations by the Company,
and the profit, if any, from the mortality and expense risk charge.
No commissions were paid to Allmerica Investments, Inc. during 1997 and 1998.
Sales of these contracts began in 1997.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
(1) Accumulation Unit Value -- Previous Valuation Period.............$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period.................$5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses.........1,675
4
<PAGE>
(4) Adjusted Gross Investment Rate for the
Valuation Period (3) divided by (2)..............................0.000335
(5) Annual Charge (one-day equivalent of 1.10% per annum)..............0.000030
(6) Net Investment Rate (4) - (5)......................................0.000305
(7) Net Investment Factor 1.000000 + (6)...............................1.000305
(8) Accumulation Unit Value -- Current Period (1) x (7)..............$ 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
Accumulation 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 the First Variable Annuity Benefit Payment" in
the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example: Assume
an Annuitant has 40,000 Accumulation Units in a 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
Accumulated Value of the Contract is $44,800 (40,000 x $1.120000). Assume also
that the Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax or surrender
charge, the first monthly payment would be 44.800 multiplied by $6.57, or
$294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum,
for the Valuation Date as of which the first payment was calculated, was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit Values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment, the number of Annuity Units represented by that payment
is determined to be 267.5818. The value of this same number of Annuity Units
will be paid in each subsequent month under most options. Assume further that
the net investment factor for the Valuation Period applicable to the next
annuity benefit payment is 1.000190. Multiplying this factor by .999906 (the
one-day adjustment factor for the assumed interest rate of 3.5% per annum)
produces a factor of 1.000096. This then is multiplied by the Annuity Unit value
on the immediately preceding Valuation Date (assumed here to be $1.105000). The
result is an Annuity Unit value of $1.105106 for the current monthly payment.
The current monthly payment then is determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 267.5818 times $1.105106,
which produces a current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both commutable
and non-commutable period certain annuity options. A commutable option gives the
Annuitant the right to exchange any remaining payments for a lump sum payment
based on the commuted value. The commuted value is the present value of
remaining payments calculated at 3.5% interest. The determination of the
commuted value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather
5
<PAGE>
than the Accumulated Value. Assume this results in 250.0000 Annuity Units.
Assume the commuted value is requested with 60 monthly payments remaining and a
current Annuity Unit Value of $1.200000. Based on these assumptions, the dollar
amount of remaining payments would be $300 a month for 60 months. The present
value at 3.5% of all remaining payments would be $16.560.72.
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 Company
should receive (1) a completed application for the new Contract, (2) the
contract being exchanged, and (3) a signed Letter of Awareness.
SURRENDER CHARGE COMPUTATION. No surrender charge otherwise applicable to the
Exchanged Contract will be assessed as a result of the exchange. Instead, the
surrender charge under the new Contract will be computed as if the payments that
had been made to the Exchanged Contract were made to the new Contract as of the
date of issue of the Exchanged Contract. Any additional payments to the new
Contract after the exchange will be subject to the surrender charge computation
outlined in the new Contract and 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.
SURRENDER CHARGE. The surrender charge under the new Contract, as described in
the Prospectus, imposes higher charge percentages against the excess amount
redeemed than the 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
6
<PAGE>
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.
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 surrender charge as described above for variable annuity
contracts. This Prospectus should be read carefully before making such exchange.
Unlike a fixed annuity, the new Contract's value is not guaranteed, and will
vary depending on the investment performance of the Underlying Portfolios to
which it is allocated. The new Contract has a different charge structure than a
fixed annuity contract, which includes not only a surrender charge that may vary
from that of the class of contracts to which the exchanged fixed contract
belongs, but also Contract fees, mortality and expense risk charges (for the
Company's assumption of certain mortality and expense risks), administrative
expense charges, transfer charges (for transfers permitted among Sub-Accounts
and the Fixed Account), and expenses incurred by the Underlying Portfolios.
Additionally, the interest rates offered under the Fixed Account of the new
Contract and the Annuity Tables for determining minimum annuity benefit payments
may be different from those offered under the exchanged fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE
Persons who, under the terms of this exchange offer, exchange their contract for
the new Contract and subsequently cancel the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right to
Cancel Individual Retirement Annuity" and "Right to Cancel All Other Contracts,"
will have their exchanged contract automatically reinstated as of the date of
cancellation. The refunded amount will be applied as the new current Accumulated
Value under the reinstated contract, which may be more or less than it would
have been had no exchange and reinstatement occurred. The refunded amount will
be allocated initially among the Fixed Account and Sub-
7
<PAGE>
Accounts of the reinstated contract in the same proportion that the value in the
Fixed Account and the value in each Sub-Account bore to the transferred
Accumulated Value on the date of the exchange of the contract for the new
Contract. For purposes of calculating any surrender charge under the reinstated
contract, the reinstated contract will be deemed to have been issued and to have
received past purchase payments as if there had been no exchange.
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 and supplemental total return information may be advertised
based on a period of time that an Underlying Portfolio and an underlying
Sub-Account have been in existence, even if longer than the period of time that
the Contract has been offered. The results for any period prior to a Contract
being offered will be calculated as if the Contract had been offered during that
period, 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 surrender charge which
would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). The quotations are
computed by finding the average annual compounded rates of return over the
specified periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
(n)
P(1 + T) = ERV
Where: P = a hypothetical initial payment to the Variable
Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at
the end of the specified period
8
<PAGE>
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 surrender charge, if any, applicable at the end of
the period is included in the calculation, according to the following schedule:
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF NEW PURCHASE
WITHDRAWAL PAYMENTS WITHDRAWN*
---------- -------------------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
Thereafter 0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No surrender charge is deducted upon expiration of the periods specified above.
In each calendar year, a certain amount (withdrawal without surrender charge
amount, as described in the Prospectus) is not subject to the surrender charge.
The calculations of Total Return reflect the deduction of the $35 annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges. It is
assumed, however, that the investment is NOT withdrawn at the end of each
period.
The quotations of Supplemental Total Return are computed by finding the average
annual compounded rates of return over the specified periods that would equate
the initial amount invested to the ending values, according to the following
formula:
(n)
P(1 + T) = EV
Where: P = a hypothetical initial payment to the Variable
Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end
of the specified period
The calculation of Supplemental Total Return reflects the 1.10% 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 therefore
there is no adjustment for the surrender charge that would be applicable if the
Contract was surrendered at the end of the period. The calculation of
supplemental total return does not include the deduction of the $35 annual
Contract fee.
9
<PAGE>
YIELD AND EFFECTIVE YIELD -- THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1998:
<TABLE>
<S> <C>
Yield 3.58%
Effective Yield 3.65%
</TABLE>
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same period
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $35 Contract fee.
TAX-DEFERRED ACCUMULATION
<TABLE>
<CAPTION>
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS AND
TAX-DEFERRED EARNINGS
-----------------------------------
TAXABLE LUMP SUM AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
-------------- -------------- --------------------
<S> <C> <C> <C>
Years 10 $107,946 $86,448 $81,693
Years 20 233,048 165,137 133,476
Years 30 503,133 335,021 218,082
</TABLE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract with a conventional savings plan. Contributions
to the non-qualified annuity contract and the conventional savings plan are made
after tax. Only the gain in the non-qualified annuity contract will be subject
to income tax in a taxable lump sum withdrawal. The chart assumes a 37.1%
federal marginal tax rate and an 8% annual return. The 37.1% federal marginal
tax is based on a marginal tax rate of 36%, representative of the target market,
adjusted to reflect a decrease of $3 of itemized deductions for each $100 of
income over $117,950. Tax rates are subject to change as is the tax-deferred
treatment of the Contract. Income on non-qualified annuity contracts is taxed as
ordinary income upon withdrawal. A 10% tax penalty may apply to early
withdrawals. See "FEDERAL TAX CONSIDERATIONS" in the Prospectus.
10
<PAGE>
The chart does not reflect the following charges and expenses under the
Contract: 0.95% for mortality and expense risk; 0.15% administration charges;
and $35 annual Contract fee. The tax-deferred accumulation would be reduced if
these charges were reflected. No implication is intended by the use of these
assumptions that the return shown is guaranteed in any way or that the return
shown represents an average or expected rate of return over the period of the
Contract. (IMPORTANT -- THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.)
Unlike savings plans, contributions to non-qualified annuity contracts provide
tax-deferred treatment on earnings. In addition, contributions to tax-deferred
retirement annuities are not subject to current tax in the year of contribution.
When monies are received from a non-qualified annuity contract (and you have
many different options on how you receive your funds), they are subject to
income tax. At the time of receipt, if the person receiving the monies is
retired, not working or has additional tax exemptions, these monies may be taxed
at a lesser rate.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Separate Account KGC.
11
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums................................................ $ 0.5 $ 22.8 $ 32.7
Universal life and investment product policy fees....... 267.4 212.2 176.2
Net investment income................................... 151.3 164.2 171.7
Net realized investment gains (losses).................. 20.0 2.9 (3.6)
Other income............................................ 0.6 1.4 0.9
------ ------ ------
Total revenues...................................... 439.8 403.5 377.9
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment
expenses.............................................. 153.9 187.8 192.6
Policy acquisition expenses............................. 64.6 2.8 49.9
Sales practice litigation............................... 21.0 -- --
Loss from cession of disability income business......... -- 53.9 --
Other operating expenses................................ 104.1 101.3 86.6
------ ------ ------
Total benefits, losses and expenses................. 343.6 345.8 329.1
------ ------ ------
Income before federal income taxes.......................... 96.2 57.7 48.8
------ ------ ------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current................................................. 22.1 13.9 26.9
Deferred................................................ 11.8 7.1 (9.8)
------ ------ ------
Total federal income tax expense.................... 33.9 21.0 17.1
------ ------ ------
Net income.................................................. $ 62.3 $ 36.7 $ 31.7
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- --------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)................................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)................................................ 31.8 54.0
Mortgage loans.......................................... 230.0 228.2
Real estate............................................. 14.5 12.0
Policy loans............................................ 151.5 140.1
Other long-term investments............................. 9.1 20.3
--------- ---------
Total investments................................... 1,767.3 1,857.1
--------- ---------
Cash and cash equivalents................................. 217.9 31.1
Accrued investment income................................. 33.5 34.2
Deferred policy acquisition costs......................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses, future
policy benefits and unearned premiums................... 308.0 251.1
Other assets.............................................. 46.9 10.7
Separate account assets................................... 11,020.4 7,567.3
--------- ---------
Total assets........................................ $14,344.5 $10,516.8
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.................................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.............................................. 17.9 18.5
Unearned premiums....................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities........................................... 38.1 32.5
--------- ---------
Total policy liabilities and accruals............... 2,343.5 2,150.1
--------- ---------
Expenses and taxes payable................................ 146.2 77.6
Reinsurance premiums payable.............................. 45.7 4.9
Deferred federal income taxes............................. 78.8 75.9
Separate account liabilities.............................. 11,020.4 7,567.3
--------- ---------
Total liabilities................................... 13,634.6 9,875.8
--------- ---------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares authorized,
2,524 and 2,521 shares issued and outstanding........... 2.5 2.5
Additional paid-in capital................................ 407.9 386.9
Accumulated other comprehensive income.................... 24.1 38.5
Retained earnings......................................... 275.4 213.1
--------- ---------
Total shareholder's equity.......................... 709.9 641.0
--------- ---------
Total liabilities and shareholder's equity.......... $14,344.5 $10,516.8
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................................ $ 2.5 $ 2.5 $ 2.5
------- ------- -------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period.......................... 386.9 346.3 324.3
Issuance of common stock................................ 21.0 40.6 22.0
------- ------- -------
Balance at end of period................................ 407.9 386.9 346.3
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period.......................... 38.5 20.5 23.8
Appreciation (depreciation) during the period:
Net (depreciation) appreciation on
available-for-sale securities..................... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal income
taxes............................................. 9.0 (9.0) 1.8
------- ------- -------
(14.4) 18.0 (3.3)
------- ------- -------
Balance at end of period................................ 24.1 38.5 20.5
------- ------- -------
RETAINED EARNINGS
Balance at beginning of period.......................... 213.1 176.4 144.7
Net income.............................................. 62.3 36.7 31.7
------- ------- -------
Balance at end of period................................ 275.4 213.1 176.4
------- ------- -------
Total shareholder's equity.......................... $ 709.9 $ 641.0 $ 545.7
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on available-for-sale
securities............................................ (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal income taxes... 9.0 (9.0) 1.8
------ ------ ------
Other comprehensive income.......................... (14.4) 18.0 (3.3)
------ ------ ------
Comprehensive income.................................... 47.9 $ 54.7 $ 28.4
====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to net cash used in
operating activities:
Net realized gains.................................. (20.0) (2.9) 3.6
Net amortization and depreciation................... (7.1) -- 3.5
Sales practice litigation expense................... 21.0
Loss from cession of disability income business..... -- 53.9 --
Deferred federal income taxes....................... 11.8 7.1 (9.8)
Payment related to cession of disability income
business.......................................... -- (207.0) --
Change in deferred acquisition costs................ (177.8) (181.3) (66.8)
Change in reinsurance premiums payable.............. 40.8 3.9 (0.2)
Change in accrued investment income................. 0.7 3.5 1.2
Change in policy liabilities and accruals, net...... 193.1 (72.4) (39.9)
Change in reinsurance receivable.................... (56.9) 22.1 (1.5)
Change in expenses and taxes payable................ 55.4 0.2 32.3
Separate account activity, net...................... (0.5) 1.6 8.0
Other, net.......................................... (28.0) (8.7) 2.3
------- ------- -------
Net cash provided by (used in) operating
activities.................................... 94.8 (343.3) (35.6)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities................... 187.0 909.7 809.4
Proceeds from disposals of equity securities............ 53.3 2.4 1.5
Proceeds from disposals of other investments............ 22.7 23.7 17.4
Proceeds from mortgages matured or collected............ 60.1 62.9 34.0
Purchase of available-for-sale fixed maturities......... (136.0) (579.7) (795.8)
Purchase of equity securities........................... (30.6) (3.2) (13.2)
Purchase of other investments........................... (22.7) (9.0) (13.9)
Purchase of mortgages................................... (58.9) (70.4) (22.3)
Other investing activities, net......................... (3.9) -- (2.0)
------- ------- -------
Net cash provided by investing activities........... 71.0 336.4 15.1
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and capital paid in..... 21.0 19.2 22.0
------- ------- -------
Net cash provided by financing activities........... 21.0 19.2 22.0
------- ------- -------
Net change in cash and cash equivalents..................... 186.8 12.3 1.5
Cash and cash equivalents, beginning of period.............. 31.1 18.8 17.3
------- ------- -------
Cash and cash equivalents, end of period.................... $ 217.9 $ 31.1 $ 18.8
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................... $ 0.6 $ -- $ 3.4
Income taxes paid....................................... $ 36.2 $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual life and annuity policies, and are based upon estimates as to future
investment yield, mortality and withdrawals that include provisions for adverse
deviation. Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. Benefits, losses and related expenses are matched
with premiums, resulting in their recognition over the lives of the contracts.
This matching is accomplished through the provision for future benefits,
estimated and unpaid losses and amortization of deferred policy acquisition
costs. Revenues for investment-related products consist of net investment income
and contract charges assessed against the fund values. Related benefit expenses
primarily consist of net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies. The Federal income tax for all subsidiaries in the consolidated
return of AFC is calculated on a separate return basis. Any current tax
liability is paid to AFC. Tax benefits resulting from taxable operating losses
or credits of AFC's subsidiaries are not reimbursed to the subsidiary until such
losses or credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), which established standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from non-owner
sources. This statement is effective for fiscal years beginning after
December 15, 1997. The Company adopted Statement No. 130 for the first quarter
of 1998, which resulted primarily in reporting unrealized gains and losses on
investments in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S. government and
agency securities................................ $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions................. 2.7 0.2 -- 2.9
Foreign governments............................... 48.8 1.6 1.5 48.9
Corporate fixed maturities........................ 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities........................ 131.3 5.8 1.4 135.7
-------- ----- ----- --------
Total fixed maturities............................ $1,284.6 $66.4 $20.6 $1,330.4
======== ===== ===== ========
Equity securities................................. $ 27.4 $ 8.9 $ 4.5 $ 31.8
======== ===== ===== ========
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
U.S. Treasury securities and U.S. government and agency
<S> <C> <C> <C> <C>
securities......................................... $ 6.3 $ 0.5 $-- $ 6.8
States and political subdivisions................... 2.8 0.2 -- 3.0
Foreign governments................................. 50.1 2.0 -- 52.1
Corporate fixed maturities.......................... 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.......................... 133.8 5.2 1.3 137.7
-------- ----- ----- --------
Total fixed maturities.............................. $1,340.5 $66.6 $ 4.6 $1,402.5
======== ===== ===== ========
Equity securities................................... $ 34.4 $19.9 $ 0.3 $ 54.0
======== ===== ===== ========
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1998, the amortized
cost and market value of these assets on deposit in New York were
$268.5 million and $284.1 million, respectively. At December 31, 1997, the
amortized cost and market value of assets on deposit were $276.8 million and
$291.7 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $4.2 million were
on deposit with various state and governmental authorities at December 31, 1998
and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
-------- --------
Total....................................................... $1,284.6 $1,330.4
======== ========
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------- --------------- -------- --------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
1997
Fixed maturities............................................ $702.9 $11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year........................ $ 22.1 $ 16.4 $ 38.5
------ ------ ------
Net depreciation on available-for-sale securities.......... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 7.1 -- 7.1
Benefit from deferred federal income taxes................. 3.2 5.8 9.0
------ ------ ------
(5.9) (8.5) (14.4)
------ ------ ------
Net appreciation, end of year.............................. $ 16.2 $ 7.9 $ 24.1
====== ====== ======
1997
Net appreciation, beginning of year........................ $ 12.7 $ 7.8 $ 20.5
------ ------ ------
Net appreciation on available-for-sale securities.......... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... (9.8) -- (9.8)
Provision for deferred federal income taxes................ (5.1) (3.9) (9.0)
------ ------ ------
9.4 8.6 18.0
------ ------ ------
Net appreciation, end of year.............................. $ 22.1 $ 16.4 $ 38.5
====== ====== ======
1996
Net appreciation, beginning of year........................ $ 20.4 $ 3.4 $ 23.8
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................ (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes...... 4.1 (2.3) 1.8
------ ------ ------
(7.7) 4.4 (3.3)
------ ------ ------
Net appreciation, end of year.............................. $ 12.7 $ 7.8 $ 20.5
====== ====== ======
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Mortgage loans.............................................. $230.0 $228.2
Real estate held for sale................................... 14.5 12.0
------ ------
Total mortgage loans and real estate........................ $244.5 $240.2
====== ======
</TABLE>
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, real estate assets with a carrying amount of
$15.7 million were written down to the estimated fair value less cost to sell of
$12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 1997. During 1996, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
====== ======
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Geographic region:
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
====== ======
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows:
1999 -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 --
$11.5 million; 2003 -- $0.6 million; and $143.0 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1998, the Company did not refinance any mortgage loans
based on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances, which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1998
Mortgage loans................................... $ 9.4 $(4.5) $1.6 $ 3.3
===== ===== ==== =====
1997
Mortgage loans................................... $ 9.5 $ 1.1 $1.2 $ 9.4
Real estate...................................... 1.7 3.7 5.4 --
----- ----- ---- -----
Total........................................ $11.2 $ 4.8 $6.6 $ 9.4
===== ===== ==== =====
1996
Mortgage loans................................... $12.5 $ 4.5 $7.5 $ 9.5
Real estate...................................... 2.1 -- 0.4 1.7
----- ----- ---- -----
Total........................................ $14.6 $ 4.5 $7.9 $11.2
===== ===== ==== =====
</TABLE>
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
====== ====== ======
</TABLE>
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 1997, and reduced net income by $0.1 million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.6 million, $21.1 million and $25.4 million at
December 31, 1998, 1997 and 1996, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $1.4 million, $1.9 million and $3.6 million in
1998, 1997, and 1996, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $2.1 million and
$2.2 million in 1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
====== ====== ======
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $(5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------ ------ -----
Other comprehensive income.................................. $(14.4) $ 18.0 $(3.3)
====== ====== =====
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), requires disclosure of fair value information about
certain financial instruments (insurance contracts, real estate, goodwill and
taxes are excluded) for which it is practicable to estimate such values, whether
or not these instruments are included in the balance sheet. The fair values
presented for certain financial instruments are estimates which, in many cases,
may differ significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments, which have comparable terms and credit
quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans is
limited to the lesser of the present value of the cash flows or book value.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents....................... $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities................................ 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities............................... 31.8 31.8 54.0 54.0
Mortgage loans.................................. 230.0 241.9 228.2 239.8
Policy loans.................................... 151.5 151.5 140.1 140.1
-------- -------- -------- --------
$1,961.6 $1,973.5 $1,855.9 $1,867.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts.............. $1,069.4 $1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life
Contingencies................................. 16.6 16.6 15.3 15.3
-------- -------- -------- --------
$1,086.0 $1,051.2 $ 891.3 $ 865.9
======== ======== ======== ========
</TABLE>
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $21.0 $17.1
===== ===== =====
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $(205.1) $(175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
------- -------
Deferred tax liability, net................................. $ 78.8 $ 75.9
======= =======
</TABLE>
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
====== ====== ======
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
====== ====== ======
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (10.2) 10.3
Adjustment for cession of disability income insurance..... -- (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- 50.3 --
------ ------ ------
Balance at end of year...................................... $950.5 $765.3 $632.7
====== ====== ======
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company believes
that no material adverse development of losses will occur. However, the amount
of the liabilities could be revised in the near term if the estimates are
revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
<S> <C> <C> <C>
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes include the transfer of FAFLIC's ownership of Allmerica Property &
Casualty Companies, Inc., as well as several non-insurance subsidiaries, from
FAFLIC to AFC. In addition, certain changes affected AFLIAC. SMAFCO transferred
its ownership in AFLIAC to FAFLIC. Hence, AFLIAC became a wholly owned
subsidiary of FAFLIC. Further, four non-insurance subsidiaries previously held
by SMAFCO were contributed to AFLIAC. Under an agreement with the Commonwealth
of Massachusetts Insurance Commissioner ("the Commissioner"), AFC has
contributed to FAFLIC capital of $125.0 million and agreed to maintain FAFLIC's
statutory surplus at specified levels during the following six years. In
addition, any dividend from FAFLIC to AFC during 2000 and 2001 would require the
prior approval of the Commissioner. This transaction was approved by the
Commissioner on May 24, 1999.
In 1998, the net income of the subsidiaries, which was reported in SMAFCO's
results of operations, to be transferred to AFLIAC from SMAFCO pursuant to the
aforementioned change in corporate structure was $18.8 million. As of
December 31, 1998, the total assets and total shareholders' equity of these
subsidiaries were $16.8 million and $9.2 million, respectively.
On May 19, 1999, the Federal District Court in Worcester, Massachusetts issued
an order relating to the litigation mentioned in Note 12, above, certifying the
class for settlement purposes and granting final approval of the settlement
agreement.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Contractowners of Separate Account KGC of Allmerica Financial
Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account KGC of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1998, the results of each of their operations
and the changes in each of their net assets for each of the periods indicated,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of Allmerica Financial Life Insurance and
Annuity Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1998 by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
SEPARATE ACCOUNT KGC
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SMALL CAP SMALL CAP CONTRARIAN
VALUE GROWTH VALUE* INTERNATIONAL GROWTH VALUE+GROWTH HORIZON 20+
------------ ----------- ------------ ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of
Investors Fund Series........ $ 10,431,659 $8,379,313 $24,025,907 $11,002,153 $ 9,484,115 $10,367,606 $3,205,109
Investments in shares of
Scudder Variable Life
Investment Fund (VLIF)....... -- -- -- -- -- -- --
Dividend receivable........... -- -- -- -- -- -- --
Receivable from Allmerica
Financial Life Insurance and
Annuity Company (Sponsor).... -- -- -- -- -- -- --
------------ ----------- ------------ ------------- ----------- ------------ -----------
Total assets................ 10,431,659 8,379,313 24,025,907 11,002,153 9,484,115 10,367,606 3,205,109
LIABILITIES:
Payable to Allmerica Financial
Life Insurance and Annuity
Company (Sponsor)............ -- -- -- -- -- 681 --
------------ ----------- ------------ ------------- ----------- ------------ -----------
Net assets.................. $ 10,431,659 $8,379,313 $24,025,907 $11,002,153 $ 9,484,115 $10,366,925 $3,205,109
------------ ----------- ------------ ------------- ----------- ------------ -----------
------------ ----------- ------------ ------------- ----------- ------------ -----------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 1,979,537 $1,728,561 $ 4,743,095 $ 2,147,816 $ 1,787,579 $ 2,450,829 $1,041,411
Non-qualified variable
annuity contracts......... 8,452,122 6,650,752 19,282,812 8,854,337 7,696,536 7,916,096 2,163,698
------------ ----------- ------------ ------------- ----------- ------------ -----------
$ 10,431,659 $8,379,313 $24,025,907 $11,002,153 $ 9,484,115 $10,366,925 $3,205,109
------------ ----------- ------------ ------------- ----------- ------------ -----------
------------ ----------- ------------ ------------- ----------- ------------ -----------
Qualified units outstanding,
December 31, 1998............ 1,857,879 1,102,617 3,182,177 1,800,243 1,325,762 1,694,210 793,957
Net asset value per qualified
unit, December 31, 1998...... $ 1.065482 $ 1.567689 $ 1.490519 $ 1.193070 $ 1.348341 $ 1.446591 $ 1.311672
Non-qualified units
outstanding, December 31,
1998......................... 7,932,675 4,242,393 12,936,978 7,421,473 5,708,152 5,472,241 1,649,573
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.065482 $ 1.567689 $ 1.490519 $ 1.193070 $ 1.348341 $ 1.446591 $ 1.311672
<CAPTION>
TOTAL
RETURN
-----------
<S> <C>
ASSETS:
Investments in shares of
Investors Fund Series........ $ 9,931,627
Investments in shares of
Scudder Variable Life
Investment Fund (VLIF)....... --
Dividend receivable........... --
Receivable from Allmerica
Financial Life Insurance and
Annuity Company (Sponsor).... --
-----------
Total assets................ 9,931,627
LIABILITIES:
Payable to Allmerica Financial
Life Insurance and Annuity
Company (Sponsor)............ --
-----------
Net assets.................. $ 9,931,627
-----------
-----------
Net asset distribution by
category:
Qualified variable annuity
contracts................. $ 2,369,796
Non-qualified variable
annuity contracts......... 7,561,831
-----------
$ 9,931,627
-----------
-----------
Qualified units outstanding,
December 31, 1998............ 1,776,745
Net asset value per qualified
unit, December 31, 1998...... $ 1.333785
Non-qualified units
outstanding, December 31,
1998......................... 5,669,453
Net asset value per
non-qualified unit, December
31, 1998..................... $ 1.333785
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT KGC
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
HIGH INVESTMENT
HORIZON 10+ HORIZON 5 YIELD GRADE BOND
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $4,839,532 $ 1,816,685 $ 26,369,509 $6,918,119
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... 779 602 -- 105
----------- ----------- ------------ -----------
Total assets.............................. 4,840,311 1,817,287 26,369,509 6,918,224
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
----------- ----------- ------------ -----------
Net assets................................ $4,840,311 $ 1,817,287 $ 26,369,509 $6,918,224
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Net asset distribution by category:
Qualified variable annuity contracts...... $1,273,548 $ 767,976 $ 4,664,023 $1,085,843
Non-qualified variable annuity
contracts............................... 3,566,763 1,049,311 21,705,486 5,832,381
----------- ----------- ------------ -----------
$4,840,311 $ 1,817,287 $ 26,369,509 $6,918,224
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Qualified units outstanding, December 31,
1998....................................... 1,037,178 636,724 4,211,083 952,253
Net asset value per qualified unit, December
31, 1998................................... $ 1.227897 $ 1.206136 $ 1.107559 $ 1.140288
Non-qualified units outstanding, December
31, 1998................................... 2,904,774 869,978 19,597,589 5,114,832
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.227897 $ 1.206136 $ 1.107559 $ 1.140288
<CAPTION>
GOVERNMENT MONEY GLOBAL BLUE
SECURITIES MARKET INCOME CHIP
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $5,217,180 $ 4,802,145 $ 487,208 $ 7,025,086
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- 9,153 -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
----------- ----------- ---------- -----------
Total assets.............................. 5,217,180 4,811,298 487,208 7,025,086
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
----------- ----------- ---------- -----------
Net assets................................ $5,217,180 $ 4,811,298 $ 487,208 $ 7,025,086
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 724,038 $ 904,694 $ 148,669 $ 1,976,611
Non-qualified variable annuity
contracts............................... 4,493,142 3,906,604 338,539 5,048,475
----------- ----------- ---------- -----------
$5,217,180 $ 4,811,298 $ 487,208 $ 7,025,086
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Qualified units outstanding, December 31,
1998....................................... 637,026 834,859 132,625 1,585,394
Net asset value per qualified unit, December
31, 1998................................... $ 1.136591 $ 1.083649 $ 1.120970 $ 1.246763
Non-qualified units outstanding, December
31, 1998................................... 3,953,174 3,605,046 302,006 4,049,266
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.136591 $ 1.083649 $ 1.120970 $ 1.246763
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT KGC
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DREMAN INTERNATIONAL
FINANCIAL DREMAN HIGH GROWTH GLOBAL
SERVICES RETURN EQUITY AND INCOME BLUE CHIP
----------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ 1,648,471 $6,072,242 $ 301,759 $ 398,070
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ -- -- -- --
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
----------- ------------- --------------- ----------
Total assets.............................. 1,648,471 6,072,242 301,759 398,070
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
----------- ------------- --------------- ----------
Net assets................................ $ 1,648,471 $6,072,242 $ 301,759 $ 398,070
----------- ------------- --------------- ----------
----------- ------------- --------------- ----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 430,358 $1,692,395 $ 53,115 $ 19,272
Non-qualified variable annuity
contracts............................... 1,218,113 4,379,847 248,644 378,798
----------- ------------- --------------- ----------
$ 1,648,471 $6,072,242 $ 301,759 $ 398,070
----------- ------------- --------------- ----------
----------- ------------- --------------- ----------
Qualified units outstanding, December 31,
1998....................................... 443,300 1,645,225 58,439 19,164
Net asset value per qualified unit, December
31, 1998................................... $ 0.970805 $ 1.028671 $0.908893 $1.005638
Non-qualified units outstanding, December
31, 1998................................... 1,254,745 4,257,772 273,568 376,674
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 0.970805 $ 1.028671 $0.908893 $1.005638
<CAPTION>
VLIF
VLIF VLIF GLOBAL CAPITAL VLIF GROWTH
INTERNATIONAL DISCOVERY GROWTH AND INCOME
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Investors Fund
Series..................................... $ -- $ -- $ -- $ --
Investments in shares of Scudder Variable
Life Investment Fund (VLIF)................ 785,331 730,475 798,443 1,031,801
Dividend receivable......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------- ----------- ------------- -----------
Total assets.............................. 785,331 730,475 798,443 1,031,801
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor).... -- -- -- --
------------- ----------- ------------- -----------
Net assets................................ $ 785,331 $ 730,475 $ 798,443 $1,031,801
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 167,776 $ 208,292 $ 171,965 $ 121,687
Non-qualified variable annuity
contracts............................... 617,555 522,183 626,478 910,114
------------- ----------- ------------- -----------
$ 785,331 $ 730,475 $ 798,443 $1,031,801
------------- ----------- ------------- -----------
------------- ----------- ------------- -----------
Qualified units outstanding, December 31,
1998....................................... 169,657 208,631 163,159 127,861
Net asset value per qualified unit, December
31, 1998................................... $0.988910 $0.998373 $1.053970 $ 0.951713
Non-qualified units outstanding, December
31, 1998................................... 624,481 523,034 594,399 956,291
Net asset value per non-qualified unit,
December 31, 1998.......................... $0.988910 $0.998373 $1.053970 $ 0.951713
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT KGC
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SMALL CAP VALUE SMALL CAP GROWTH
---------------------------------- ----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 1/8/97** TO YEAR ENDED 1/8/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
------------- ------------------ ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends........................ $ -- $ 7,250 $ -- $ 2,747
Mortality and expense risk
fees........................... (80,976) (21,386) (47,188) (10,210)
Administrative expense fees...... (12,785) (3,377) (7,451) (1,612)
------------- ------------------ ----------- --------------
Net investment income (loss)... (93,761) (17,513) (54,639) (9,075)
------------- ------------------ ----------- --------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 195,791 -- 710,585 52,207
Net realized gain (loss) from
sales of investments........... (175,883) 20,005 (46,762) 27,173
------------- ------------------ ----------- --------------
Net realized gain (loss)......... 19,908 20,005 663,823 79,380
Net unrealized gain (loss)....... (1,185,352) 260,916 557,244 234,181
------------- ------------------ ----------- --------------
Net realized and unrealized
gain (loss).................. (1,165,444) 280,921 1,221,067 313,561
------------- ------------------ ----------- --------------
Net increase (decrease) in net
assets from operations......... (1,259,205) 263,408 1,166,428 304,486
------------- ------------------ ----------- --------------
CONTRACT TRANSACTIONS:
Net purchase payments............ 4,815,657 4,298,210 3,164,070 1,605,412
Withdrawals...................... (202,915) (34,319) (130,607) (14,065)
Contract benefits................ (81,749) (653) (33,135) --
Contract charges................. (6,799) (1,191) (3,367) (492)
Transfers between sub-accounts
(including fixed account),
net............................ 125,579 1,414,257 952,186 706,625
Other transfers from (to) the
General Account................ 832,653 268,726 465,470 196,302
------------- ------------------ ----------- --------------
Net increase (decrease) in net
assets from contract
transactions................... 5,482,426 5,945,030 4,414,617 2,493,782
------------- ------------------ ----------- --------------
Net increase (decrease) in net
assets......................... 4,223,221 6,208,438 5,581,045 2,798,268
NET ASSETS:
Beginning of year................ 6,208,438 -- 2,798,268 --
------------- ------------------ ----------- --------------
End of year...................... $10,431,659 $6,208,438 $8,379,313 $2,798,268
------------- ------------------ ----------- --------------
------------- ------------------ ----------- --------------
<CAPTION>
CONTRARIAN INTERNATIONAL
VALUE* -----------------------------
------------------------------------ PERIOD FROM
YEAR ENDED PERIOD FROM YEAR ENDED 1/14/97** TO
12/31/98 1/29/97** TO 12/31/97 12/31/98 12/31/97
------------ --------------------- ------------ --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends........................ $ 107,974 $ 11,117 $ 83,430 $ 15,244
Mortality and expense risk
fees........................... (180,222) (44,066) (79,519) (23,726)
Administrative expense fees...... (28,456) (6,958) (12,556) (3,746)
------------ --------------------- ------------ --------------
Net investment income (loss)... (100,704) (39,907) (8,645) (12,228)
------------ --------------------- ------------ --------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 431,895 -- 250,291 53,355
Net realized gain (loss) from
sales of investments........... 191,851 29,263 48,845 3,822
------------ --------------------- ------------ --------------
Net realized gain (loss)......... 623,746 29,263 299,136 57,177
Net unrealized gain (loss)....... 2,398,753 1,051,631 229,563 (26,678)
------------ --------------------- ------------ --------------
Net realized and unrealized
gain (loss).................. 3,022,499 1,080,894 528,699 30,499
------------ --------------------- ------------ --------------
Net increase (decrease) in net
assets from operations......... 2,921,795 1,040,987 520,054 18,271
------------ --------------------- ------------ --------------
CONTRACT TRANSACTIONS:
Net purchase payments............ 9,202,476 9,736,086 4,501,022 3,632,970
Withdrawals...................... (889,594) (167,287) (244,010) (60,352)
Contract benefits................ (212,900) (633) (111,839) (594)
Contract charges................. (15,587) (3,152) (7,576) (1,482)
Transfers between sub-accounts
(including fixed account),
net............................ (416,225) 1,689,494 245,577 964,529
Other transfers from (to) the
General Account................ 1,034,065 106,382 1,045,980 499,603
------------ --------------------- ------------ --------------
Net increase (decrease) in net
assets from contract
transactions................... 8,702,235 11,360,890 5,429,154 5,034,674
------------ --------------------- ------------ --------------
Net increase (decrease) in net
assets......................... 11,624,030 12,401,877 5,949,208 5,052,945
NET ASSETS:
Beginning of year................ 12,401,877 -- 5,052,945 --
------------ --------------------- ------------ --------------
End of year...................... $24,025,907 $12,401,877 $11,002,153 $5,052,945
------------ --------------------- ------------ --------------
------------ --------------------- ------------ --------------
</TABLE>
* Name changed. See Note 1.
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT KGC
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GROWTH VALUE+GROWTH
----------------------------------- ------------------------------------
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/98 1/29/97** TO 12/31/97 12/31/98 1/28/97** TO 12/31/97
----------- --------------------- ------------ ---------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends........................ $ 16,824 $ 5,361 $ -- $ 3,341
Mortality and expense risk
fees........................... (61,116) (15,229) (65,809) (11,563)
Administrative expense fees...... (9,649) (2,405) (10,390) (1,826)
----------- ----------- ------------ -----------
Net investment income (loss)... (53,941) (12,273) (76,199) (10,048)
----------- ----------- ------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 841,179 217,082 145,289 --
Net realized gain (loss) from
sales of investments........... (205,260) (11,011) 20,219 1,947
----------- ----------- ------------ -----------
Net realized gain (loss)......... 635,919 206,071 165,508 1,947
Net unrealized gain (loss)....... 188,064 59,773 952,049 149,515
----------- ----------- ------------ -----------
Net realized and unrealized
gain (loss).................. 823,983 265,844 1,117,557 151,462
----------- ----------- ------------ -----------
Net increase (decrease) in net
assets from operations......... 770,042 253,571 1,041,358 141,414
----------- ----------- ------------ -----------
CONTRACT TRANSACTIONS:
Net purchase payments............ 3,639,357 2,591,907 4,675,071 2,236,756
Withdrawals...................... (162,171) (36,134) (342,008) (23,766)
Contract benefits................ (83,094) (636) (31,265) --
Contract charges................. (5,051) (753) (7,016) (977)
Transfers between sub-accounts
(including fixed account),
net............................ 513,601 594,489 131,946 904,234
Other transfers from (to) the
General Account................ 1,088,099 320,888 1,436,904 204,274
----------- ----------- ------------ -----------
Net increase (decrease) in net
assets from contract
transactions................... 4,990,741 3,469,761 5,863,632 3,320,521
----------- ----------- ------------ -----------
Net increase (decrease) in net
assets......................... 5,760,783 3,723,332 6,904,990 3,461,935
NET ASSETS:
Beginning of year................ 3,723,332 -- 3,461,935 --
----------- ----------- ------------ -----------
End of year...................... $9,484,115 $3,723,332 $10,366,925 $3,461,935
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
<CAPTION>
HORIZON 20+ TOTAL RETURN
---------------------------------- -----------------------------------
YEAR ENDED PERIOD FROM YEAR ENDED PERIOD FROM
12/31/98 2/6/97** TO 12/31/97 12/31/98 1/28/97** TO 12/31/97
----------- -------------------- ----------- ---------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends........................ $ 11,600 $ 1,252 $ 159,309 $ 10,971
Mortality and expense risk
fees........................... (19,573) (3,918) (62,045) (12,115)
Administrative expense fees...... (3,091) (618) (9,796) (1,913)
----------- -------- ----------- -----------
Net investment income (loss)... (11,064) (3,284) 87,468 (3,057)
----------- -------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 46,400 -- 708,040 45,100
Net realized gain (loss) from
sales of investments........... (6,014) 735 (35,643) 881
----------- -------- ----------- -----------
Net realized gain (loss)......... 40,386 735 672,397 45,981
Net unrealized gain (loss)....... 145,761 62,301 121,480 105,655
----------- -------- ----------- -----------
Net realized and unrealized
gain (loss).................. 186,147 63,036 793,877 151,636
----------- -------- ----------- -----------
Net increase (decrease) in net
assets from operations......... 175,083 59,752 881,345 148,579
----------- -------- ----------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments............ 1,621,990 681,458 4,696,268 3,061,459
Withdrawals...................... (143,172) (3,335) (303,542) (72,837)
Contract benefits................ -- -- (29,018) --
Contract charges................. (1,734) (164) (6,143) (877)
Transfers between sub-accounts
(including fixed account),
net............................ 394,309 221,486 (22,856) 602,210
Other transfers from (to) the
General Account................ 166,632 32,804 897,532 79,507
----------- -------- ----------- -----------
Net increase (decrease) in net
assets from contract
transactions................... 2,038,025 932,249 5,232,241 3,669,462
----------- -------- ----------- -----------
Net increase (decrease) in net
assets......................... 2,213,108 992,001 6,113,586 3,818,041
NET ASSETS:
Beginning of year................ 992,001 -- 3,818,041 --
----------- -------- ----------- -----------
End of year...................... $3,205,109 $992,001 $9,931,627 $3,818,041
----------- -------- ----------- -----------
----------- -------- ----------- -----------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT KGC
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
HORIZON 10+
---------------------------- HORIZON 5
PERIOD FROM -----------------------------------
YEAR ENDED 2/18/97** TO YEAR ENDED PERIOD FROM
12/31/98 12/31/97 12/31/98 3/19/97** TO 12/31/97
----------- -------------- ----------- ---------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends........................ $ 17,499 $ 725 $ 4,961 $ 124
Mortality and expense risk
fees........................... (28,931) (4,929) (9,063) (1,544)
Administrative expense fees...... (4,568) (778) (1,431) (243)
----------- -------------- ----------- --------
Net investment income (loss)... (16,000) (4,982) (5,533) (1,663)
----------- -------------- ----------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 52,496 -- 14,884 --
Net realized gain (loss) from
sales of investments........... 10,763 460 4,295 323
----------- -------------- ----------- --------
Net realized gain (loss)......... 63,259 460 19,179 323
Net unrealized gain (loss)....... 236,828 34,241 71,558 14,509
----------- -------------- ----------- --------
Net realized and unrealized
gain (loss).................. 300,087 34,701 90,737 14,832
----------- -------------- ----------- --------
Net increase (decrease) in net
assets from operations......... 284,087 29,719 85,204 13,169
----------- -------------- ----------- --------
CONTRACT TRANSACTIONS:
Net purchase payments............ 2,528,693 1,197,888 1,290,376 360,924
Withdrawals...................... (99,809) (11,716) (40,947) (7,676)
Contract benefits................ (2,535) -- (1,867) --
Contract charges................. (3,214) (589) (1,083) (113)
Transfers between sub-accounts
(including fixed account),
net............................ (221,124) 380,338 (106,836) 118,269
Other transfers from (to) the
General Account................ 758,394 179 104,737 3,130
----------- -------------- ----------- --------
Net increase (decrease) in net
assets from contract
transactions................... 2,960,405 1,566,100 1,244,380 474,534
----------- -------------- ----------- --------
Net increase (decrease) in net
assets......................... 3,244,492 1,595,819 1,329,584 487,703
NET ASSETS:
Beginning of year................ 1,595,819 -- 487,703 --
----------- -------------- ----------- --------
End of year...................... $4,840,311 $1,595,819 $1,817,287 $487,703
----------- -------------- ----------- --------
----------- -------------- ----------- --------
<CAPTION>
INVESTMENT GRADE BOND
HIGH YIELD ----------------------------
------------------------------------ PERIOD FROM
YEAR ENDED PERIOD FROM YEAR ENDED 2/12/97** TO
12/31/98 1/14/97** TO 12/31/97 12/31/98 12/31/97
------------ --------------------- ----------- --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends........................ $ 1,042,922 $ 237,876 $ 52,226 $ 316
Mortality and expense risk
fees........................... (174,751) (43,521) (35,732) (3,967)
Administrative expense fees...... (27,592) (6,872) (5,642) (626)
------------ --------------------- ----------- --------------
Net investment income (loss)... 840,579 187,483 10,852 (4,277)
------------ --------------------- ----------- --------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. -- -- 17,409 --
Net realized gain (loss) from
sales of investments........... (346,154) (41,923) 53,374 545
------------ --------------------- ----------- --------------
Net realized gain (loss)......... (346,154) (41,923) 70,783 545
Net unrealized gain (loss)....... (218,163) 289,722 183,750 45,392
------------ --------------------- ----------- --------------
Net realized and unrealized
gain (loss).................. (564,317) 247,799 254,533 45,937
------------ --------------------- ----------- --------------
Net increase (decrease) in net
assets from operations......... 276,262 435,282 265,385 41,660
------------ --------------------- ----------- --------------
CONTRACT TRANSACTIONS:
Net purchase payments............ 15,388,553 7,758,912 2,345,309 519,540
Withdrawals...................... (694,199) (146,765) (156,435) (18,861)
Contract benefits................ (206,487) (73,073) (4,807) --
Contract charges................. (14,599) (3,107) (3,939) (183)
Transfers between sub-accounts
(including fixed account),
net............................ (7,535,895) 871,823 2,875,368 547,901
Other transfers from (to) the
General Account................ 8,651,844 1,660,958 495,551 11,735
------------ --------------------- ----------- --------------
Net increase (decrease) in net
assets from contract
transactions................... 15,589,217 10,068,748 5,551,047 1,060,132
------------ --------------------- ----------- --------------
Net increase (decrease) in net
assets......................... 15,865,479 10,504,030 5,816,432 1,101,792
NET ASSETS:
Beginning of year................ 10,504,030 -- 1,101,792 --
------------ --------------------- ----------- --------------
End of year...................... $26,369,509 $10,504,030 $6,918,224 $1,101,792
------------ --------------------- ----------- --------------
------------ --------------------- ----------- --------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT KGC
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES MONEY MARKET
--------------------------- -----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 3/14/97** TO YEAR ENDED 1/2/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends........................ $ 62,682 $ 8,852 $ 239,237 $ 83,140
Mortality and expense risk
fees........................... (28,984) (3,060) (45,676) (15,242)
Administrative expense fees...... (4,576) (483) (7,211) (2,407)
----------- ------------- ------------ --------------
Net investment income (loss)... 29,122 5,309 186,350 65,491
----------- ------------- ------------ --------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. -- -- -- --
Net realized gain (loss) from
sales of investments........... 60,126 1,415 -- --
----------- ------------- ------------ --------------
Net realized gain (loss)......... 60,126 1,415 -- --
Net unrealized gain (loss)....... 86,189 21,511 -- --
----------- ------------- ------------ --------------
Net realized and unrealized
gain (loss).................. 146,315 22,926 -- --
----------- ------------- ------------ --------------
Net increase (decrease) in net
assets from operations......... 175,437 28,235 186,350 65,491
----------- ------------- ------------ --------------
CONTRACT TRANSACTIONS:
Net purchase payments............ 1,655,197 735,891 8,079,251 13,000,534
Withdrawals...................... (196,719) (14,545) (243,215) (97,554)
Contract benefits................ (2,481) -- (287,652) (1,774)
Contract charges................. (4,319) (338) (3,040) (548)
Transfers between sub-accounts
(including fixed account),
net............................ 2,574,060 (42,061) (2,685,150) (10,373,545)
Other transfers from (to) the
General Account................ 308,793 30 (2,661,817) (166,033)
----------- ------------- ------------ --------------
Net increase (decrease) in net
assets from contract
transactions................... 4,334,531 678,977 2,198,377 2,361,080
----------- ------------- ------------ --------------
Net increase (decrease) in net
assets......................... 4,509,968 707,212 2,384,727 2,426,571
NET ASSETS:
Beginning of year................ 707,212 -- 2,426,571 --
----------- ------------- ------------ --------------
End of year...................... $5,217,180 $707,212 $ 4,811,298 $ 2,426,571
----------- ------------- ------------ --------------
----------- ------------- ------------ --------------
<CAPTION>
GLOBAL INCOME BLUE CHIP
------------------------------- -----------------------------
PERIOD FROM PERIOD FROM
YEAR ENDED 5/1/97** TO YEAR ENDED 5/1/97** TO
12/31/98 12/31/97 12/31/98 12/31/97
------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends........................ $ 9,994 $ -- $ 27,896 $ --
Mortality and expense risk
fees........................... (5,073) (2,351) (40,800) (3,507)
Administrative expense fees...... (801) (371) (6,442) (553)
------------- --------------- ----------- ---------------
Net investment income (loss)... 4,120 (2,722) (19,346) (4,060)
------------- --------------- ----------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Realized gain distributions from
portfolio sponsors............. 4,997 -- -- --
Net realized gain (loss) from
sales of investments........... 11,675 352 5,025 173
------------- --------------- ----------- ---------------
Net realized gain (loss)......... 16,672 352 5,025 173
Net unrealized gain (loss)....... 23,686 10,823 540,897 40,124
------------- --------------- ----------- ---------------
Net realized and unrealized
gain (loss).................. 40,358 11,175 545,922 40,297
------------- --------------- ----------- ---------------
Net increase (decrease) in net
assets from operations......... 44,478 8,453 526,576 36,237
------------- --------------- ----------- ---------------
CONTRACT TRANSACTIONS:
Net purchase payments............ 514,073 116,467 4,151,503 1,177,338
Withdrawals...................... (11,952) (250) (134,135) (8,665)
Contract benefits................ -- -- (38,677) --
Contract charges................. (428) (68) (3,328) (280)
Transfers between sub-accounts
(including fixed account),
net............................ (550,025) 338,609 181,650 388,960
Other transfers from (to) the
General Account................ 24,783 3,068 613,615 134,292
------------- --------------- ----------- ---------------
Net increase (decrease) in net
assets from contract
transactions................... (23,549) 457,826 4,770,628 1,691,645
------------- --------------- ----------- ---------------
Net increase (decrease) in net
assets......................... 20,929 466,279 5,297,204 1,727,882
NET ASSETS:
Beginning of year................ 466,279 -- 1,727,882 --
------------- --------------- ----------- ---------------
End of year...................... $ 487,208 $466,279 $7,025,086 $1,727,882
------------- --------------- ----------- ---------------
------------- --------------- ----------- ---------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT KGC
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
DREMAN INTERNATIONAL
FINANCIAL DREMAN HIGH GROWTH AND GLOBAL
SERVICES RETURN EQUITY INCOME BLUE CHIP
----------------- ------------- --------------- -----------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
5/4/98** TO 5/5/98** TO 5/19/98** TO 6/4/98** TO
12/31/98 12/31/98 12/31/98 12/31/98
----------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ -- $ --
Mortality and expense risk fees............ (5,555) (17,359) (535) (1,078)
Administrative expense fees................ (877) (2,741) (85) (171)
----------------- ------------- --------------- -----------
Net investment income (loss)............. (6,432) (20,100) (620) (1,249)
----------------- ------------- --------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. (7,309) (5,240) (364) (43)
----------------- ------------- --------------- -----------
Net realized gain (loss)................... (7,309) (5,240) (364) (43)
Net unrealized gain (loss)................. 42,500 326,991 4,403 12,328
----------------- ------------- --------------- -----------
Net realized and unrealized gain
(loss)................................. 35,191 321,751 4,039 12,285
----------------- ------------- --------------- -----------
Net increase (decrease) in net assets from
operations............................... 28,759 301,651 3,419 11,036
----------------- ------------- --------------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 891,013 2,888,136 65,477 241,993
Withdrawals................................ (12,515) (53,563) (2,030) (334)
Contract benefits.......................... -- -- -- --
Contract charges........................... (146) (1,140) (63) (21)
Transfers between sub-accounts (including
fixed account), net...................... 512,803 1,978,856 163,124 66,390
Other transfers from (to) the General
Account.................................. 228,557 958,302 71,832 79,006
----------------- ------------- --------------- -----------
Net increase (decrease) in net assets from
contract transactions.................... 1,619,712 5,770,591 298,340 387,034
----------------- ------------- --------------- -----------
Net increase (decrease) in net assets...... 1,648,471 6,072,242 301,759 398,070
NET ASSETS:
Beginning of year.......................... -- -- -- --
----------------- ------------- --------------- -----------
End of year................................ $1,648,471 $6,072,242 $301,759 $398,070
----------------- ------------- --------------- -----------
----------------- ------------- --------------- -----------
<CAPTION>
VLIF
VLIF VLIF VLIF GROWTH AND
INTERNATIONAL GLOBAL DISCOVERY CAPITAL GROWTH INCOME
------------- ---------------- -------------- ----------------
PERIOD FROM PERIOD FROM PERIOD FROM PERIOD FROM
5/12/98** TO 5/26/98** TO 5/12/98** TO 5/18/98** TO
12/31/98 12/31/98 12/31/98 12/31/98
------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ -- $ -- $ 1,213 $ 5,154
Mortality and expense risk fees............ (2,116) (2,568) (1,734) (2,749)
Administrative expense fees................ (334) (405) (274) (434)
------------- -------- -------------- ----------------
Net investment income (loss)............. (2,450) (2,973) (795) 1,971
------------- -------- -------------- ----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- --
Net realized gain (loss) from sales of
investments.............................. (1,943) (7,910) (1,815) (2,189)
------------- -------- -------------- ----------------
Net realized gain (loss)................... (1,943) (7,910) (1,815) (2,189)
Net unrealized gain (loss)................. 20,714 40,747 85,889 32,208
------------- -------- -------------- ----------------
Net realized and unrealized gain
(loss)................................. 18,771 32,837 84,074 30,019
------------- -------- -------------- ----------------
Net increase (decrease) in net assets from
operations............................... 16,321 29,864 83,279 31,990
------------- -------- -------------- ----------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 395,977 549,568 378,623 645,076
Withdrawals................................ (4,114) -- (15,242) (4,722)
Contract benefits.......................... -- -- -- --
Contract charges........................... (180) (51) (98) (77)
Transfers between sub-accounts (including
fixed account), net...................... 311,003 102,476 303,151 227,355
Other transfers from (to) the General
Account.................................. 66,324 48,618 48,730 132,179
------------- -------- -------------- ----------------
Net increase (decrease) in net assets from
contract transactions.................... 769,010 700,611 715,164 999,811
------------- -------- -------------- ----------------
Net increase (decrease) in net assets...... 785,331 730,475 798,443 1,031,801
NET ASSETS:
Beginning of year.......................... -- -- -- --
------------- -------- -------------- ----------------
End of year................................ $785,331 $730,475 $798,443 $1,031,801
------------- -------- -------------- ----------------
------------- -------- -------------- ----------------
</TABLE>
** Date of initial investment.
The accompanying notes are an integral part of these financial statements.
SA-8
<PAGE>
SEPARATE ACCOUNT KGC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account 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 contracts issued by the Company.
The Company is a wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company (First Allmerica). First Allmerica is a wholly-owned
subsidiary of Allmerica Financial Corporation (AFC). Under applicable insurance
law, the assets and liabilities of Separate Account KGC are clearly identified
and distinguished from the other assets and liabilities of the Company. Separate
Account KGC cannot be charged with liabilities arising out of any other business
of the Company.
Separate Account KGC is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account KGC
currently offers twenty-four Sub-Accounts under the variable annuity contracts.
Each Sub-Account invests exclusively in a corresponding investment portfolio of
Investors Fund Series (Kemper INFS) or Scudder Variable Life Investment Fund
(Scudder VLIF) managed by Scudder Kemper Investments, Inc. (Scudder Kemper).
Kemper INFS and Scudder VLIF (the Funds) are open-end, management investment
companies registered under the 1940 Act.
Separate Account KGC funds two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408 of the Internal Revenue Code (the
Code), while a non-qualified contract is one that is not purchased in connection
with one of the indicated retirement plans. The tax treatment for certain
withdrawals or surrenders will vary according to whether they are made from a
qualified contract or a non-qualified contract.
Effective May 1, 1998, Kemper Value Portfolio was renamed Kemper Contrarian
Value Portfolio.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Code and files a consolidated federal income tax
return with First Allmerica. The Company anticipates no tax liability resulting
from the operations of Separate Account KGC. Therefore, no provision for income
taxes has been charged against Separate Account KGC.
SA-9
<PAGE>
SEPARATE ACCOUNT KGC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
---------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- ----------- ------------ ---------
<S> <C> <C> <C>
Small Cap Value......................... 9,790,940 $ 11,356,095 $ 1.065
Small Cap Growth........................ 4,248,563 7,587,888 1.972
Contrarian Value*....................... 13,673,458 20,575,523 1.757
International........................... 6,471,817 10,799,268 1.700
Growth.................................. 3,207,658 9,236,278 2.957
Value+Growth............................ 6,204,729 9,266,042 1.671
Horizon 20+............................. 2,127,026 2,997,047 1.507
Total Return............................ 3,631,839 9,704,491 2.735
Horizon 10+............................. 3,471,687 4,568,463 1.394
Horizon 5............................... 1,395,528 1,730,618 1.302
High Yield.............................. 21,484,389 26,297,950 1.227
Investment Grade Bond................... 5,939,931 6,688,977 1.165
Government Securities................... 4,318,321 5,109,480 1.208
Money Market............................ 4,802,145 4,802,145 1.000
Global Income........................... 439,274 452,699 1.109
Blue Chip............................... 5,576,970 6,444,065 1.260
Dreman Financial Services............... 1,685,725 1,605,971 0.978
Dreman High Return Equity............... 5,903,691 5,745,251 1.029
International Growth and Income......... 330,999 297,356 0.912
Global Blue Chip........................ 406,625 385,742 0.979
VLIF International...................... 53,938 764,617 14.560
VLIF Global Discovery................... 90,855 689,728 8.040
VLIF Capital Growth..................... 33,338 712,554 23.950
VLIF Growth and Income.................. 91,961 999,593 11.220
</TABLE>
* Name changed. See Note 1.
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 0.95% 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 0.15% per annum based on the
average daily net assets of each Sub-Account for administrative expenses. These
charges are deducted from the daily value of each Sub-Account and are paid to
the Company on a daily basis.
A contract fee is currently deducted on the contract anniversary and upon
full surrender of the contract when the accumulated value is less than $50,000
on contracts issued on Form A3026-96. The fee is currently waived for contracts
issued to and maintained by the trustee of a 401(k) plan.
SA-10
<PAGE>
SEPARATE ACCOUNT KGC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of Separate Account KGC, and does not receive any compensation for sales of the
contracts. Commissions are paid by the Company to registered representatives of
Allmerica Investments and to certain independent broker-dealers. The current
series of contracts have a contingent deferred sales charge and no deduction is
made for sales charges at the time of the sale. For the years ended December 31,
1998 and 1997, the Company received $55,333 and $2,979, respectively, for
contingent deferred sales charges applicable to Separate Account KGC.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Small Cap Value
Issuance of Units.......................... 7,776,705 $ 8,903,629 5,853,683 $ 6,610,275
Redemption of Units........................ (3,100,914) (3,421,203) (738,920) (665,245)
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,675,791 $ 5,482,426 5,114,763 $ 5,945,030
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Small Cap Growth
Issuance of Units.......................... 5,351,872 $ 7,208,994 2,717,366 $ 3,067,415
Redemption of Units........................ (2,096,605) (2,794,377) (627,623) (573,633)
------------ ------------- ------------ -------------
Net increase (decrease).................. 3,255,267 $ 4,414,617 2,089,743 $ 2,493,782
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Contrarian Value*
Issuance of Units.......................... 9,957,627 $ 13,654,429 10,902,499 $ 12,448,838
Redemption of Units........................ (3,653,050) (4,952,194) (1,087,922) (1,087,948)
------------ ------------- ------------ -------------
Net increase (decrease).................. 6,304,577 $ 8,702,235 9,814,577 $ 11,360,890
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
International
Issuance of Units.......................... 7,708,241 $ 8,996,578 5,297,587 $ 5,672,472
Redemption of Units........................ (3,095,148) (3,567,424) (688,963) (637,798)
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,613,093 $ 5,429,154 4,608,624 $ 5,034,674
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Growth
Issuance of Units.......................... 6,555,804 $ 8,181,445 3,424,040 $ 3,764,264
Redemption of Units........................ (2,665,545) (3,190,704) (280,385) (294,503)
------------ ------------- ------------ -------------
Net increase (decrease).................. 3,890,259 $ 4,990,741 3,143,655 $ 3,469,761
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Value+Growth
Issuance of Units.......................... 8,800,319 $ 11,524,938 3,039,321 $ 3,487,336
Redemption of Units........................ (4,478,388) (5,661,306) (194,800) (166,815)
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,321,931 $ 5,863,632 2,844,521 $ 3,320,521
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
* Name changed. See Note 1.
</TABLE>
SA-11
<PAGE>
SEPARATE ACCOUNT KGC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Horizon 20+
Issuance of Units.......................... 1,950,047 $ 2,460,879 853,250 $ 941,138
Redemption of Units........................ (352,054) (422,854) (7,714) (8,889)
------------ ------------- ------------ -------------
Net increase (decrease).................. 1,597,993 $ 2,038,025 845,536 $ 932,249
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Total Return
Issuance of Units.......................... 5,473,294 $ 6,869,877 3,413,894 $ 3,824,453
Redemption of Units........................ (1,287,033) (1,637,636) (153,957) (154,991)
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,186,261 $ 5,232,241 3,259,937 $ 3,669,462
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Horizon 10+
Issuance of Units.......................... 3,295,342 $ 3,827,053 1,457,494 $ 1,578,933
Redemption of Units........................ (784,458) (866,648) (26,426) (12,833)
------------ ------------- ------------ -------------
Net increase (decrease).................. 2,510,884 $ 2,960,405 1,431,068 $ 1,566,100
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Horizon 5
Issuance of Units.......................... 1,313,661 $ 1,509,442 455,035 $ 492,277
Redemption of Units........................ (245,895) (265,062) (16,099) (17,743)
------------ ------------- ------------ -------------
Net increase (decrease).................. 1,067,766 $ 1,244,380 438,936 $ 474,534
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
High Yield
Issuance of Units.......................... 29,448,980 $ 32,149,350 12,655,413 $ 13,157,969
Redemption of Units........................ (15,156,655) (16,560,133) (3,139,066) (3,089,221)
------------ ------------- ------------ -------------
Net increase (decrease).................. 14,292,325 $ 15,589,217 9,516,347 $ 10,068,748
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Investment Grade Bond
Issuance of Units.......................... 10,234,949 $ 11,092,575 1,066,645 $ 1,088,022
Redemption of Units........................ (5,199,358) (5,541,528) (35,152) (27,890)
------------ ------------- ------------ -------------
Net increase (decrease).................. 5,035,591 $ 5,551,047 1,031,493 $ 1,060,132
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Government Securities
Issuance of Units.......................... 8,420,482 $ 9,134,573 865,882 $ 870,049
Redemption of Units........................ (4,488,958) (4,800,042) (207,207) (191,072)
------------ ------------- ------------ -------------
Net increase (decrease).................. 3,931,524 $ 4,334,531 658,675 $ 678,977
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Money Market
Issuance of Units.......................... 26,302,580 $ 27,915,935 16,927,453 $ 16,642,678
Redemption of Units........................ (24,191,342) (25,717,558) (14,598,787) (14,281,598)
------------ ------------- ------------ -------------
Net increase (decrease).................. 2,111,238 $ 2,198,377 2,328,666 $ 2,361,080
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Global Income
Issuance of Units.......................... 977,382 $ 1,018,134 471,806 $ 462,949
Redemption of Units........................ (999,349) (1,041,683) (15,209) (5,123)
------------ ------------- ------------ -------------
Net increase (decrease).................. (21,967) $ (23,549) 456,597 $ 457,826
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
SA-12
<PAGE>
SEPARATE ACCOUNT KGC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31,
1998 1997
---------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Blue Chip
Issuance of Units.......................... 5,429,153 $ 6,280,415 1,594,645 $ 1,713,314
Redemption of Units........................ (1,354,979) (1,509,787) (34,158) (21,669)
------------ ------------- ------------ -------------
Net increase (decrease).................. 4,074,174 $ 4,770,628 1,560,487 $ 1,691,645
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Dreman Financial Services
Issuance of Units.......................... 1,826,222 $ 1,736,001 -- $ --
Redemption of Units........................ (128,177) (116,289) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 1,698,045 $ 1,619,712 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Dreman High Return Equity
Issuance of Units.......................... 6,240,369 $ 6,091,264 -- $ --
Redemption of Units........................ (337,372) (320,673) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 5,902,997 $ 5,770,591 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
International Growth and Income
Issuance of Units.......................... 337,807 $ 302,886 -- $ --
Redemption of Units........................ (5,800) (4,546) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 332,007 $ 298,340 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Global Blue Chip
Issuance of Units.......................... 399,905 $ 390,576 -- $ --
Redemption of Units........................ (4,068) (3,542) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 395,837 $ 387,034 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF International
Issuance of Units.......................... 832,186 $ 804,324 -- $ --
Redemption of Units........................ (38,049) (35,314) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 794,137 $ 769,010 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Global Discovery
Issuance of Units.......................... 818,550 $ 776,583 -- $ --
Redemption of Units........................ (86,885) (75,972) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 731,665 $ 700,611 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Capital Growth
Issuance of Units.......................... 873,028 $ 821,698 -- $ --
Redemption of Units........................ (115,471) (106,534) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 757,557 $ 715,164 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
VLIF Growth and Income
Issuance of Units.......................... 1,125,991 $ 1,036,881 -- $ --
Redemption of Units........................ (41,839) (37,070) -- --
------------ ------------- ------------ -------------
Net increase (decrease).................. 1,084,152 $ 999,811 -- $ --
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
SA-13
<PAGE>
SEPARATE ACCOUNT KGC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
the Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account KGC satisfies the current
requirements of the regulations, and it intends that Separate Account KGC will
continue to meet such requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Separate
Account KGC during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ -----------
<S> <C> <C>
Small Cap Value........................................ $ 7,637,976 $ 2,053,520
Small Cap Growth....................................... 7,015,585 1,945,022
Contrarian Value*...................................... 11,622,926 2,589,500
International.......................................... 7,638,617 1,967,817
Growth................................................. 7,868,968 2,090,989
Value+Growth........................................... 10,395,239 4,462,036
Horizon 20+............................................ 2,438,382 365,021
Total Return........................................... 7,078,220 1,050,471
Horizon 10+............................................ 3,795,521 799,555
Horizon 5.............................................. 1,440,339 187,210
High Yield............................................. 29,654,530 13,224,734
Investment Grade Bond.................................. 9,134,142 3,554,994
Government Securities.................................. 8,911,438 4,547,785
Money Market........................................... 21,053,973 18,672,618
Global Income.......................................... 644,784 659,216
Blue Chip.............................................. 5,682,933 931,651
Dreman Financial Services.............................. 1,674,089 60,809
Dreman High Return Equity.............................. 5,922,929 172,438
International Growth and Income........................ 302,416 4,696
Global Blue Chip....................................... 386,982 1,197
VLIF International..................................... 801,796 35,236
VLIF Global Discovery.................................. 772,549 74,911
VLIF Capital Growth.................................... 805,387 91,018
VLIF Growth and Income................................. 1,033,858 32,076
------------ -----------
Totals............................................... $153,713,579 $59,574,520
------------ -----------
------------ -----------
</TABLE>
* Name changed. See Note 1.
SA-14
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for Allmerica Financial Life Insurance and Annuity
Company
Financial Statements for Separate Account KGC of Allmerica Financial
Life Insurance and Annuity Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing
Establishment of Registrant dated June 13, 1996 was
previously filed on August 16, 1996 in Registrant's
Initial Registration Statement, and is incorporated
by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the
Insurance Company may hold the assets of the
Registrant NOT pursuant to a trust indenture or other
such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Services
Agreement was previously filed on April 30,
1998 in Post-Effective Amendment No. 2,
and is incorporated by reference herein.
(b) Wholesaling Agreement was previously filed
on December 10, 1996 in Pre-Effective
Amendment No. 1, and is incorporated by
reference herein.
(c) Sales Agreements with Commission Schedule
were previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and are
incorporated by reference herein.
(d) Sales Agreement with Chase was previously
filed on April 30, 1998 in Post-Effective
Amendment No. 2, and is incorporated by
reference herein.
(e) General Agent's Agreement was previously
filed on April 30, 1998 in Post-Effective
Amendment No. 2, and is incorporated by
reference herein.
(f) Career Agent Agreement was previously filed
on April 30, 1998 in Post-Effective
Amendment No. 2, and is incorporated by
reference herein.
<PAGE>
(g) Registered Representative's Agreement was
previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
(h) Form of Indemnification Agreement with
Scudder Kemper was previously filed on April
30, 1998 in Post-Effective Amendment No. 2,
and is incorporated by reference herein.
EXHIBIT 4 Minimum Guaranteed Annuity Payout Rider was
previously filed on December 29, 1998 in
Post-Effective Amendment No. 3, and is incorporated
by reference herein. Policy Form was previously filed
on August 16, 1996 in Registrant's Initial
Registration Statement, and is incorporated by
reference herein.
EXHIBIT 5 Application Form was previously filed on August 16,
1996 in Registrant's Initial Registration Statement,
and is incorporated by reference herein.
EXHIBIT 6 The Depositor's Articles of Incorporation and
Bylaws, effective October 1, 1995 as amended to
reflect its name change, were previously filed on
August 16, 1996 in Registrant's Initial Registration
Statement, and are incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) BFDS Agreements for lockbox and
mailroom services were previously filed on
April 30, 1998 in Post-Effective Amendment
No. 2, and are incorporated by reference
herein.
(b) Form of Scudder Services Agreement was
previously filed on April 30, 1998 in
Post-Effective Amendment No. 2, and is
incorporated by reference herein.
(c) Directors' Power of Attorney is filed
herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement with Kemper was
previously filed on December 10, 1996 in
Pre-Effective Amendment No. 1, and is
incorporated by reference herein.
<PAGE>
(b) Form of Participation Agreement with Scudder
Kemper was previously filed on April 30,
1998 in Post-Effective Amendment No. 2, and
is incorporated by reference herein.
(c) Draft Participation Agreement with Alger is
filed herewith.
(d) Participation Agreement with Dreyfus was
previously filed on June 23, 1999 in
Post-Effective Amendment No. 3 (Registration
Statement Nos. 333-63091/811-7767) 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
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
<S> <C>
Bruce C. Anderson Director (since 1996), Vice President (since 1984) and Assistant Secretary
Director (since 1992) of First Allmerica
Warren E. Barnes Vice President (since 1996) and Corporate Controller (since 1998) of First
Vice President and Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since 1997) and Vice President
Director and Chief Information (since 1995) of First Allmerica; and Corporate Manager (1979 to 1995) of
Officer Digital Equipment Corporation
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary (since 1999) of
Secretary Allmerica Investments, Inc.; and Secretary (since 1999) of Allmerica
Financial Investment Management Services, Inc.
John P. Kavanaugh Director and Chief Investment Officer (since 1996) and Vice President
Director, Vice President and (since 1991) of First Allmerica; and Vice President (since 1998) of
Chief Investment Officer Allmerica Financial Investment Management Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President (since 1986), General
Director, Vice President and Counsel (since 1981) and Assistant Secretary (since 1991) of First
General Counsel Allmerica; Director (since 1985) of Allmerica Investments, Inc.; and
Director (since 1990) of Allmerica Financial Investment
Management Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director and President (since
Director 1996) of The Hanover Insurance Company; and Vice President (1993 to 1996)
of The Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director (since 1992), President
Director (since 1994) and Chief Executive Officer (since 1996) of Citizens Insurance
Company of America
<PAGE>
John F. O'Brien Director, President and Chief Executive Officer (since 1989) of First
Director and Chairman Allmerica; Director (since 1989) of Allmerica Investments, Inc.; and
of the Board Director and Chairman of the Board (since 1990) of Allmerica Financial
Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and Vice President
Director, Vice President and Treasurer (since 1993) of First Allmerica; Treasurer (since 1993)
Chief Financial Officer of Allmerica Investments, Inc.; and Treasurer (since 1993) of Allmerica
and Treasurer Financial Investment Management Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990) of First Allmerica;
Director, President and Director (since 1990) of Allmerica Investments, Inc.; and Director and
Chief Executive Officer President (since 1998) of Allmerica Financial Investment Management
Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First Allmerica; Chief
Director Executive Officer (1996 to 1998) of Travelers Property & Casualty; Senior
Vice President (1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990) of First Allmerica;
Director and Vice President Director (since 1991) of Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since 1987) of First Allmerica
Director
</TABLE>
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | | |
________________________________________________________________________________________________________________________________
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Financial Allmerica, Allmerica First Allmerica AFC Capital Allmerica First Sterling
Asset Profiles, Inc. Inc. Funding Financial Life Trust I Services Limited
Management, Inc. Corp. Insurance Corporation
Company
Massachusetts California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| | |
| ___________________________________________________________ ________________
| | | | |
| 100% 99.2% 100% 100%
| Advantage Allmerica Allmerica First Sterling
| Insurance Trust Financial Life Reinsurance
| Network, Inc. Company, N.A. Insurance and Company
| Annuity Company Limited
|
| Delaware Federally Chartered Delaware Bermuda
| |
| ________________________________________________________________
| | | | |
| 100% 100% 100% 100%
| Allmerica Allmerica Allmerica Allmerica
| Investments, Investment Financial Financial
| Inc. Management Investment Services
| Company, Inc. Management Insurance
| Services, Inc. Agency, Inc.
|
| Massachusetts Massachusetts Massachusetts Massachusetts
|
________________________________________________________________
| | | |
100% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica
Property Management Benefits, Inc. Asset
& Casualty Services, Inc. Management,
Companies, Inc. Limited
Delaware Delaware Florida Bermuda
|
________________________________________________
| | |
100% 100% 100%
The Hanover Allmerica Citizens
Insurance Financial Insurance
Company Insurance Company
Brokers, Inc. of Illinois
New Hampshire Massachusetts Illinois
|
________________________________________________________________________________________________________________________________
| | | | | | | |
100% 100% 100% 100% 100% 100% 100% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts Allmerica AMGRO
Financial Plus American Insurance Corporation Bay Insurance Financial Inc.
Benefit Insurance Insurance Management Company Alliance
Insurance Agency, Inc. Company Company, Inc. Insurance
Company Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire New Hampshire Massachusetts
| |
________________________________________________ ________________
| | | |
100% 100% 100% 100%
Citizens Citizens Citizens Lloyds Credit
Insurance Insurance Insurance Corporation
Company Company Company
of Ohio of America of the
Midwest
Ohio Michigan Indiana Massachusetts
|
_________________
|
100%
Citizens
Management
Inc.
Michigan
_______________ ---------------- ----------------
Allmerica Greendale AAM
Equity Special Equity Fund
Index Pool Placements
Fund
Massachusetts Massachusetts Massachusetts
- -------- Grantor Trusts established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
--------------- ----------------
Allmerica Allmerica
Investment Trust Securities
Trust
Massachusetts Massachusetts
- -------- Affiliated Management Investment Companies
...............
Hanover Lloyd's
Insurance
Company
Texas
- -------- Affiliated Lloyd's plan company, controlled by Underwriters
for the benefit of The Hanover Insurance Company
_______________ ________________
AAM Growth AAM High Yield
& Income Fund, L.L.C.
Fund L.P.
Delaware Massachusetts
________ L.P. or L.L.C. established for the benefit of First Allmerica,
Allmerica Financial Life, Hanover and Citizens
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
<S> <C> <C>
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
AAM Growth & Income Fund, L.P 440 Lincoln Street Limited Partnership
Worcester MA 01653
Advantage Insurance Network Inc. 440 Lincoln Street Insurance Agency
Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
Allmerica Asset Management Limited 440 Lincoln Street Investment advisory services
Worcester MA 01653
Allmerica Benefits, Inc. 440 Lincoln Street Non-insurance medical services
Worcester MA 01653
<PAGE>
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
Allmerica Financial Alliance Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Benefit Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
Allmerica Financial Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life Insurance 440 Lincoln Street Life insurance, accident and health
and Annuity Company (formerly known Worcester MA 01653 insurance, annuities, variable annuities
as SMA Life Assurance Company and variable life insurance
Allmerica Financial Services Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding vehicle for
Worcester MA 01653 commercial paper
Allmerica, Inc. 440 Lincoln Street Common employer for Allmerica
Worcester MA 01653 Financial Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory services
Management Services, Inc. (formerly Worcester MA 01653
known as Allmerica Institutional Services, Inc.
and 440 Financial Group of
Worcester, Inc.)
Allmerica Investment Management 440 Lincoln Street Investment advisory services
Company, Inc. Worcester MA 01653
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail broker-dealer
Worcester MA 01653
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
<PAGE>
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative services
Worcester MA 01653 provider to Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national trust
Worcester MA 01653 company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of America 645 West Grand River Multi-line property and casualty
Howell MI 48843 insurance
Citizens Insurance Company of Illinois 333 Pierce Road Multi-line property and casualty
Itasca IL 60143 insurance
Citizens Insurance Company of the 3950 Priority Way Multi-line property and casualty
Midwest South Drive, Suite 200 insurance
Indianapolis IN 46280
Citizens Insurance Company of Ohio 8101 N. High Street Multi-line property and casualty
P.O. Box 342250 insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management company
Howell MI 48843
Financial Profiles 5421 Avenida Encinas Computer software company
Carlsbad, CA 92008
First Allmerica Financial Life Insurance 440 Lincoln Street Life, pension, annuity, accident
Company (formerly State Mutual Life Worcester MA 01653 and health insurance company
Assurance Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance Company 440 Lincoln Street Reinsurance Company
Limited Worcester MA 01653
Greendale Special Placements Fund 440 Lincoln Street Massachusetts Grantor Trust
Worcester MA 01653
The Hanover American Insurance 100 North Parkway Multi-line property and casualty
Company Worcester MA 01605 insurance
<PAGE>
The Hanover Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Hanover Texas Insurance Management 801 East Campbell Road Attorney-in-fact for Hanover Lloyd's
Company, Inc. Richardson TX 75081 Insurance Company
Hanover Lloyd's Insurance Company Hanover Lloyd's Insurance Multi-line property and casualty
Company insurance
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Massachusetts Bay Insurance Company 100 North Parkway Multi-line property and casualty
Worcester MA 01605 insurance
Sterling Risk Management Services, Inc. 440 Lincoln Street Risk management services
Worcester MA 01653
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of September 30, 1999, there were 977 Contact holders of qualified Contracts
and 2,192 Contract holders of non-qualified Contracts.
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 judgment,
except in relation to matters as to which he shall be finally adjudged in such
action, suit or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
- VEL Account, VEL II Account, VEL Account III, Select Account III,
Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C, VA-G,
VA-H, VA-K, VA-P, Allmerica Select Separate Account II, Group VEL
Account, Separate Account KG, Separate Account KGC, Fulcrum
Separate Account, Fulcrum Variable Life Separate Account, and
Allmerica Select Separate Account of Allmerica Financial Life
Insurance and Annuity Company
- Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate
Account KGC, Fulcrum Separate Account, and Allmerica Select
Separate Account of First Allmerica Financial Life Insurance
Company.
<PAGE>
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
Emil J. Aberizk, Jr Vice President and Chief Compliance Officer
Edward T. Berger Vice President and Chief Compliance Officer
Mary Eldridge Secretary
Philip L. Heffernan Vice President
John F. Kelly Director
Daniel Mastrototaro Vice President
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
(c) As indicated in Part B (Statement of Additional Information) in
response to Item 20(c), there were no commissions retained by
Allmerica Investments, Inc., the principal underwriter of the
Contracts, for sales of variable contracts funded by the Registrant in
1998. No commissions or other compensation was received by the
principal underwriter, directly or indirectly, from the Registrant
during the Registrant's last fiscal year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section 31(a)
of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by the
Company at 440 Lincoln Street, Worcester, Massachusetts 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 ("SEC") such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or
regulation of the SEC heretofore or hereafter duly adopted
pursuant to authority conferred in that section.
(b) The Registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of
Additional Information and any financial statements promptly upon
written or oral request, according to the requirements of Form
N-4.
(d) Insofar as indemnification for liability arising under the 1933
Act may be permitted to Directors, Officers and Controlling
Persons of Registrant under any registration statement,
underwriting agreement or otherwise, Registrant has been advised
that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of
expenses incurred or paid by a Director, Officer or Controlling
Person of Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, Officer or
Controlling Person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the 1933 Act and will be governed by the final adjudication of
such issue.
(e) The Company hereby 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
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.
<PAGE>
2. Appropriate disclosures regarding the redemption restrictions
imposed by the Program and by Section 403(b)(11) have been
included in sales literature used in connection with the offer
of the Company's variable contracts.
3. Sales Representatives who solicit participants to purchase the
variable contracts have been instructed to specifically bring
the redemption restrictions imposed by the Program and by
Section 403(b)(11) to the attention of potential participants.
4. A signed statement acknowledging the participant's
understanding of (i) the restrictions on redemption imposed by
the Program and by Section 403(b)(11) and (ii) the investment
alternatives available under the employer's arrangement will
be obtained from each participant who purchases a variable
annuity contract prior to or at the time of purchase.
Registrant hereby represents that it will not act to deny
or limit a transfer request except to the extent that a
Service-Ruling or written opinion of counsel,
specifically addressing the fact pattern involved and
taking into account the terms of the applicable employer
plan, determines that denial or limitation is necessary
for the variable annuity contracts to meet the
requirements of the Program or of Section 403(b). Any
transfer request not so denied or limited will be
effected as expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 1st day of
November, 1999.
SEPARATE ACCOUNT KGC OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Mary Eldridge
------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Warren E. Barnes Vice President and Corporate Controller November 1, 1999
- -------------------------
Warren E. Barnes
Edward J. Parry III* Director, Vice President, Chief Financial
- ------------------------- Officer and Treasurer
Richard M. Reilly* Director, President and
- ------------------------- Chief Executive Officer
John F. O'Brien* Director and Chairman of the Board
- -------------------------
Bruce C. Anderson* Director
- -------------------------
Robert E. Bruce* Director and Chief Information Officer
- -------------------------
John P. Kavanaugh* Director, Vice President and
- ------------------------- Chief Investment Officer
John F. Kelly* Director, Vice President and
- ------------------------- General Counsel
J. Barry May* Director
- -------------------------
James R. McAuliffe* Director
- -------------------------
Robert P. Restrepo, Jr.* Director
- -------------------------
Eric A. Simonsen* Director and Vice President
- -------------------------
Director
- -------------------------
Phillip E. Soule
</TABLE>
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated July 1, 1999 duly executed by
such persons.
/s/ Sheila B. St. Hilaire
- ------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-10283)
<PAGE>
EXHIBIT TABLE
Exhibit 8(c) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
Exhibit 15(c) Draft Participation Agreement with Alger
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all Registration Statements and all amendments thereto, including post-effective
amendments, with respect to the Separate Accounts supporting variable life and
variable annuity contracts issued by Allmerica Financial Life Insurance and
Annuity Company, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and with any other regulatory agency or state authority that may so require,
granting unto said attorneys and each of them, acting alone, full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys or any of them may lawfully do or cause to be done by virtue hereof.
Witness our hands on the date set forth below.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John F. O'Brien Director and Chairman of the Board 7/1/99
- -------------------------- ------
John F. O'Brien
/s/ Bruce C. Anderson Director 7/1/99
- -------------------------- ------
Bruce C. Anderson
/s/ Robert E. Bruce Director and Chief Information Officer 7/1/99
- -------------------------- ------
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 7/1/99
- -------------------------- Chief Investment Officer ------
John P. Kavanaugh
/s/ John F. Kelly Director, Vice President and 7/1/99
- -------------------------- General Counsel ------
John F. Kelly
/s/ J. Barry May Director 7/1/99
- -------------------------- ------
J. Barry May
/s/ James R. McAuliffe Director 7/1/99
- -------------------------- ------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief Financial 7/1/99
- -------------------------- Officer and Treasurer ------
Edward J. Parry, III
/s/ Richard M. Reilly Director, President and 7/1/99
- -------------------------- Chief Executive Officer ------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director 7/1/99
- -------------------------- ------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 7/1/99
- -------------------------- ------
Eric A. Simonsen
/s/ Phillip E. Soule Director 7/1/99
- -------------------------- ------
Phillip E. Soule
</TABLE>
<PAGE>
November 1, 1999
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
RE: SEPARATE ACCOUNT KGC OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY FILE NO.'S: 333-10283 AND 811-7777
Gentlemen:
In my capacity as Assistant Vice President and Counsel of Allmerica Financial
Life Insurance and Annuity Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
Separate Account KGC on Form N-4 under the Securities Act of 1933 and amendment
under the Investment Company Act of 1940, with respect to the Company's
qualified and non-qualified variable annuity contracts.
I am of the following opinion:
1. Separate Account 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 variable annuity contracts, when issued in accordance with the
Prospectus contained in the Post-Effective Amendment to the
Registration Statement and upon compliance with applicable local law,
will be legal and binding obligations of the Company in accordance with
their terms and when sold will be legally issued, fully paid and
non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement for Separate Account KGC
on Form N-4 filed under the Securities Act of 1933.
Very truly yours,
/s/ John C. Donlon, Jr.
John C. Donlon, Jr.
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 6 to the Registration
Statement of Separate Account KGC of Allmerica Financial Life Insurance and
Annuity Company on Form N-4 of our report dated February 2, 1999, except for
paragraph 2 of Note 12, which is as of March 19, 1999, relating to the financial
statements of Allmerica Financial Life Insurance and Annuity Company, and our
report dated March 26, 1999, relating to the financial statements of Separate
Account KGC of Allmerica Financial Life Insurance and Annuity Company, both of
which appear in such Statement of Additional Information. We also consent to the
reference to us under the heading "Experts" in such Statement of Additional
Information.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 15, 1999
<PAGE>
PARTICIPATION AGREEMENT
THIS AGREEMENT is made this _____ day of ______________ , 1999, by and
among The Alger American Fund (the "Trust"), an open-end management investment
company organized as a Massachusetts business trust, Allmerica Financial Life
Insurance and Annuity Company, a life insurance company organized as a
corporation under the laws of the State of Delaware, (the "Company"), on its own
behalf and on behalf of each segregated asset account of the Company set forth
in Schedule A, as may be amended from time to time (the "Accounts"), and Fred
Alger & Company, Incorporated, a Delaware corporation, the Trust's distributor
(the "Distributor").
WHEREAS, the Trust is registered with the Securities and Exchange
Commission (the "Commission") as an open-end management investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), and has an
effective registration statement relating to the offer and sale of the various
series of its shares under the Securities Act of 1933, as amended (the "1933
Act");
WHEREAS, the Trust and the Distributor desire that Trust shares be used
as an investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by life
insurance companies which have entered into fund participation agreements with
the Trust (the "Participating Insurance Companies");
WHEREAS, shares of beneficial interest in the Trust are divided into the
following series which are available for purchase by the Company for the
Accounts: Alger American Small Capitalization Portfolio, Alger American Growth
Portfolio, Alger American Income and Growth Portfolio, Alger American Balanced
Portfolio, Alger American MidCap Growth Portfolio, and Alger American Leveraged
AllCap Portfolio;
WHEREAS, the Trust has received an order from the Commission, dated
February 17, 1989 (File No. 812-7076), granting Participating Insurance
Companies and their separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the
Portfolios of the Trust to be sold to and held by variable annuity and variable
life insurance separate accounts of both affiliated and unaffiliated life
insurance companies (the "Shared Funding Exemptive Order");
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and variable annuity contracts to be
issued by the Company under which the Portfolios are to be made available as
investment vehicles (the "Contracts");
1
<PAGE>
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act unless an exemption from registration
under the 1940 Act is available and the Trust has been so advised;
WHEREAS, the Company desires to use shares of the Portfolios indicated on
Schedule A as investment vehicles for the Accounts;
NOW THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I.
PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES
1.1. For purposes of this Article I, the Company shall be the Trust's agent
for the receipt from each account of purchase orders and requests for
redemption pursuant to the Contracts relating to each Portfolio, provided
that the Company notifies the Trust of such purchase orders and requests
for redemption by 9:30 a.m. Eastern time on the next following Business
Day, as defined in Section 1.3.
1.2. The Trust shall make shares of the Portfolios available to the Accounts
at the net asset value next computed after receipt of a purchase order by
the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust describing
Portfolio purchase procedures. The Company will transmit orders from time
to time to the Trust for the purchase and redemption of shares of the
Portfolios. The Trustees of the Trust (the "Trustees") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the
offering of shares of any Portfolio if such action is required by law or
by regulatory authorities having jurisdiction or if, in the sole
discretion of the Trustees acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, such action
is deemed in the best interests of the shareholders of such Portfolio.
1.3. The Company shall pay for the purchase of shares of a Portfolio on behalf
of an Account with federal funds to be transmitted by wire to the Trust,
with the reasonable expectation of receipt by the Trust by 2:00 p.m.
Eastern time on the next Business Day after the Trust (or its agent)
receives the purchase order. Upon receipt by the Trust of the federal
funds so wired, such funds shall cease to be the responsibility of the
Company and shall become the responsibility of the Trust for this
purpose. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Trust calculates its net
asset value pursuant to the rules of the Commission.
1.4. The Trust will redeem for cash any full or fractional shares of any
Portfolio, when requested by the Company on behalf of an Account, at the
net asset value next computed
2
<PAGE>
after receipt by the Trust (or its agent) of the request for redemption,
as established in accordance with the provisions of the then current
prospectus of the Trust describing Portfolio redemption procedures. The
Trust shall make payment for such shares in the manner established from
time to time by the Trust. Proceeds of redemption with respect to a
Portfolio will normally be paid to the Company for an Account in federal
funds transmitted by wire to the Company by order of the Trust with the
reasonable expectation of receipt by the Company by 2:00 p.m. Eastern
time on the next Business Day after the receipt by the Trust (or its
agent) of the request for redemption. Such payment may be delayed if, for
example, the Portfolio's cash position so requires or if extraordinary
market conditions exist, but in no event shall payment be delayed for a
greater period than is permitted by the 1940 Act. The Trust reserves the
right to suspend the right of redemption, consistent with Section 22(e)
of the 1940 Act and any rules thereunder.
1.5. Payments for the purchase of shares of the Trust's Portfolios by the
Company under Section 1.3 and payments for the redemption of shares of
the Trust's Portfolios under Section 1.4 on any Business Day may be
netted against one another for the purpose of determining the amount of
any wire transfer.
1.6. Issuance and transfer of the Trust's Portfolio shares will be by book
entry only. Stock certificates will not be issued to the Company or the
Accounts. Portfolio Shares purchased from the Trust will be recorded in
the appropriate title for each Account or the appropriate subaccount of
each Account.
1.7. The Trust shall furnish, on or before the ex-dividend date, notice to the
Company of any income dividends or capital gain distributions payable on
the shares of any Portfolio of the Trust. The Company hereby elects to
receive all such income dividends and capital gain distributions as are
payable on a Portfolio's shares in additional shares of that Portfolio.
The Trust shall notify the Company of the number of shares so issued as
payment of such dividends and distributions.
1.8. The Trust shall calculate the net asset value of each Portfolio on each
Business Day, as defined in Section 1.3. The Trust shall make the net
asset value per share for each Portfolio available to the Company or its
designated agent on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best
efforts to make such net asset value per share available to the Company
by 6:30 p.m. Eastern time each Business Day.
1.9. The Trust agrees that its Portfolio shares will be sold only to
Participating Insurance Companies and their segregated asset accounts, to
the Fund Sponsor or its affiliates and to such other entities as may be
permitted by Section 817(h) of the Code, the regulations hereunder, or
judicial or administrative interpretations thereof. No shares of any
Portfolio will be sold directly to the general public. The Company agrees
that it will use Trust shares only for the purposes of funding the
Contracts through the Accounts listed in
3
<PAGE>
Schedule A, as amended from time to time.
1.10. The Trust agrees that all Participating Insurance Companies shall have
the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding materially to those contained in
Section 2.9 and Article IV of this Agreement.
ARTICLE II.
OBLIGATIONS OF THE PARTIES
2.1. The Trust shall prepare and be responsible for filing with the Commission
and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional
information of the Trust. The Trust shall bear the costs of registration
and qualification of shares of the Portfolios, preparation and filing of
the documents listed in this Section 2.1 and all taxes to which an issuer
is subject on the issuance and transfer of its shares.
2.2. The Company shall distribute such prospectuses, proxy statements and
periodic reports of the Trust to the Contract owners as required to be
distributed to such Contract owners under applicable federal or state
law.
2.3. The Trust shall provide such documentation (including a final copy of the
Trust's prospectus as set in type or in camera-ready copy) and other
assistance as is reasonably necessary in order for the Company to print
together in one document the current prospectus for the Contracts issued
by the Company and the current prospectus for the Trust. The Trust shall
bear the expense of printing copies of its current prospectus that will
be distributed to existing Contract owners, and the Company shall bear
the expense of printing copies of the Trust's prospectus that are used in
connection with offering the Contracts issued by the Company.
2.4. The Trust and the Distributor shall provide (1) at the Trust's expense,
one copy of the Trust's current Statement of Additional Information
("SAI") to the Company and to any Contract owner who requests such SAI,
(2) at the Company's expense, such additional copies of the Trust's
current SAI as the Company shall reasonably request and that the Company
shall require in accordance with applicable law in connection with
offering the Contracts issued by the Company.
2.5. The Trust, at its expense, shall provide the Company with copies of its
proxy material, periodic reports to shareholders and other communications
to shareholders in such quantity as the Company shall reasonably require
for purposes of distributing to Contract owners.The Trust shall bear any
costs associated with the distribution of its proxy materials to existing
shareholders. The Trust, at the Company's expense, shall provide the
Company with copies of its periodic reports to shareholders and other
communications to
4
<PAGE>
shareholders in such quantity as the Company shall reasonably request for
use in connection with offering the Contracts issued by the Company. If
requested by the Company in lieu thereof, the Trust shall provide such
documentation (including a final copy of the Trust's proxy materials,
periodic reports to shareholders and other communications to
shareholders, as set in type or in camera-ready copy) and other
assistance as reasonably necessary in order for the Company to print such
shareholder communications for distribution to Contract owners.
2.6. The Company agrees and acknowledges that the Distributor is the sole
owner of the name and mark "Alger" and that all use of any designation
comprised in whole or part of such name or mark under this Agreement
shall inure to the benefit of the Distributor. Except as provided in
Section 2.5, the Company shall not use any such name or mark on its own
behalf or on behalf of the Accounts or Contracts in any registration
statement, advertisement, sales literature or other materials relating to
the Accounts or Contracts without the prior written consent of the
Distributor. Upon termination of this Agreement for any reason, the
Company shall cease all use of any such name or mark as soon as
reasonably practicable.
2.7. The Company shall furnish, or cause to be furnished, to the Trust or its
designee a copy of each Contract prospectus and/or statement of
additional information describing the Contracts, each report to Contract
owners, proxy statement, application for exemption or request for
no-action letter in which the Trust or the Distributor is named
contemporaneously with the filing of such document with the Commission.
The Company shall furnish, or shall cause to be furnished, to the Trust
or its designee each piece of sales literature or other promotional
material in which the Trust or the Distributor is named, at least five
Business Days prior to its use. No such material shall be used if the
Trust or its designee reasonably objects to such use within three
Business Days after receipt of such material.
2.8. The Company shall not give any information or make any representations or
statements on behalf of the Trust or concerning the Trust or the
Distributor in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from
the registration statement or prospectus for the Trust shares (as such
registration statement and prospectus may be amended or supplemented from
time to time), annual and semi-annual reports of the Trust,
Trust-sponsored proxy statements, or in sales literature or other
promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the prior
written permission of the Trust, the Distributor or their respective
designees. The Trust and the Distributor agree to respond to any request
for approval on a prompt and timely basis. The Company shall adopt and
implement procedures reasonably designed to ensure that "broker only"
materials including information therein about the Trust or the
Distributor are not distributed to existing or prospective Contract
owners.
5
<PAGE>
2.9. The Trust shall use its best efforts to provide the Company, on a timely
basis, with such information about the Trust, the Portfolios and the
Distributor, in such form as the Company may reasonably require, as the
Company shall reasonably request in connection with the preparation of
registration statements, prospectuses and annual and semi-annual reports
pertaining to the Contracts.
2.10. The Trust and the Distributor shall not give, and agree that no affiliate
of either of them shall give, any information or make any representations
or statements on behalf of the Company or concerning the Company, the
Accounts or the Contracts other than information or representations
contained in and accurately derived from the registration statement or
prospectus for the Contracts (as such registration statement and
prospectus may be amended or supplemented from time to time), or in
materials approved by the Company for distribution including sales
literature or other promotional materials, except as required by legal
process or regulatory authorities or with the prior written permission of
the Company. The Company agrees to respond to any request for approval on
a prompt and timely basis.
2.11. So long as, and to the extent that, the Commission interprets the 1940
Act to require pass-through voting privileges for Contract owners, the
Company will provide pass-through voting privileges to Contract owners
whose cash values are invested, through the registered Accounts, in
shares of one or more Portfolios of the Trust. The Trust shall require
all Participating Insurance Companies to calculate voting privileges in
the same manner and the Company shall be responsible for assuring that
the Accounts calculate voting privileges in the manner established by the
Trust. With respect to each registered Account, the Company will vote
shares of each Portfolio of the Trust held by a registered Account and
for which no timely voting instructions from Contract owners are received
in the same proportion as those shares for which voting instructions are
received. The Company and its agents will in no way recommend or oppose
or interfere with the solicitation of proxies for Portfolio shares held
to fund the Contacts without the prior written consent of the Trust,
which consent may be withheld in the Trust's sole discretion. The Company
reserves the right, to the extent permitted by law, to vote shares held
in any Account in its sole discretion.
2.12. The Company and the Trust will each provide to the other information
about the results of any regulatory examination relating to the Contracts
or the Trust, including relevant portions of any "deficiency letter" and
any response thereto.
2.13. No compensation shall be paid by the Trust to the Company, or by the
Company to the Trust, under this Agreement (except for specified expense
reimbursements). However, nothing herein shall prevent the parties hereto
from otherwise agreeing to perform, and arranging for appropriate
compensation for, other services relating to the Trust, the
6
<PAGE>
Accounts or both.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1. The Company represents and warrants that it is an insurance company duly
organized and in good standing under the laws of the State of Delaware
and that it has legally and validly established each Account as a
segregated asset account under such law as of the date set forth in
Schedule A, and that _________________________________, the principal
underwriter for the Contracts, is registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member in good standing of the
National Association of Securities Dealers, Inc.
3.2. The Company represents and warrants that it has registered or, prior to
any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act
and cause each Account to remain so registered to serve as a segregated
asset account for the Contracts, unless an exemption from registration is
available.
3.3. The Company represents and warrants that the Contracts will be registered
under the 1933 Act unless an exemption from registration is available
prior to any issuance or sale of the Contracts; the Contracts will be
issued and sold in compliance in all material respects with all
applicable federal and state laws; and the sale of the Contracts shall
comply in all material respects with state insurance law suitability
requirements.
3.4. The Trust represents and warrants that it is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and the
rules and regulations thereunder.
3.5. The Trust and the Distributor represent and warrant that the Portfolio
shares offered and sold pursuant to this Agreement will be registered
under the 1933 Act and sold in accordance with all applicable federal and
state laws, and the Trust shall be registered under the 1940 Act prior to
and at the time of any issuance or sale of such shares. The Trust shall
amend its registration statement under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of
its shares. The Trust shall register and qualify its shares for sale in
accordance with the laws of the various states only if and to the extent
deemed advisable by the Trust.
3.6. The Trust represents and warrants that the investments of each Portfolio
will comply with the diversification requirements for variable annuity,
endowment or life insurance
7
<PAGE>
contracts set forth in Section 817(h) of the Internal Revenue Code of
1986, as amended (the "Code"), and the rules and regulations thereunder,
including without limitation Treasury Regulation 1.817-5, and will notify
the Company immediately upon having a reasonable basis for believing any
Portfolio has ceased to comply or might not so comply and will
immediately take all reasonable steps to adequately diversify the
Portfolio to achieve compliance within the grace period afforded by
Regulation 1.817-5.
3.7. The Trust represents and warrants that it is currently qualified as a
"regulated investment company" under Subchapter M of the Code, that it
will make every effort to maintain such qualification and will notify the
Company immediately upon having a reasonable basis for believing it has
ceased to so qualify or might not so qualify in the future.
3.8. The Trust represents and warrants that it, its directors, officers,
employees and others dealing with the money or securities, or both, of a
Portfolio shall at all times be covered by a blanket fidelity bond or
similar coverage for the benefit of the Trust in an amount not less than
the minimum coverage required by Rule 17g-1 or other applicable
regulations under the 1940 Act. Such bond shall include coverage for
larceny and embezzlement and be issued by a reputable bonding company.
3.9. The Distributor represents that it is duly organized and validly existing
under the laws of the State of Delaware and that it is registered, and
will remain registered, during the term of this Agreement, as a
broker-dealer under the Securities Exchange Act of 1934 and is a member
in good standing of the National Association of Securities Dealers, Inc.
ARTICLE IV.
POTENTIAL CONFLICTS
4.1. The parties acknowledge that a Portfolio's shares may be made available
for investment to other Participating Insurance Companies. In such event,
the Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of
all Participating Insurance Companies. A material irreconcilable conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretative letter, or any
similar action by insurance, tax, or securities regulatory authorities;
(c) an administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investments of any Portfolio are being
managed; (e) a difference in voting instructions given by variable
annuity contract and variable life insurance contract owners; or (f) a
decision by an insurer to disregard the voting instructions of contract
owners. The Trust shall promptly inform the Company of any determination
by the Trustees that a material irreconcilable conflict exists and of the
implications thereof.
8
<PAGE>
4.2. The Company agrees to report promptly any potential or existing conflicts
of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Shared Funding
Exemptive Order by providing the Trustees with all information reasonably
necessary for and requested by the Trustees to consider any issues raised
including, but not limited to, information as to a decision by the
Company to disregard Contract owner voting instructions. All
communications from the Company to the Trustees may be made in care of
the Trust.
4.3. If it is determined by a majority of the Trustees, or a majority of the
disinterested Trustees, that a material irreconcilable conflict exists
that affects the interests of contract owners, the Company shall, in
cooperation with other Participating Insurance Companies whose contract
owners are also affected, at its own expense and to the extent reasonably
practicable (as determined by the Trustees) take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict,
which steps could include: (a) withdrawing the assets allocable to some
or all of the Accounts from the Trust or any Portfolio and reinvesting
such assets in a different investment medium, including (but not limited
to) another Portfolio of the Trust, or submitting the question of whether
or not such segregation should be implemented to a vote of all affected
Contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering
to the affected Contract owners the option of making such a change; and
(b) establishing a new registered management investment company or
managed separate account.
4.4. If a material irreconcilable conflict arises because of a decision by the
Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the
Company may be required, at the Trust's election, to withdraw the
affected Account's investment in the Trust and terminate this Agreement
with respect to such Account; provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Any such withdrawal and termination must take
place within six (6) months after the Trust gives written notice that
this provision is being implemented. Until the end of such six (6) month
period, the Trust shall continue to accept and implement orders by the
Company for the purchase and redemption of shares of the Trust.
4.5. If a material irreconcilable conflict arises because a particular state
insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw
the affected Account's investment in the Trust and terminate this
Agreement with respect to such Account within six (6) months after the
Trustees inform the Company in writing that the Trust has determined that
such decision has created a material irreconcilable conflict; provided,
however, that such withdrawal
9
<PAGE>
and termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Until the end of such six (6) month period, the
Trust shall continue to accept and implement orders by the Company for
the purchase and redemption of shares of the Trust.
4.6. For purposes of Section 4.3 through 4.6 of this Agreement, a majority of
the disinterested Trustees shall determine whether any proposed action
adequately remedies any material irreconcilable conflict, but in no event
will the Trust be required to establish a new funding medium for any
Contract. The Company shall not be required to establish a new funding
medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
material irreconcilable conflict. In the event that the Trustees
determine that any proposed action does not adequately remedy any
material irreconcilable conflict, then the Company will withdraw the
Account's investment in the Trust and terminate this Agreement within six
(6) months after the Trustees inform the Company in writing of the
foregoing determination; provided, however, that such withdrawal and
termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.
4.7. The Company shall at least annually submit to the Trustees such reports,
materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Shared
Funding Exemptive Order, and said reports, materials and data shall be
submitted more frequently if reasonably deemed appropriate by the
Trustees.
4.8. If and to the extent that Rule 6e-3(T) is amended, or Rule 6e-3 is
adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared
Funding Exemptive Order, then the Trust and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be
necessary to comply with Rule 6e-3(T), as amended, or Rule 6e-3, as
adopted, to the extent such rules are applicable.
ARTICLE V.
INDEMNIFICATION
5.1. INDEMNIFICATION BY THE COMPANY. The Company agrees to indemnify and hold
harmless the Distributor, the Trust and each of its Trustees, officers,
employees and agents and each person, if any, who controls the Trust
within the meaning of Section 15 of the 1933
10
<PAGE>
Act (collectively, the "Indemnified Parties" for purposes of this Section
5.1) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Company, which
consent shall not be unreasonably withheld) or expenses (including the
reasonable costs of investigating or defending any alleged loss, claim,
damage, liability or expense and reasonable legal counsel fees incurred
in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation,
or at common law or otherwise, insofar as such Losses are related to the
sale or acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts
themselves or in sales literature generated or approved by the
Company on behalf of the Contracts or Accounts (or any amendment
or supplement to any of the foregoing) (collectively, "Company
Documents" for the purposes of this Article V), or arise out of or
are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Company by or on behalf of the Trust
for use in Company Documents or otherwise for use in connection
with the sale of the Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived from Trust Documents as defined in Section 5.2(a)) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Trust
shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Trust Documents as
defined in Section 5.2(a) or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such
statement or omission was made in reliance upon and accurately
derived from written information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any failure by the Company to provide
the services or furnish the materials required under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Company; or
11
<PAGE>
(f) arise out of or result from the provision by the Company to the
Trust of insufficient or incorrect information regarding the
purchase or sale of shares of any Portfolio, or the failure of the
Company to provide such information on a timely basis.
5.2. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor agrees to indemnify
and hold harmless the Company and each of its directors, officers,
employees, and agents and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for the purposes of this Section 5.2) against any
and all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Distributor, which consent
shall not be unreasonably withheld) or expenses (including the reasonable
costs of investigating or defending any alleged loss, claim, damage,
liability or expense and reasonable legal counsel fees incurred in
connection therewith) (collectively, "Losses"), to which the Indemnified
Parties may become subject under any statute or regulation, or at common
law or otherwise, insofar as such Losses are related to the sale or
acquisition of the Contracts or Trust shares and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
registration statement or prospectus for the Trust (or any
amendment or supplement thereto) (collectively, "Trust Documents"
for the purposes of this Article V), or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that this
indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and was accurately derived from written
information furnished to the Distributor or the Trust by or on
behalf of the Company for use in Trust Documents or otherwise for
use in connection with the sale of the Contracts or Trust shares;
or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately
derived form Company Documents) or wrongful conduct of the
Distributor or persons under its control, with respect to the sale
or acquisition of the Contracts or Portfolio shares; or
(c) arise out of or result from any untrue statement or alleged untrue
statement of a material fact contained in Company Documents or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Trust; or
12
<PAGE>
(d) arise out of or result from any failure by the Distributor or the
Trust to provide the services or furnish the materials required
under the terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Distributor or the
Trust in this Agreement or arise out of or result from any other
material breach of this Agreement by the Distributor or the Trust.
5.3. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any Losses incurred or assessed against an Indemnified
Party that arise from such Indemnified Party's willful misfeasance, bad
faith or negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement.
5.4. None of the Company, the Trust or the Distributor shall be liable under
the indemnification provisions of Sections 5.1 or 5.2, as applicable,
with respect to any claim made against an Indemnified party unless such
Indemnified Party shall have notified the other party in writing within a
reasonable time after the summons, or other first written notification,
giving information of the nature of the claim shall have been served upon
or otherwise received by such Indemnified Party (or after such
Indemnified Party shall have received notice of service upon or other
notification to any designated agent), but failure to notify the party
against whom indemnification is sought of any such claim shall not
relieve that party from any liability which it may have to the
Indemnified Party in the absence of Sections 5.1 and 5.2.
5.5. In case any such action is brought against an Indemnified Party, the
indemnifying party shall be entitled to participate, at its own expense,
in the defense of such action. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel reasonably
satisfactory to the party named in the action. After notice from the
indemnifying party to the Indemnified Party of an election to assume such
defense, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the indemnifying party will not be
liable to the Indemnified Party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
13
<PAGE>
ARTICLE VI.
TERMINATION
6.1. This Agreement shall terminate:
(a) at the option of any party upon 60 days advance written notice to
the other parties, unless a shorter time is agreed to by the
parties;
(b) at the option of the Trust or the Distributor if the Contracts
issued by the Company cease to qualify as annuity contracts or
life insurance contracts, as applicable, under the Code or if the
Contracts are not registered, issued or sold in accordance with
applicable state and/or federal law; or
(c) at the option of any party upon a determination by a majority of
the Trustees of the Trust, or a majority of its disinterested
Trustees, that a material irreconcilable conflict exists; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust or the Distributor by the NASD, the
SEC, or any state securities or insurance department or any other
regulatory body regarding the Trust's or the Distributor's duties
under this Agreement or related to the sale of Trust shares or the
operation of the Trust; or
(e) at the option of the Company if the Trust or a Portfolio fails to
meet the diversification requirements specified in Section 3.6
hereof; or
(f) at the option of the Company if shares of the Series are not
reasonably available to meet the requirements of the Variable
Contracts issued by the Company, as determined by the Company, and
upon prompt notice by the Company to the other parties; or
(g) at the option of the Company in the event any of the shares of the
Portfolio are not registered, issued or sold in accordance with
applicable state and/or federal law, or such law precludes the use
of such shares as the underlying investment media of the Variable
Contracts issued or to be issued by the Company; or
(h) at the option of the Company, if the Portfolio fails to qualify as
a Regulated Investment Company under Subchapter M of the Code; or
(i) at the option of the Distributor if it shall determine in its sole
judgment exercised in good faith, that the Company and/or its
affiliated companies has suffered a
14
<PAGE>
material adverse change in its business, operations, financial condition
or prospects since the date of this Agreement or is the subject of
material adverse publicity.
6.2. Notwithstanding any termination of this Agreement, the Trust shall, at
the option of the Company, continue to make available additional shares
of any Portfolio and redeem shares of any Portfolio pursuant to the terms
and conditions of this Agreement for all Contracts in effect on the
effective date of termination of this Agreement.
6.3. The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.9 shall survive
the termination of this Agreement as long as shares of the Trust are held
on behalf of Contract owners in accordance with Section 6.2.
ARTICLE VII.
NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust or its Distributor:
Fred Alger Management, Inc.
30 Montgomery Street
Jersey City, NJ 07302
Attn: Gregory S. Duch
If to the Company:
ARTICLE VIII.
MISCELLANEOUS
8.1. The captions in this Agreement are included for convenience of reference
only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
15
<PAGE>
8.2. This Agreement may be executed in two or more counterparts, each of which
taken together shall constitute one and the same instrument.
8.3. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
8.4. This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New York. It shall
also be subject to the provisions of the federal securities laws and the
rules and regulations thereunder and to any orders of the Commission
granting exemptive relief therefrom and the conditions of such orders.
Copies of any such orders shall be promptly forwarded by the Trust to the
Company.
8.5. All liabilities of the Trust arising, directly or indirectly, under this
Agreement, of any and every nature whatsoever, shall be satisfied solely
out of the assets of the Trust and no Trustee, officer, agent or holder
of shares of beneficial interest of the Trust shall be personally liable
for any such liabilities.
8.6. Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Commission,
the National Association of Securities Dealers, Inc. and state insurance
regulators) and shall permit such authorities reasonable access to its
books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled
to under state and federal laws.
8.8. This Agreement shall not be exclusive in any respect.
8.9. Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other
party.
8.10. No provisions of this Agreement may be amended or modified in any manner
except by a written agreement properly authorized and executed by both
parties.
8.11. Each party hereto shall, except as required by law or otherwise permitted
by this greement, treat as confidential the names and addresses of the
owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto, and shall not disclose
such confidential information without the written consent of the affected
party unless such information has become publicly available.
16
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Participation Agreement as of the date and year first
above written.
Fred Alger & Company, Incorporated
By:________________________________
Name:
Title:
The Alger American Fund
By:_________________________________
Name:
Title:
Allmerica Financial Life Insurance and
Annuity Company
By:___________________________________
Name:
Title:
17
<PAGE>
SCHEDULE A
----------
The Alger American Fund:
Alger American Growth Portfolio
Alger American Leveraged AllCap Portfolio
Alger American Income and Growth Portfolio
Alger American Small Capitalization Portfolio
Alger American Balanced Portfolio
Alger American MidCap Growth Portfolio
The Accounts:
18
