<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
FULCRUM SEPARATE ACCOUNT
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS OF THE FULCRUM SEPARATE ACCOUNT,
DATED SEPTEMBER 1, 1998 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED
FROM ANNUITY CLIENT SERVICES, ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, 440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE
1-800-917-1909.
DATED SEPTEMBER 1, 1998
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY. . . . . . . . . . . . . . . . . . . . . .2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
ANNUITY BENEFIT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . .4
EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . .7
TAX-DEFERRED ACCUMULATION. . . . . . . . . . . . . . . . . . . . . . . . 12
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
GENERAL INFORMATION AND HISTORY
The Fulcrum Separate Account (the "Variable Account") is a separate
investment account of Allmerica Financial Life Insurance and Annuity Company
(the "Company") authorized by vote of its Board of Directors on June 13,
1996. The Company is a life insurance company organized under the laws of
Delaware in July 1974. Its principal office (the "Principal Office") is
located at 440 Lincoln Street, Worcester, Massachusetts 01653, telephone
508-855-1000. The Company is subject to the laws of the State of Delaware
governing insurance companies and to regulation by the Commissioner of
Insurance of Delaware. In addition, the Company is subject to the insurance
laws and regulations of other states and jurisdictions in which it is
licensed to operate. As of December 31, 1997, the Company had over $9.4
billion in assets and over $26.6 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
The Company is an indirectly wholly owned subsidiary of First Allmerica
Financial Life Insurance Company ("First Allmerica") which, in turn, is a
wholly owned subsidiary of Allmerica Financial Corporation ("AFC"). First
Allmerica, originally organized under the laws of Massachusetts in 1844 as a
mutual life insurance company and known as State Mutual Life Assurance
Company of America, converted to a stock life insurance company and adopted
its present name on October 16, 1995. First Allmerica is the fifth oldest
life insurance company in America. As of December 31, 1997, First Allmerica
and its subsidiaries (including the Company) had over $16.3 billion in
combined assets and over $43.8 billion in life insurance in force.
Currently, fourteen Sub-Accounts of the Variable Account are available under
the Contract. Each Sub-Account invests in a corresponding investment
portfolio, fund or series of The Fulcrum Trust ("Fulcrum"), Allmerica
Investment Trust (the "Trust"), AIM Variable Insurance Funds, Inc ("AVIF"),
Delaware Group Premium Fund, Inc. ("DGPF"), Lazard Retirement Series, Inc.
("Lazard"), MFS Variable Insurance Trust (the "MFS Trust"), and Oppenheimer
Variable Account Funds ("Oppenheimer"). Fulcrum and the Trust are managed by
Allmerica Financial Investment Management Services, Inc.
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("AFIMS"). AIM is managed by A I M Advisors, Inc. DGPF is managed by
Delaware Management Company. Lazard is managed by Lazard Asset Management.
The MFS Trust is managed by Massachusetts Financial Services Company and
Oppenheimer is managed by OppenheimerFunds, Inc.
Fulcrum, the Trust, AVIF, DGPF, Lazard, the MFS Trust and Oppenheimer are
open-end, management investment companies. Five different portfolios of Fulcrum
are available under the Contract: Global Interactive/Telecomm, International
Growth, Growth, Value, and Strategic Income. One fund of the Trust is available
under the Contract: the Money Market Fund. One fund of AVIF is available under
the Contract: the AIM V.I. Value Fund. Two series of DGPF are available under
the Contract: the Delaware Series and Small Cap Value Series. One portfolio of
Lazard is available under the Contract: the Lazard Retirement International
Equity Portfolio. Two funds of the MFS Trust are available under the Contract:
MFS Emerging Growth Series and MFS Growth With Income Series. Two funds of
Oppenheimer are available under the Contract: Oppenheimer Aggressive Growth Fund
and Oppenheimer Growth & Income Fund. Each portfolio, fund and series
available under the Contract (together, the "Underlying Funds") has its own
investment objectives and certain attendant risks. For more information, see the
Prospectuses and Statements of Additional Information for the Underlying Funds.
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. Shares of the Underlying Funds owned by the
Sub-Accounts are held on an open account basis. A Sub-Account's ownership of
Underlying Fund shares is reflected on the records of the Underlying Funds,
and are not represented by any transferable stock certificates.
EXPERTS. The financial statements of the Company as of December 31, 1997 and
1996 and for each of the two years in the period ended December 31, 1997, and
the financial statements of the Fulcrum Separate Account of the Company as of
December 31, 1997 and for the periods indicated, included in this Statement
of Additional Information constituting part of this Registration Statement,
have been so included in reliance on the reports of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contract.
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UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as
principal underwriter and general distributor for the Contract pursuant to a
contract with Allmerica Investments, the Company and the Variable Account.
Allmerica Investments distributes the Contract on a best-efforts basis.
Allmerica Investments, Inc., 440 Lincoln Street, Worcester, Massachusetts
01653, was organized in 1969 as a wholly owned subsidiary of First Allmerica,
and presently is indirectly wholly owned by First Allmerica.
The Contract offered by this Prospectus is offered continuously, and may be
purchased from certain independent broker-dealers which are NASD members and
whose representatives are authorized by applicable law to sell variable
annuity contracts.
All persons selling the Contract are required to be licensed by their
respective state insurance authorities for the sale of variable annuity
contracts. The Company pays commissions, not to exceed 6.0% of purchase
payments, to entities which sell the Contract. To the extent permitted by
NASD rules, promotional incentives or payments also may be provided to such
entities based on sales volumes, the assumption of wholesaling functions or
other sales-related criteria. Additional payments may be made for other
services not directly related to the sale of the Contract, including the
recruitment and training of personnel, production of promotional literature
and similar services.
Commissions paid on the Contract, including additional incentives or
payments, and allowances paid, if any, are paid by the Company and do not
result in any charge to Owners or to the Variable Account in addition to the
charges described under "CHARGES AND DEDUCTIONS" in the Prospectus. The
Company intends to recoup the commission and other sales expense through a
combination of anticipated surrender, withdrawal and/or annuitization
charges, profits from the Company's general account, including the investment
earnings on amounts allocated to accumulate on a fixed basis in excess of the
interest credited on fixed accumulations by the Company, and the profit, if
any, from the mortality and expense risk charge.
The aggregate amounts of commissions paid to Western Capital Financial Group,
Inc. and to independent broker-dealers, respectively, for sales of contracts
funded by Fulcrum Separate Account were $529,272.25 and $588,878.81 in 1997.
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
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(4) Adjusted Gross Investment Rate for the Valuation
Period (3) divided by (2) . . . . . . . . . . . . . . . . . . 0.000335
(5) Annual Charge (one-day equivalent of 1.45% per annum) . . . . 0.000040
(6) Net Investment Rate (4) - (5) . . . . . . . . . . . . . . . . 0.000295
(7) Net Investment Factor 1.000000 + (6). . . . . . . . . . . . . 1.000295
(8) Accumulation Unit Value -- Current Period (1) x (7) . . . . $ 1.135335
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
$1.134574.
The method for determining the amount of annuity benefit payments is
described in detail under "Determination of the First and Subsequent Annuity
Benefit Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example:
Assume an Annuitant has 40,000 Accumulation Units in a Variable Account, and
that the value of an Accumulation Unit on the Valuation Date used to
determine the amount of the first variable annuity payment is $1.120000.
Therefore, the Accumulation Value of the Contract is $44,800 (40,000 x
$1.120000). Assume also that the Owner elects an option for which the first
monthly payment is $6.57 per $1,000 of Accumulated Value applied. Assuming
no premium tax or contingent deferred sales charge, the first monthly payment
would be 44.800 multiplied by $6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per
annum for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit
Values because the former reflect the 3.5% assumed interest rate used in the
annuity rate calculations. When the Annuity Unit value of $1.100000 is
divided into the first monthly payment, the number of Annuity Units
represented by that payment is determined to be 267.5818. The value of this
same number of Annuity Units will be paid in each subsequent month under most
options. Assume further that the net investment factor for the Valuation
Period applicable to the next annuity benefit payment is 1.000190.
Multiplying this factor by .999906 (the one-day adjustment factor for the
assumed interest rate of 3.5% per annum) produces a factor of 1.000096. This
then is multiplied by the Annuity Unit value on the immediately preceding
Valuation Date (assumed here to be $1.105000). The result is an Annuity Unit
value of $1.105106 for the current monthly payment. The current monthly
payment then is determined by multiplying the number of Annuity Units by the
current Annuity Unit value, or 267.5818 times $1.105106, which produces a
current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN
OPTIONS AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers
both commutable and non-commutable period certain options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The Commuted Value is the
present value of remaining payments calculated at 3.5% interest. The
determination of the Commuted Value may be illustrated by the following
hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the
Surrender Value less any premium tax rather than the Accumulated Value.
Assume this results in 250.0000 Annuity Units. Assume the Commuted Value is
requested with 60 monthly payments remaining and a current Annuity Unit Value
of $1.200000. Based on these assumptions, the dollar amount of remaining
payments would be $300 a month for 60 months. The present value at 3.5% of
all remaining payments would be $16,560.72.
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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. A3026-96 or a state variation thereof ("new Contract"). The Company
reserves the right to suspend this exchange offer at any time.
This offer applies to the exchange of Elective Payment Variable Annuity
contracts issued 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.
CONTINGENT DEFERRED SALES CHARGE COMPUTATION. No surrender charge otherwise
applicable to the Exchanged Contract will be assessed as a result of the
exchange. Instead, the contingent deferred sales charge under the new
Contract will be computed as if the payments that had been made to the
Exchanged Contract were made to the new Contract, as of the date of issue of
the Exchanged Contract. Any additional payments to the new Contract after
the exchange will be subject to the contingent deferred sales charge
computation outlined in the new Contract and the Prospectus; i.e., the charge
will be computed based on the number of years that the additional payment (or
portion of that payment) that is being withdrawn has been credited to the new
Contract.
SUMMARY OF DIFFERENCES BETWEEN THE EXCHANGED CONTRACT AND THE NEW CONTRACT.
The new Contract and the Exchanged Contract differ substantially as
summarized below. There may be additional differences important to a person
considering an exchange, and the Prospectuses for the new Contract and the
Exchanged Contract should be reviewed carefully before the exchange request
is submitted to the Company.
CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales charge under
the new Contract, as described in the Prospectus, imposes higher charge
percentages against the excess amount redeemed than the Single Payment
Exchanged Contract. In addition, if an Elective Payment Exchanged Contract
was issued more than nine years before the date of an exchange under this
offer, additional payments to the Exchanged Contract would not be subject to
a surrender charge. New payments to the new Contract may be subject to a
charge if withdrawn prior to the surrender charge period described in the
Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$100,000. 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 0.20% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25
for each transfer after the twelfth in any Contract year.
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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.
B. FIXED ANNUITY EXCHANGE OFFER
- --------------------------------
This exchange offer also applies to all fixed annuity contracts issued by the
Company. A fixed annuity contract to which this exchange offer applies may
be exchanged at net asset value for the Contract described in this
Prospectus, subject to the same provisions for effecting the exchange and for
applying the new Contract's contingent deferred sales charge as described
above for variable annuity contracts. This Prospectus should be read
carefully before making such exchange. Unlike a fixed annuity, the new
Contract's value is not guaranteed, and will vary depending on the investment
performance of the Underlying Funds to which it is allocated. The new
Contract has a different charge structure than a fixed annuity contract,
which includes not only a contingent deferred sales charge that may vary from
that of the class of contracts to which the exchanged fixed contract belongs,
but also Contract fees, mortality and expense risk charges (for the Company's
assumption of certain mortality and expense risks), administrative expense
charges, transfer charges (for transfers permitted among Sub-Accounts and the
Fixed Account), and expenses incurred by the Underlying Funds. Additionally,
the interest rates offered under the Fixed Account of the new Contract and
the Annuity Tables for determining minimum annuity benefit payments may be
different from those offered under the exchanged fixed contract.
C. EXERCISE OF "FREE-LOOK PROVISION" AFTER ANY EXCHANGE
- --------------------------------------------------------
Persons who, under the terms of this exchange offer, exchange their contract
for the new Contract and subsequently revoke the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right
to Revoke Individual Retirement Annuity" and "Right to Revoke All Other
Contracts," will have their exchanged contract automatically reinstated as of
the date of revocation. The refunded amount will be applied as the new
current Accumulated Value under the reinstated contract, which may be more or
less than it would have been had no exchange and reinstatement occurred. The
refunded amount will be allocated initially among the Fixed Account and
Sub-Accounts of the reinstated contract in the same proportion that the value
in the Fixed Account and the value in each Sub-Account bore to the
transferred Accumulated Value on the date of the exchange of the contract for
the new Contract. For purposes of calculating any contingent deferred sales
charge under the reinstated contract, the reinstated contract will be deemed
to have been issued and to have received past purchase payments as if there
had been no exchange.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on
various topics of interest to Owners and prospective Owners. These topics
may include the relationship between sectors of the economy and the economy
as a whole and its effect on various securities markets, investment
strategies
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and techniques (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred
and taxable investments, customer profiles and hypothetical purchase and
investment scenarios, financial management and tax and retirement planning,
and investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Contract and the
characteristics of and market for such financial instruments. Total return
data and supplemental total return information may be advertised based on the
period of time that an underlying Sub-Account has been in existence and the
period of time that an Underlying Fund has been in existence, even if longer
than the period of time that the Contract has been offered. The results for
any period prior to a Contract being offered will be calculated as if the
Contract had been offered during that period of time, with all charges
assumed to be those applicable to the Contract. Contracts funded by Fulcrum
Separate Account have been offered to the public since 1997.
TOTAL RETURN
- ------------
"Total Return" refers to the total of the income generated by an investment
in a Sub-Account and of the changes of value of the principal invested (due
to realized and unrealized capital gains or losses) for a specified period,
reduced by the Sub-Account's asset charge and any applicable contingent
deferred sales charge which would be assessed upon complete withdrawal of the
investment.
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
Quotations of average annual total return for the periods that the
Sub-Accounts and for periods that the Underlying Funds have been in existence
are calculated in the manner prescribed by the SEC and show the percentage
rate of return of a hypothetical initial investment of $1,000 for the most
recent one, five and ten year period or for a period covering the time the
Sub-Account has been in existence, if less than the prescribed periods. The
calculation is adjusted to reflect the deduction of the annual Sub-Account
asset charge of 1.45%, the $30 annual Contract fee and the contingent
deferred sales charge which would be assessed if the investment were
completely withdrawn at the end of the specified period, according to the
following schedule. See Tables 1A and 2A.
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<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE
PURCHASE PAYMENT TO DATE OF OF NEW PURCHASE PAYMENTS
WITHDRAWAL WITHDRAWN*
---------- ----------
<S> <C>
0-1 7%
2 6%
3 5%
4 4%
5 3%
6 2%
7 1%
Thereafter 0%
</TABLE>
* Subject to the maximum limit described in the Prospectus.
No contingent deferred sales charge is deducted upon expiration of the
periods specified above. In all calendar years, an amount equal to the
greater of: (a) 15% of the Accumulated Value, (b) cumulative earnings
(Accumulated Value less total gross payments not previously withdrawn), or
(c) the life expectancy distribution, is not subject to the contingent
deferred sales charge.
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
Quotations of supplemental average total return for the periods that the
Sub-Accounts and for periods that the Underlying Funds have been in existence
are calculated in exactly the same manner as total return information and for
the same periods of time except that they do not reflect the contingent
deferred sales charge and assume that the Contract is not surrendered at the
end of the periods shown. See Table 2A.
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TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(Assuming COMPLETE Withdrawal of the Investment)
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION
SUB-ACCOUNT 12/31/97 OF SUB-ACCOUNT*
- ----------- -------- ---------------
<S> <C> <C>
Global Interactive/Telecomm Portfolio. . . . . . . N/A 22.49%
International Growth Portfolio . . . . . . . . . . N/A -14.72%
Growth Portfolio . . . . . . . . . . . . . . . . . N/A -0.83%
Value Portfolio. . . . . . . . . . . . . . . . . . N/A 17.29%
Strategic Income Portfolio . . . . . . . . . . . . N/A -3.33%
Money Market Fund. . . . . . . . . . . . . . . . . N/A -3.00%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1997
SINCE INCEPTION OF SUB-ACCOUNT
(Assuming NO Withdrawal of the Investment)
<TABLE>
<CAPTION>
FOR YEAR SINCE
ENDED INCEPTION
SUB-ACCOUNT 12/31/97 OF SUB-ACCOUNT*
- ----------- -------- ---------------
<S> <C> <C>
Global Interactive/Telecomm Portfolio. . . . . . . N/A 29.49%
International Growth Portfolio . . . . . . . . . . N/A -9.32%
Growth Portfolio . . . . . . . . . . . . . . . . . N/A 5.44%
Value Portfolio. . . . . . . . . . . . . . . . . . N/A 24.29%
Strategic Income Portfolio . . . . . . . . . . . . N/A 2.79%
Money Market Fund. . . . . . . . . . . . . . . . . N/A 3.14%
</TABLE>
* The inception date for the Sub-Accounts is March 13, 1997.
As of the date of this Statement of Additional Information, no performance
information is available for the following Sub-Accounts due to the fact that
sales to the public had not yet begun: Oppenheimer Aggressive Growth Fund,
MFS Emerging Growth Series, Small Cap Value Series, Lazard Retirement
International Equity Portfolio, AIM V.I. Value Fund, MFS Growth With Income
Series, Oppenheimer Growth & Income Fund and Delaware Series.
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TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(Assuming COMPLETE Withdrawal of Investment)
<TABLE>
<CAPTION>
10 YEARS OR
SINCE
FOR YEAR INCEPTION OF
ENDED UNDERLYING
SUB-ACCOUNT 12/31/97 5 YEARS FUND **
- ----------- -------- ------- -------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 31.16% N/A 15.05%
Oppenheimer Aggressive Growth Fund 3.49% 13.87% 14.53%
MFS Emerging Growth Series 13.11% N/A 19.82%
Small Cap Value Series 23.99% N/A 17.14%
Lazard Retirement International Equity N/A N/A N/A
Portfolio
International Growth Portfolio -12.22% N/A -4.61%
Growth Portfolio 2.13% N/A 5.18%
Value Portfolio 23.40% N/A 20.07%
AIM V.I. Value Fund 14.88% N/A 17.65%
MFS Growth With Income Series 20.91% N/A 24.65%
Oppenheimer Growth & Income Fund 23.54% N/A 33.91%
Delaware Series 17.57% 12.86% 12.24%
Strategic Income Portfolio -6.80% N/A -3.64%
Money Market Fund -2.29% 2.62% 4.22%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT FOR PERIODS
ENDING DECEMBER 31, 1997
SINCE INCEPTION OF UNDERLYING FUND
(Assuming NO Withdrawal of Investment)
<TABLE>
<CAPTION>
10 YEARS OR
SINCE
FOR YEAR INCEPTION OF
ENDED UNDERLYING
SUB-ACCOUNT 12/31/97 5 YEARS FUND **
- ----------- -------- ------- -------
<S> <C> <C> <C>
Global Interactive/Telecomm Portfolio 38.16% N/A 17.78%
Oppenheimer Aggressive Growth Fund 10.04% 14.22% 14.53%
MFS Emerging Growth Series 20.11% N/A 21.38%
Small Cap Value Series 30.99% N/A 17.60%
Lazard Retirement International N/A N/A N/A
Equity Portfolio
International Growth Portfolio -6.67% N/A -1.74%
Growth Portfolio 8.60% N/A 8.09%
Value Portfolio 30.40% N/A 22.70%
AIM V.I. Value Fund 21.88% N/A 18.00%
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C>
MFS Growth With Income Series 27.91% N/A 26.35%
Oppenheimer Growth & Income Fund 30.54% N/A 35.20%
Delaware Series 24.57% 13.23% 12.24%
Strategic Income Portfolio -0.90% N/A -0.97%
Money Market Fund 3.90% 3.15% 4.22%
</TABLE>
** The inception dates for the Underlying Funds are: 2/1/96 for the Value,
Growth, Strategic Income and Global Interactive/Telecomm Portfolios; 3/26/96
for the International Growth Portfolio; 4/29/85 for the Money Market Fund;
5/5/93 for the AIM V.I. Value Fund; 7/28/88 for the Delaware Series; 12/27/93
for the Small Cap Value Series; 9/1/98 for the Lazard Retirement
International Equity Portfolio; 8/15/86 for the Oppenheimer Aggressive Growth
Fund; 7/5/95 for the Oppenheimer Growth & Income Fund; 7/24/95 for the MFS
Emerging Growth Series; and 10/9/95 for the MFS Growth With Income Series.
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
- --------------------------------------------------------
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1997:
Yield 4.30%
Effective Yield 4.39%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period,
subtracting a charge reflecting the annual 1.45% deduction for mortality and
expense risk and the administrative charge, dividing the difference by the
value of the account at the beginning of the same period to obtain the base
period return, and then multiplying the return for a seven-day base period by
(365/7), with the resulting yield carried to the nearest hundredth of one
percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [(base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
TAX DEFERRED ACCUMULATION
NON-QUALIFIED CONVENTIONAL
ANNUITY CONTRACT SAVINGS PLAN
AFTER-TAX CONTRIBUTIONS
AND TAX-DEFERRED EARNINGS
<TABLE>
<CAPTION>
TAXABLE LUMP AFTER-TAX CONTRIBUTIONS
NO WITHDRAWALS SUM WITHDRAWAL AND TAXABLE EARNINGS
<S> <C> <C> <C>
10 Years $107,946 $ 86,448 $ 81,693
20 Years 233,048 165,137 133,476
30 Years 503,133 335,021 218,082
</TABLE>
12
<PAGE>
This chart compares the accumulation of a $50,000 initial investment into a
non-qualified annuity contract and a conventional savings plan.
Contributions to the non-qualified annuity contract and the conventional
savings plan are made after tax. Only the gain in the non-qualified annuity
contract will be subject to income tax in a taxable lump sum withdrawal. The
chart assumes a 37.1% federal marginal tax rate and an 8% annual return. The
37.1% federal marginal tax is based on a marginal tax rate of 36%,
representative of the target market, adjusted to reflect a decrease of $3 of
itemized deductions for each $100 of income over $117,950. Tax rates are
subject to change as is the tax-deferred treatment of the Contract. Income
on non-qualified annuity contracts is taxed as ordinary income upon
withdrawal. A 10% tax penalty may apply to early withdrawals. See "Federal
Income Taxes" in the Prospectus.
The chart does not reflect the following charges and expenses under the
contract: 1.25% for mortality and expense risk; 0.20% administration charges;
7% maximum deferred sales charge; and $30 annual Contract fee. The
tax-deferred accumulation would be reduced if these charges were reflected.
No implication is intended by the use of these assumptions that the return
shown is guaranteed in any way or that the return shown represents an average
or expected rate of return over the period of the Contract. (IMPORTANT --
THIS IS NOT AN ILLUSTRATION OF YIELD OR RETURN.)
Unlike savings plans, contributions to non-qualified annuity contracts
provide tax-deferred treatment on earnings. In addition, contributions to
tax-deferred retirement annuities are not subject to current tax in the year
of 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 Fulcrum Separate Account.
13
