<PAGE>
File Number 33-39702
811-6293
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 13
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 25
Separate Account VA-K of Allmerica Financial Life Insurance and Annuity Company
(Exact Name of Trust)
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
(508) 855-1000
(Registrant's telephone number including area code)
Abigail M. Armstrong Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester MA 01653
(Name and complete address of agent for service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
---
x on May 1, 1997 pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)(1)
---
on pursuant to paragraph (a)(1)
---
on (date) pursuant to paragraph (a)(2) of Rule 485
---
<PAGE>
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940,
Registrant hereby declares that an indefinite amount of its securities is being
registered under the Securities Act of 1933. The Rule 24f-2 Notice for the
issuer's fiscal year ended December 31, 1996 was filed on February 28, 1997.
<PAGE>
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1. . . . . . . . . . . . . . . Cover Page
2. . . . . . . . . . . . . . . "Special Terms"
3. . . . . . . . . . . . . . . "Summary"; "Annual and Transaction Expenses"
4. . . . . . . . . . . . . . . "Condensed Financial Information"
"Performance Information"
5. . . . . . . . . . . . . . . Prospectus A: Description of the Company, the
Separate Account, the Trust, Variable
Insurance Products Fund, Variable Insurance
Products Fund II, T. Rowe Price International
Series, Inc. and Delaware Group Premium
Fund, Inc.
Prospectus B: Description of the Company, the
Variable Account, the Trust, Variable
Insurance Products Fund, Variable Insurance
Products Fund II, T. Rowe Price International
Series, Inc. and Delaware Group Premium
Fund,Inc.
6. . . . . . . . . . . . . . . "Charges and Deductions"
7. . . . . . . . . . . . . . . Prospectus A: "The Variable Annuity
Policies"
Prospectus B: "Description of the Contract"
8. . . . . . . . . . . . . . . Prospectus A: "The Variable Annuity
Policies"
Prospectus B: "Electing the Form of Annuity
and the Annuity Date"; "Description of
Variable Annuity Option"; "Annuity Benefit
Payments"
9. . . . . . . . . . . . . . . "Death Benefit"
<PAGE>
10 . . . . . . . . . . . . . . Prospectus A: "Purchase Payments";
"Computation of Policy Values" and Annuity
Payments"
Prospectus B: "Payments" "Computation of
Values"; "Distribution"
11 . . . . . . . . . . . . . . Prospectus A: "Surrender"; "Partial
Redemption"
Prospectus B: "Surrender"; "Withdrawals";
"Charge for Surrender and Withdrawal";
"Withdrawal Without Surrender Charge"; "Texas
Optional Retirement Program"
12 . . . . . . . . . . . . . . "Federal Tax Considerations"
13 . . . . . . . . . . . . . . "Legal Matters"
14 . . . . . . . . . . . . . . "Statement of Additional Information-Table of
Contents"
FORM N-4
ITEM NO. CAPTION IN THE 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 Payments"
23 . . . . . . . . . . . . . . "Financial Statements"
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
ALLMERICA ADVANTAGE VARIABLE ANNUITY
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT
MAY 1, 1997 POINTS THAT YOU SHOULD KNOW AND CONSIDER BEFORE PURCHASING
THE ALLMERICA ADVANTAGE VARIABLE ANNUITY CONTRACT. THE
CONTRACT IS MORE FULLY DESCRIBED LATER IN THIS PROSPECTUS.
PLEASE READ THE PROSPECTUS CAREFULLY
1. THE ALLMERICA ADVANTAGE VARIABLE ANNUITY CONTRACT
The Allmerica Advantage Variable Annuity contract is a contract between you and
Allmerica Financial Life Insurance and Annuity Company. It is designed to help
you accumulate assets for your retirement or other important financial goals on
a tax-deferred basis. The Allmerica Advantage Variable Annuity combines the
concept of professional money management with the attributes of an annuity
contract.
The Allmerica Advantage Variable Annuity offers a diverse selection of money
managers and investment options. You may allocate your payments among any of 18
investment portfolios, the Guarantee Period Accounts and the Fixed Account. This
range of investment choices enables you to allocate your money to meet your
particular investment needs.
Like all annuities, the contract has an ACCUMULATION PHASE and an INCOME PHASE.
During the ACCUMULATION PHASE you can make payments into the contract on any
frequency. Investment and interest gains accumulate tax deferred. You may
withdraw money from your contract during the ACCUMULATION PHASE. However, as
with other tax-deferred investments, you pay taxes on earnings and any untaxed
payments to the contract when you withdraw them. A federal tax penalty may apply
if you withdraw prior to age 59 1/2.
During the INCOME PHASE you will receive regular payments from your contract,
provided you annuitize. Annuitization involves beginning a series of payments
from the capital that has built up in your contract. The amount of your payments
during the income phase will, in part, be determined by your account's growth
during the accumulation phase.
2. ANNUITY PAYMENTS
If you choose to annuitize your contract, you may select one of six annuity
options: (1) periodic payments for your lifetime; (2) periodic payments 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 a refund of the remaining value will be paid: (4) periodic
payments for your lifetime and your survivor's lifetime; (5) periodic payments
for your lifetime and your survivor's lifetime with the payment to the survivor
being reduced to 2/3; and (6) periodic payments for a specified period of 1 to
30 years.
You also need to decide if you want your annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.
3. PURCHASING THIS CONTRACT
You can buy a contract through your financial representative, who can also help
you complete the proper forms. There is no fixed schedule for making payments
into this contract. Payments are not limited as to frequency, but there are
certain limitations as to amount. Currently, the initial payment must be at
least $1,000. In all cases, each subsequent payment must be at least $50.
P-1
<PAGE>
4. INVESTMENT OPTIONS
You have full investment control over the contract. You may allocate money to
the following funds:
<TABLE>
<S> <C>
Select International Equity Fund Fidelity VIP Growth Portfolio
DGPF International Equity Series Equity Index Fund
Fidelity VIP Overseas Portfolio Select Growth and Income Fund
T. Rowe Price International Stock Fidelity VIP Equity-Income
Portfolio Portfolio
Select Aggressive Growth Fund Fidelity VIP II Asset Manager
Portfolio
Select Capital Appreciation Fund Fidelity VIP High Income Portfolio
Small-Mid Cap Value Fund Investment Grade Income Fund
Select Growth Fund Government Bond Fund
Growth Fund Money Market Fund
</TABLE>
In most jurisdictions you may also allocate money to the Guarantee Period
Accounts and the Fixed Account. The Guarantee Period Accounts let you choose
from among seven different Guarantee Periods during which interest rates are
guaranteed. The Fixed Account guarantees principal and a minimum rate of
interest (never less than 3% compounded annually).
5. EXPENSES
Each year and upon surrender a $30.00 contract fee is deducted from your
contract. The contract fee is waived if the value of the contract is $50,000 or
more or if the contract is issued to and maintained by the Trustees of a 401(k)
plan. We also deduct insurance charges which amount to 1.45% annually of the
daily value of your contract value allocated to the variable investment options.
The insurance charges include: Mortality and Expense Risk Charge, 1.25%; and
Administrative Expense Charge, 0.20%. There are also investment management fees
and other fund operating expenses that vary by fund.
If you decide to surrender your contract, make withdrawals or receive payments
under certain annuity options, we may impose a surrender charge between 1% and
8% 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 $25.00, for transfers after
your 12 free transfers.
The following chart is designed to help you understand the charges in your
contract. The column "Total Annual Charges" shows the total of the $30 contract
fee (which is represented as 0.12%), the 1.45% insurance charges and the
investment charges for each fund. The next two columns show you two examples of
the charges, in dollar amounts, you would pay under a contract. The examples
assume you invest $1,000 in a fund which earns 5% annually and that you withdraw
your money: (1) at the end of year 1, and (2) at the end of year 10. For year 1,
the Total Annual Charges are assessed as well as the surrender charges. For year
10, 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.
P-2
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL EXPENSES AT
END OF
TOTAL ANNUAL TOTAL ------------------------
INSURANCE TOTAL ANNUAL ANNUAL (1) (2)
FUND CHARGES FUND CHARGES CHARGES 1 YEAR 10 YEARS
- -------------------------------------------------------- --------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Select International Equity Fund 1.57% 1.23% 2.80% $ 102 $ 313
DGPF International Equity Series 1.57% 0.80% 2.37% $ 98 $ 271
Fidelity VIP Overseas Portfolio 1.57% 0.93% 2.50% $ 99 $ 284
T. Rowe Price International Stock Portfolio 1.57% 1.05% 2.62% $ 100 $ 295
Select Aggressive Growth Fund 1.57% 1.08% 2.65% $ 101 $ 298
Select Capital Appreciation Fund 1.57% 1.13% 2.70% $ 101 $ 303
Small-Mid Cap Value Fund 1.57% 0.97% 2.54% $ 99 $ 288
Select Growth Fund 1.57% 0.93% 2.50% $ 99 $ 284
Growth Fund 1.57% 0.51% 2.08% $ 95 $ 241
Fidelity VIP Growth Portfolio 1.57% 0.69% 2.26% $ 97 $ 260
Equity Index Fund 1.57% 0.46% 2.03% $ 95 $ 236
Select Growth and Income Fund 1.57% 0.83% 2.40% $ 98 $ 274
Fidelity VIP Equity-Income Portfolio 1.57% 0.68% 2.25% $ 97 $ 258
Fidelity VIP II Asset Manager Portfolio 1.57% 0.74% 2.31% $ 97 $ 265
Fidelity VIP High Income Portfolio 1.57% 0.71% 2.28% $ 97 $ 262
Investment Grade Income Fund 1.57% 0.52% 2.09% $ 95 $ 242
Government Bond Fund 1.57% 0.66% 2.23% $ 97 $ 256
Money Market Fund 1.57% 0.34% 1.91% $ 94 $ 223
</TABLE>
For more information, see the Fee Table in the Prospectus for the Contract.
6. TAXES
You will not pay taxes until you withdraw money from your contract. During the
accumulation phase, earnings are withdrawn first and are taxed as ordinary
income. If you make a withdrawal prior to age 59 1/2, you may be subject to a
10% federal tax penalty on the earnings. Payments during the income phase are
considered partly a return of your investment and partly earnings. You will be
subject to income taxes on the earnings portion of each payment. However, if
your contract is funded with pre-tax or tax deductible dollars (such as a
pension or profit sharing plan contribution), then the entire payment will be
taxable.
7. WITHDRAWALS
You can withdraw money from your contract at any time during the accumulation
phase. Any payment invested for more than nine years can be withdrawn without a
surrender charge. For amounts invested nine years or less, you can withdraw,
without a charge, the GREATEST of: (1) 100% of cumulative earnings; (2) 10% of
the contract value per calendar year; or (3) an amount based on your life
expectancy. Where permitted by state law, the surrender charges are also waived
if after the contract is issued, the owner (1) is diagnosed with a fatal
illness, (2) becomes disabled (before age 65) or (3) is admitted to a medical
care facility.
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 the account. This adjustment will never impact your
original investment, nor will earnings in the GPA amount to less than an
effective annual rate of 3%.
8. PERFORMANCE
The value of your contract will vary up or down depending on the investment
performance of the funds you choose. The following chart illustrates past
returns for each fund for the time period shown. The performance figures reflect
the contract fee, the insurance charges, the investment charges and all other
P-3
<PAGE>
expenses of the fund. They do not reflect the surrender charges and if applied
would reduce such performance. Past performance is not a guarantee of future
results.
<TABLE>
<CAPTION>
CALENDAR YEAR
--------------------------------------------------------
FUND 1996 1995 1994 1993 1992
- ------------------------------------------------------- --------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Select International Equity Fund 20.07% 17.82% N/A N/A N/A
DGPF International Equity Series 18.18% 12.15% 1.08% N/A N/A
Fidelity VIP Overseas Portfolio 11.46% 8.00% 0.16% 35.23% -12.10%
T. Rowe Price International Stock Portfolio 12.90% 9.44% N/A N/A N/A
Select Aggressive Growth Fund 16.72% 30.31% -3.81% 17.73% N/A
Select Capital Appreciation Fund 7.11% N/A N/A N/A N/A
Small-Mid Cap Value Fund 26.57% 15.83% -7.96% N/A N/A
Select Growth Fund 20.14% 22.71% -3.01% -0.43% N/A
Growth Fund 18.34% 30.81% -1.34% 5.07% 5.68%
Fidelity VIP Growth Portfolio 12.93% 33.35% -1.55% 17.58% 7.66%
Equity Index Fund 20.42% 34.15% -0.50% 7.89% 5.58%
Select Growth and Income Fund 19.40% 28.38% -0.82% 8.69% N/A
Fidelity VIP Equity-Income Portfolio 12.51% 33.08% 5.43% 16.42% 15.20%
Fidelity VIP II Asset Manager Portfolio 12.83% 15.19% N/A N/A N/A
Fidelity VIP High Income Portfolio 12.27% 18.79% -3.07% 18.69% 21.19%
Investment Grade Income Fund 1.93% 16.06% -4.45% 9.08% 6.61%
Government Bond Fund 1.89% 11.34% -2.41% 5.89% 3.35%
Money Market Fund 3.71% 4.22% 2.34% 1.42% 2.18%
</TABLE>
9. DEATH BENEFIT
If you die during the accumulation phase, we will pay the beneficiary a death
benefit. The death benefit is equal to the GREATEST of: (1) the accumulated
value increased for any positive market value adjustment; (2) gross payments,
with interest accumulating daily at an annual rate of 5% from the date each
payment was applied to the date of death, reduced proportionately to reflect any
withdrawals; or (3) the death benefit that would have been payable on the most
recent contract anniversary date, increased by for any subsequent payments and
reduced proportionately to reflect withdrawals made after that date.
10. OTHER INFORMATION
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), we will pay you an amount equal
to the value of your contract. This may be more or less than your original
payment. If required by applicable state or federal law, we will return your
payment.
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Money Market Fund, Select Income Fund or Fixed Account
to one or more of the other investment options.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
NO PROBATE: In most cases, the death benefit is payable to the beneficiary you
select without having to go through probate.
11. INQUIRIES
If you need more information you may contact us at:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln St.
Worcester, Massachusetts 01653
1-800-533-7881
P-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
This Prospectus describes interests under flexible payment deferred combination
variable and fixed annuity contracts issued either on a group basis or as
individual contracts by Allmerica Financial Life Insurance and Annuity Company
("Company") to individuals and businesses in connection with retirement plans
which may or may not qualify for special federal income tax treatment. (For
information about the tax status when used with a particular type of plan, see
"FEDERAL TAX CONSIDERATIONS.") Participation in a group contract will be
accounted for by the issuance of a certificate describing the individual's
interest under the group contract. Participation in an individual contract will
be evidenced by the issuance of an individual contract. Certificates and
individual contracts are collectively referred to herein as the "Contract(s)."
The following is a summary of information about these Contracts. More detailed
information can be found under the referenced captions in this Prospectus.
Contract values may accumulate on a variable basis in the Contract's Variable
Account, known as Separate Account VA-K. The assets of the Variable Account are
divided into Sub-Accounts, each investing exclusively in a corresponding
investment portfolio of Allmerica Investment Trust ("Trust"), Variable Insurance
Products Fund ("Fidelity VIP"), Variable Insurance Products Fund II ("Fidelity
VIP II"), T. Rowe Price International Series, Inc.(T.Rowe Price), or Delaware
Group Premium Fund, Inc.("DGPF"). The following Underlying Funds are available
under the Contract:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
SELECT INTERNATIONAL EQUITY FUND OVERSEAS PORTFOLIO
SELECT AGGRESSIVE GROWTH FUND EQUITY-INCOME PORTFOLIO
SELECT CAPITAL APPRECIATION FUND GROWTH PORTFOLIO
SMALL-MID CAP VALUE FUND HIGH INCOME PORTFOLIO
SELECT GROWTH FUND FIDELITY VIP II
GROWTH FUND ASSET MANAGER PORTFOLIO
EQUITY INDEX FUND T. ROWE PRICE
SELECT GROWTH AND INCOME FUND T. ROWE PRICE INTERNATIONAL
INVESTMENT GRADE INCOME FUND STOCK PORTFOLIO
GOVERNMENT BOND FUND DGPF
MONEY MARKET FUND INTERNATIONAL EQUITY SERIES
</TABLE>
In most jurisdictions, values may also be allocated on a fixed basis to the
Fixed Account, which is part of the Company's General Account, and during the
accumulation period to one or more of the Guarantee Period Accounts. Amounts
allocated to the Fixed Account earn interest at a guaranteed rate for one year
from the date allocated. Amounts allocated to a Guarantee Period Account earn a
fixed rate of interest for the duration of the applicable Guarantee Period. The
interest earned in the Guarantee Period Account is guaranteed if held for the
entire Guarantee Period. If removed prior to the end of the Guarantee Period,
the value may be increased or decreased by a Market Value Adjustment. Assets
supporting allocations to the Guarantee Period Accounts in the accumulation
phase are held in the Company's Separate Account GPA.
This Prospectus gives prospective investors information about the contract that
they should consider before investing. Additional information is contained in a
Statement of Additional Information ("SAI") dated May 1, 1997, filed with the
Securities and Exchange Commission and incorporated herein by reference. The
Table of Contents of the SAI is on page 3 of this Prospectus. The SAI is
available upon request and without charge through Allmerica Investments, Inc.,
440 Lincoln Street, Worcester, Massachusetts 01653, 1-800-533-7881.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE
PRODUCTS FUND II, T.ROWE PRICE INTERNATIONAL SERIES, INC., AND DELAWARE GROUP
PREMIUM FUND, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO INVESTS IN HIGHER
YIELDING, HIGHER RISK, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT OBJECTIVES
AND POLICIES"). INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE CONTRACTS ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE CONTRACTS ARE
NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE CONTRACTS ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
CONTRACTS ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS 3
SPECIAL TERMS 4
SUMMARY 6
ANNUAL AND TRANSACTION EXPENSES 10
CONDENSED FINANCIAL INFORMATION 14
PERFORMANCE INFORMATION 16
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE TRUST, FIDELITY VIP, FIDELITY VIP
II, T. ROWE PRICE AND DGPF 19
INVESTMENT OBJECTIVES AND POLICIES 20
INVESTMENT ADVISORY SERVICES 22
DESCRIPTION OF THE CONTRACT 25
A. Payments 25
B. Right to Revoke Individual Retirement Annuity 26
C. Right to Revoke All Other Contracts 27
D. Transfer Privilege 27
Automatic Transfers and Automatic Account Rebalancing Options 27
E. Surrender 28
F. Withdrawals 28
Systematic Withdrawals 29
Life Expectancy Distributions 29
G. Death Benefit 29
Death of the Annuitant Prior to the Annuity Date 29
Death of an Owner Who is Not Also the Annuitant Prior to the Annuity Date 30
Payment of the Death Benefit Prior to the Annuity Date 30
Death of the Annuitant After the Annuity Date 30
H. The Spouse of the Owner as Beneficiary 30
I. Assignment 30
J. Electing the Form of Annuity and the Annuity Date 31
K. Description of Variable Annuity Payout Options 31
L. Annuity Benefit Payments 32
The Annuity Unit 32
Determination of the First and Subsequent Annuity Benefit Payments 33
M. NORRIS Decision 33
N. Computation of Values 34
The Accumulation Unit 34
Net Investment Factor 34
CHARGES AND DEDUCTIONS 34
A. Variable Account Deductions 35
Mortality and Expense Risk Charge 35
Administrative Expense Charge 35
Other Charges 35
B. Contract Fee 35
C. Premium Taxes 36
D. Contingent Deferred Sales Charge 36
Charge for Surrender and Withdrawal 36
Reduction or Elimination of Surrender Charge 37
Withdrawal Without Surrender Charge 38
Surrenders 38
Charge at the Time Annuity Benefit Payments Begin 39
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
E. Transfer Charge 39
GUARANTEE PERIOD ACCOUNTS 39
FEDERAL TAX CONSIDERATIONS 41
A. Qualified and Non-Qualified Contracts 42
B. Taxation of the Contracts in General 42
Withdrawals Prior to Annuitization 42
Annuity Payouts After Annuitization 42
Penalty on Distribution 42
Assignments or Transfers 43
Non-Natural Owners 43
Deferred Compensation Plans of State and Local Government and Tax-Exempt
Organizations 43
C. Tax Withholding 43
D. Provisions Applicable to Qualified Employer Plans 44
Corporate and Self-Employed Pension and Profit Sharing Plans 44
Individual Retirement Annuities 44
Tax-Sheltered Annuities 44
Texas Optional Retirement Program 44
REPORTS 45
LOANS (QUALIFIED CONTRACTS ONLY) 45
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 45
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 46
VOTING RIGHTS 46
DISTRIBUTION 47
SERVICES 47
LEGAL MATTERS 47
FURTHER INFORMATION 47
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT A-1
APPENDIX B -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT B-1
APPENDIX C -- THE DEATH BENEFIT C-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE VARIABLE ACCOUNT AND THE COMPANY 3
SERVICES 3
UNDERWRITERS 4
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 5
PERFORMANCE INFORMATION 7
TAX-DEFERRED ACCUMULATION 9
FINANCIAL STATEMENTS F-1
</TABLE>
THE CONTRACTS OFFERED BY THIS PROSPECTUS MAY NOT BE AVAILABLE IN ALL STATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
3
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Sub-Accounts and of the value of all accumulations in the Fixed Account and
Guarantee Period Accounts then credited to the Contract on any date before the
Annuity Date.
ACCUMULATION UNIT: a measure of the Owner's interest in a Sub-Account before
annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin as specified
pursuant to the Contract.
ANNUITY UNIT: a measure of the value of the periodic annuity benefit payments
under the Contract.
FIXED ACCOUNT: the part of the Company's General Account that guarantees
principal and a fixed minimum interest rate and to which all or a portion of a
payment or transfer under this Contract may be allocated.
FIXED ANNUITY PAYOUT: an Annuity in the payout phase providing for annuity
benefit payments which remain fixed in amount throughout the annuity benefit
payment period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period and is supported by assets in a
non-unitized separate account.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER: the person, persons or entity entitled to exercise the rights and
privileges under this Contract. Joint Owners are permitted if one of the two is
the Annuitant.
SUB-ACCOUNT: a subdivision of the Variable Account. Each Sub-Account available
under the Contract invests exclusively in the shares of a corresponding fund of
Allmerica Investment Trust ("Trust"); a corresponding portfolio of the Variable
Insurance Product Fund ("Fidelity VIP"), the Variable Insurance Products Fund II
("Fidelity VIP II) or the T. Rowe Price International Stock Portfolio of T. Rowe
Price International Series, Inc. ("T.Rowe Price"); or a corresponding series of
the Delaware Group Premium Fund, Inc. ("DGPF").
SURRENDER VALUE: the Accumulated Value of the Contract on full surrender after
application of any Contract fee, contingent deferred sales charge, and Market
Value Adjustment.
UNDERLYING FUNDS (OR FUNDS): the Growth Fund, Investment Grade Income Fund,
Money Market Fund, Equity Index Fund, Government Bond Fund, Select International
Equity Fund, Select Aggressive Growth Fund, Select Capital Appreciation Fund,
Select Growth Fund, Select Growth and Income Fund and Small-Mid Cap Value Fund
of Allmerica Investment Trust; Fidelity VIP High Income Portfolio, Fidelity VIP
Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas
Portfolio of Variable Insurance Products Fund; the Fidelity VIP II Asset Manager
Portfolio of Variable Insurance Products Fund II; the T.Rowe Price International
Stock Portfolio of T. Rowe Price International Series, Inc.; and the
International Equity Series of Delaware Group Premium Fund, Inc.
4
<PAGE>
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 VA-K, one of the Company's separate accounts,
consisting of assets segregated from other assets of the Company. The investment
performance of the assets of the Variable Account is determined separately from
the other assets of the Company, and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
VARIABLE ANNUITY PAYOUT: an Annuity in the payout phase providing for payments
varying in amount in accordance with the investment experience of certain of the
Funds.
5
<PAGE>
SUMMARY
WHAT IS THE ALLMERICA ADVANTAGE VARIABLE ANNUITY?
The Allmerica Advantage variable annuity Contract is an insurance contract
designed to help you accumulate assets for your retirement or other important
financial goals on a tax-deferred basis. The Contract combines the concept of
professional money management with the attributes of an annuity contract.
Features available through the Contract include:
- - A customized investment portfolio
- - Experienced professional investment advisers
- - Tax deferral on earnings
- - Guarantees that can protect your beneficiaries during the accumulation phase
- - Income that can be guaranteed for life
- - Issue age up to 90
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase, your initial
payment and any additional payments you choose to make may be allocated among
the Sub-Accounts investing in the Underlying Funds, the Guarantee Period
Accounts and 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. The Contract's
Accumulated Value is based on the investment performance of the Funds and any
accumulations in the Guarantee Period and Fixed Accounts. No income taxes are
paid on any earnings under the Contract unless and until Accumulated Values are
withdrawn. In addition, during the accumulation phase, your beneficiaries
receive certain protections and guarantees in the event of the Annuitant's
death. See discussion below "WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION
PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
Funds, fixed annuity benefit payments with payment amounts guaranteed by the
Company, or a combination of fixed and variable annuity benefit payments. Among
the payout options available during the annuity payout phase are:
- - periodic payments for your lifetime (assuming you are the Annuitant);
- - periodic payments for your life and the life of another person selected by
you;
- - periodic payments for your lifetime with guaranteed payments continuing to
your beneficiary for ten years in the event that you die before the end of ten
years;
- - periodic payments over a specified number of years (1 to 30); under this
option you may reserve the right to convert remaining payments to a lump-sum
payout by electing a "commutable" option.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the Owner) and us, Allmerica Financial Life
Insurance and Annuity Company ("the Company"). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two also must be the
Annuitant), an Annuitant and a beneficiary. As Owner, you make payments, choose
investment allocations and select the Annuitant and beneficiary. The Annuitant
is the individual to receive annuity benefit payments under the Contract. The
beneficiary is the person who receives any payment on the death of the Owner or
Annuitant.
6
<PAGE>
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject only to a $600
minimum ($1,000 in Washington) for your initial payment and a $50 minimum for
any additional payments. (A lower initial payment amount is permitted for
certain qualified plans and where monthly payments are being forwarded directly
from a financial institution.) In addition, a minimum of $1,000 is always
required to establish a Guarantee Period Account.
WHAT ARE MY INVESTMENT CHOICES?
The Contract permits net payments to be allocated among the Sub-Accounts
investing in the Funds, the Guarantee Period Accounts, and the Fixed Account.
VARIABLE ACCOUNT. You have a choice of Sub-Accounts investing in the following
18 Underlying Funds:
<TABLE>
<S> <C>
ALLMERICA INVESTMENT TRUST FIDELITY VIP
Select International Equity Fund Overseas Portfolio
Select Aggressive Growth Fund Equity-Income Portfolio
Select Capital Appreciation Fund Growth Portfolio
Small-Mid Cap Value Fund High Income Portfolio
Select Growth Fund FIDELITY VIP II
Growth Fund Asset Manager Portfolio
Equity Index Fund T. ROWE PRICE
Select Growth and Income Fund T. Rowe Price International
Investment Grade Income Fund Stock Portfolio
Government Bond Fund DGPF
Money Market Fund International Equity Series
</TABLE>
For a more detailed description of the Underlying Funds, see "INVESTMENT
OBJECTIVES AND POLICIES."
GUARANTEE PERIOD ACCOUNTS. Assets supporting the guarantees under the Guarantee
Period Accounts are held in the Company's Separate Account GPA, a non-unitized
insulated separate account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company may offer up to nine Guarantee Periods ranging from two to ten years
in duration. Once declared, the Guaranteed Interest Rate will not change during
the duration of the Guarantee Period. If amounts allocated to a Guarantee Period
Account are transferred, surrendered or applied to any annuity option at any
time other than the day following the last day of the applicable Guarantee
Period, a Market Value Adjustment will apply that may increase or decrease the
Account's value. For more information about the Guarantee Period Accounts and
the Market Value Adjustment, see "GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account will be
guaranteed for one year from that date. For more information about the Fixed
Account see "Appendix A. MORE INFORMATION ABOUT THE FIXED ACCOUNT."
THE FIXED ACCOUNT AND/OR THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN
ALL STATES.
7
<PAGE>
CAN I MAKE TRANSFERS AMONG THE ACCOUNTS?
Yes. Prior to the Annuity Date, you may transfer among the Sub-Accounts
investing in the Underlying Funds, the Guarantee Period Accounts, and the Fixed
Account. You will incur no current taxes on transfers while your money remains
in the Contract. See "C. Transfer Privilege." The first 12 transfers in a
Contract year are guaranteed to be free of a transfer charge. For each
subsequent transfer in a Contract year, the Company does not currently charge
but reserves the right to assess a processing charge guaranteed never to exceed
$25.
WHAT IF I NEED MY MONEY BEFORE MY ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before your annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 10% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. A 10% tax penalty may apply on all amounts deemed to be earnings if
you are under age 59 1/2 . Additional amounts may be withdrawn at anytime but
may be subject to the surrender charge for payments that have not been invested
in the Contract for more than nine years. (A Market Value Adjustment may apply
to any withdrawal made from a Guarantee Period Account prior to the expiration
of the Guarantee Period.)
In addition, except where prohibited by state law, you may withdraw all or a
portion of your money without a surrender charge if, after the Contract is
issued, you are admitted to a medical care facility, become disabled or are
diagnosed with a fatal illness. For details and restrictions, see "Reduction or
Elimination of Surrender Charge."
WHAT HAPPENS UPON DEATH DURING THE ACCUMULATION PHASE?
If the Annuitant, Owner or Joint Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon the death of the Annuitant
(or an Owner who is also an Annuitant), the death benefit is equal to the
GREATEST of:
- - The Accumulated Value increased by any positive Market Value Adjustment;
- - Gross payments with interest accumulating daily at an annual rate of 5%
starting on the date each payment was applied, reduced proportionately to
reflect withdrawals;
- - The highest Accumulated Value that would have been payable as a death benefit
on any Contract anniversary, increased for subsequent payments and reduced
proportionately to reflect withdrawals since that anniversary.
At the death of an Owner who is not also the Annuitant during the accumulation
phase, 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?
If the Accumulated Value is less than $50,000 on a Contract anniversary and at
surrender, the Company will deduct a $30 Contract fee from the Contract. The
Contract fee is waived for a Contract issued to and maintained by a trustee of a
401(k) plan.
Should you decide to surrender the Contract, make withdrawals, or receive
payments under certain annuity options, you may be subject to a contingent
deferred sales charge. If applicable, this charge will be between 1% and 8% of
payments withdrawn, based on when the payments were made.
8
<PAGE>
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."
The Company will deduct, on a daily basis, an annual mortality and expense risk
charge and administrative expense charge equal to 1.25% and 0.20%, respectively,
of the average daily net assets invested in each Portfolio. The Funds will incur
certain management fees and expenses described more fully in "Other Charges" and
in the Fund prospectuses accompanying this Prospectus.
For more information, see "CHARGES AND DEDUCTIONS."
CAN I EXAMINE THE CONTRACT?
Yes. The 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 the 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 the Contract was issued as an Individual Retirement
Annuity ("IRA"), you will receive the greater of the amount described above or
your entire payment. See "B. Right to Revoke Individual Retirement Annuity" and
"C. Right to Revoke All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
There are several changes you can make after receiving the Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
- - You may change your allocation of payments.
- - You may make transfers of Contract value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by law).
9
<PAGE>
ANNUAL AND TRANSACTION EXPENSES
The following tables show charges under the Contract, expenses of the
Sub-Accounts, and expenses of the Funds. In addition to the charges and expenses
described below, premium taxes are applicable in some states and deducted as
described under "C. Premium Taxes."
CONTRACT CHARGES:
<TABLE>
<CAPTION>
YEARS FROM
DATE OF PAYMENT CHARGE
--------------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE:
This charge may be assessed upon surrender, withdrawal or 0-2 8.0%
annuitization under any commutable period certain option or a 3 7.0%
noncommutable period certain option of less than ten years. 4 6.0%
The charge is a percentage of payments applied to the amount 5 5.0%
surrendered (in excess of any amount that is free of surrender 6 4.0%
charge) within the indicated time period. 7 3.0%
8 2.0%
9 1.0%
More than 9 0%
TRANSFER CHARGE:
The Company currently makes no charge for processing transfers None
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.
CONTRACT FEE:
The fee is deducted annually and upon surrender prior to the $30
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.
SUB-ACCOUNT EXPENSES:
(on annual basis as percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
---------
Total Asset Charge: 1.45%
</TABLE>
10
<PAGE>
UNDERLYING FUND EXPENSES:
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1996. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
OTHER FUND
MANAGEMENT EXPENSES (AFTER ANY TOTAL FUND
UNDERLYING FUND FEE APPLICABLE REIMBURSEMENTS EXPENSES
- --------------------------------------------------------- --------------- ---------------------------- ----------------
<S> <C> <C> <C>
Select International Equity Fund......................... 1.00% 0.23%* 1.23%***
DGPF International Equity Series......................... 0.64% 0.16%** 0.80%
Fidelity VIP Overseas Portfolio.......................... 0.76% 0.17% 0.93%****
T. Rowe Price International Stock Portfolio.............. 1.05% 0.00% 1.05%
Select Aggressive Growth Fund............................ 1.00% 0.08%* 1.08%
Select Capital Appreciation Fund......................... 1.00% 0.13%* 1.13%
Small-Mid Cap Value Fund................................. 0.85% 0.12%* 0.97%
Select Growth Fund....................................... 0.85% 0.08%* 0.93%***
Growth Fund.............................................. 0.44% 0.07%* 0.51%
Fidelity VIP Growth Portfolio............................ 0.61% 0.08% 0.69%****
Equity Index Fund........................................ 0.32% 0.14%* 0.46%
Select Growth and Income Fund............................ 0.75% 0.08%* 0.83%***
Fidelity VIP Equity-Income Portfolio..................... 0.51% 0.07% 0.68%****
Fidelity VIP II Asset Manager Portfolio.................. 0.64% 0.10% 0.74%****
Fidelity VIP High Income Portfolio....................... 0.59% 0.12% 0.71%
Investment Grade Income Fund............................. 0.40% 0.12%* 0.52%
Government Bond Fund..................................... 0.50% 0.16%* 0.66%
Money Market Fund........................................ 0.28% 0.06%* 0.34%
</TABLE>
* Under the Management Agreement with the Trust, Allmerica Investment
Management Company, Inc. ("Allmerica Investment") has declared a voluntary
expense limitation of 1.50% of average net assets for the Select
International Equity Fund, 1.35% for the Select Aggressive Growth Fund and
Select Capital Appreciation Fund, 1.25% for the Small-Mid Cap Value Fund,
1.20% for the Growth Fund and Select Growth Fund, 1.10% for the Select
Growth and Income Fund, 1.00% for the Investment Grade Income Fund, and
Government Bond Fund, and 0.60% for the Money Market Fund and Equity Index
Fund. The total operating expenses of the trust were less than their
respective expense limitations throughout 1996. The declaration of a
voluntary expense limitation in any year does not bind Allmerica Investment
to declare future expense limitations with respect to these funds.
** Delaware International Advisers Ltd., the investment adviser for the
International Equity Series, has agreed to waive its management fee and
reimburse the International Equity Series to limit certain expenses to 8/10
of 1% of the corresponding net assets. This waiver has been in effect from
the commencement of the public offering for the Series and has been
extended through June 30, 1997. Without the expense limitation, in 1996 the
total annual expenses of the International Equity Series would have been
0.99%.
*** These funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. Had these amounts been treated as
reductions of expenses the total operating expenses would have been 1.20%
for the Select International Equity Fund, 0.92% for the Select Growth Fund
and 0.80% for the Select Growth and Income Fund.
**** A portion of the brokerage commissions that certain funds pay was used to
reduce the portfolio expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest
earned on uninvested cash balances was used to reduce custodian and
transfer agent expenses. Including these reductions, the total operating
expenses presented in the table would have been 0.92% for Fidelity VIP
Overseas Portfolio, 0.67% for Fidelity VIP Growth Portfolio, 0.56% for
Fidelity VIP Equity-Income Portfolio and 0.73% for Fidelity VIP II Asset
Manager Portfolio.
11
<PAGE>
Examples. The following examples demonstrate the cumulative expenses which would
be paid by the Owner at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets, as required by rules of the Securities and
Exchange Commission (the "SEC"). Because the expenses of the Underlying Funds
differ, separate examples are used to illustrate the expenses incurred by an
Owner on an investment in the various Sub-Accounts.
The information given under the following examples should not be considered a
representation of past or future expenses. Actual expenses may be greater or
lesser than those shown.
(1) If, at the end of the applicable period, you surrender the Contract or
annuitize* under a commutable variable period certain option or a non-commutable
period certain option of less than ten years, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Select International Equity Fund....................................... $ 102 $ 154 $ 198 $ 313
DGPF International Equity Series....................................... $ 98 $ 142 $ 177 $ 271
Fidelity VIP Overseas Portfolio........................................ $ 99 $ 146 $ 183 $ 284
T. Rowe Price International Stock Portfolio............................ $ 100 $ 149 $ 189 $ 295
Select Aggressive Growth Fund.......................................... $ 101 $ 150 $ 191 $ 298
Select Capital Appreciation Fund....................................... $ 101 $ 151 $ 193 $ 303
Small-Mid Cap Value Fund............................................... $ 99 $ 147 $ 185 $ 288
Select Growth Fund..................................................... $ 99 $ 146 $ 183 $ 284
Growth Fund............................................................ $ 95 $ 134 $ 162 $ 241
Fidelity VIP Growth Portfolio.......................................... $ 97 $ 139 $ 171 $ 260
Equity Index Fund...................................................... $ 95 $ 132 $ 159 $ 236
Select Growth and Income Fund.......................................... $ 98 $ 143 $ 178 $ 274
Fidelity Equity-Income Portfolio....................................... $ 97 $ 139 $ 170 $ 258
Fidelity VIP II Asset ManagerPortfolio................................. $ 97 $ 140 $ 174 $ 265
Fidelity VIP High Income Portfolio..................................... $ 97 $ 140 $ 172 $ 262
Investment Grade Income Fund........................................... $ 95 $ 134 $ 162 $ 242
Government Bond Fund................................................... $ 97 $ 138 $ 169 $ 256
Money Market Fund...................................................... $ 94 $ 129 $ 153 $ 223
</TABLE>
12
<PAGE>
(2) If you annuitize* under a life option or any non-commutable period certain
option of ten years or more at the end of the applicable time period or if you
do NOT surrender or annuitize the Contract, you would pay the following expenses
on a $1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Select International Equity Fund....................................... $ 28 $ 87 $ 148 $ 313
DGPF International Equity Series....................................... $ 24 $ 74 $ 127 $ 271
Fidelity VIP Overseas Portfolio........................................ $ 25 $ 78 $ 133 $ 284
T. Rowe Price International Stock Portfolio............................ $ 27 $ 81 $ 139 $ 295
Select Aggressive Growth Fund.......................................... $ 27 $ 82 $ 141 $ 298
Select Capital Appreciation Fund....................................... $ 27 $ 84 $ 143 $ 303
Small-Mid Cap Value Fund............................................... $ 26 $ 79 $ 135 $ 288
Select Growth Fund..................................................... $ 25 $ 78 $ 133 $ 284
Growth Fund............................................................ $ 21 $ 65 $ 112 $ 241
Fidelity VIP Growth Portfolio.......................................... $ 23 $ 71 $ 121 $ 260
Equity Index Fund...................................................... $ 21 $ 64 $ 109 $ 236
Select Growth and Income Fund.......................................... $ 24 $ 75 $ 128 $ 274
Fidelity Equity-Income Portfolio....................................... $ 23 $ 70 $ 120 $ 258
Fidelity VIP II Asset ManagerPortfolio................................. $ 23 $ 72 $ 124 $ 265
Fidelity VIP High Income Portfolio..................................... $ 23 $ 71 $ 122 $ 262
Investment Grade Income Fund........................................... $ 21 $ 65 $ 112 $ 242
Government Bond Fund................................................... $ 23 $ 70 $ 119 $ 256
Money Market Fund...................................................... $ 19 $ 60 $ 103 $ 223
</TABLE>
Pursuant to requirements of the Investment Company Act of 1940 (the "1940 Act"),
the Contract fee has been reflected in the examples by a method intended to show
the "average" impact of the Contract fee on an investment in the Variable
Account. The total Contract fees collected under the Contracts by the Company
are divided by the total average net assets attributable to the Contracts. The
resulting percentage is 0.12%, and the amount of the Contract fee is assumed to
be $1.20 in the examples. The Contract fee is deducted only when the accumulated
value is less than $50,000. Lower costs apply to Contracts issued and maintained
as part of a 401(k) plan.
* The Contract fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any Contract year
under an option including a life contingency or under any noncommutable period
certain option of ten years or more.
13
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
SUB-ACCOUNTS 1996 1995 1994 1993 1992
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECT INTERNATIONAL EQUITY FUND**
Unit Value:
Beginning of Period........................................ 1.127 0.956 1.000 N/A N/A
End of Period.............................................. 1.355 1.127 0.956 N/A N/A
Number of Units Outstanding at End
of Period (in thousands).................................... 77,485 37,680 12,530 N/A N/A
DGPF INTERNATIONAL EQUITY SERIES*
Unit Value:
Beginning of Period........................................ 1.284 1.143 1.129 1.000 N/A
End of Period.............................................. 1.519 1.284 1.143 1.129 N/A
Number of Units Outstanding at End
of Period (in thousands).................................... 44,416 34,692 26,924 6,681 N/A
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period........................................ 1.330 1.230 1.226 0.906 1.030
End of Period.............................................. 1.484 1.330 1.230 1.226 0.906
Number of Units Outstanding at End
of Period (in thousands).................................... 63,050 65,256 59,774 25,395 6,728
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO***
Unit Value:
Beginning of Period........................................ 1.064 1.000 N/A N/A N/A
End of Period.............................................. 1.203 1.064 N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands).................................... 35,915 10,882 N/A N/A N/A
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period........................................ 1.686 1.292 1.342 1.139 1.000
End of Period.............................................. 1.970 1.686 1.292 1.342 1.139
Number of Units Outstanding at End
of Period (in thousands).................................... 89,974 70,349 54,288 26,158 2,019
SELECT CAPITAL APPRECIATION FUND***
Unit Value:
Beginning of Period........................................ 1.383 1.000 N/A N/A N/A
End of Period.............................................. 1.482 1.383 N/A N/A N/A
Number of Units Outstanding at End
of Period (in thousands).................................... 52,927 16,096 N/A N/A N/A
SMALL-MID CAP VALUE FUND*
Unit Value:
Beginning of Period........................................ 1.249 1.075 1.167 1.000 N/A
End of Period.............................................. 1.580 1.249 1.075 1.167 N/A
Number of Units Outstanding at End
of Period (in thousands).................................... 60,145 43,433 33,049 9,902 N/A
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNTS 1996 1995 1994 1993 1992
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
SELECT GROWTH FUND
<S> <C> <C> <C> <C> <C>
Unit Value:
Beginning of Period........................................ 1.259 1.024 1.055 1.058 1.000
End of Period.............................................. 1.514 1.259 1.024 1.055 1.058
Number of Units Outstanding at End
of Period (in thousands).................................... 62,633 47,078 38,415 26,064 3,039
GROWTH FUND
Unit Value:
Beginning of Period........................................ 1.599 1.221 1.236 1.175 1.111
End of Period.............................................. 1.894 1.599 1.221 1.236 1.175
Number of Units Outstanding at End
of Period (in thousands).................................... 135,573 116,008 102,399 72,609 34,373
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period........................................ 1.895 1.419 1.440 1.224 1.135
End of Period.............................................. 2.143 1.895 1.419 1.440 1.224
Number of Units Outstanding at End
of Period (in thousands).................................... 142,450 116,485 90,717 49,136 18,253
EQUITY INDEX FUND
Unit Value:
Beginning of Period........................................ 1.640 1.221 1.266 1.135 1.074
End of Period.............................................. 1.977 1.640 1.221 1.226 1.135
Number of Units Outstanding at End
of Period (in thousands).................................... 57,428 39,534 29,176 22,466 9,535
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period........................................ 1.370 1.066 1.074 0.987 1.000
End of Period.............................................. 1.638 1.370 1.066 1.074 0.987
Number of Units Outstanding at End
of Period (in thousands).................................... 82,434 63,841 51,098 31,846 4,711
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period........................................ 1.185 1.490 1.412 1.211 1.051
End of Period.............................................. 2.236 1.185 1.490 1.412 1.211
Number of Units Outstanding at End
of Period (in thousands).................................... 167,000 139,145 104,356 61,264 17,855
FIDELITY VIP II ASSET MANAGER PORTFOLIO**
Unit Value:
Beginning of Period........................................ 1.127 0.977 1.000 N/A N/A
End of Period.............................................. 1.273 1.127 0.977 N/A N/A
Number of Units Outstanding at End
of Period (in thousands).................................... 42,415 33,444 20,720 N/A N/A
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period........................................ 1.743 1.465 1.510 1.270 1.047
End of Period.............................................. 1.958 1.743 1.465 1.510 1.270
Number of Units Outstanding at End
of Period (in thousands).................................... 53,956 38,042 27,041 13,583 3,625
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNTS 1996 1995 1994 1993 1992
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
INVESTMENT GRADE INCOME FUND
<S> <C> <C> <C> <C> <C>
Unit Value:
Beginning of Period........................................ 1.390 1.073 1.250 1.145 1.073
End of Period.............................................. 1.418 1.390 1.196 1.250 1.145
Number of Units Outstanding at End
of Period (in thousands).................................... 79,054 69,168 57,454 48,488 15,428
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period........................................ 1.285 1.152 1.179 1.112 1.075
End of Period.............................................. 1.311 1.285 1.152 1.179 1.112
Number of Units Outstanding at End
of Period (in thousands).................................... 30,921 31,710 32,519 60,265 29,844
MONEY MARKET FUND
Unit Value:
Beginning of Period........................................ 1.124 1.077 1.051 1.035 1.013
End of Period.............................................. 1.167 1.124 1.077 1.051 1.035
Number of Units Outstanding at End
of Period (in thousands).................................... 92,354 69,311 37,668 30,815 30,778
</TABLE>
* Inception date of Sub-Accounts: 4/30/93
** Inception date of Sub-Accounts: 5/01/94
*** Inception date of Sub-Accounts: 4/28/95
PERFORMANCE INFORMATION
The Contract was first offered to the public in 1996. However, Allmerica
Financial may advertise "Total Return" and "Average Annual Total Return"
performance information based on the periods that the Underlying Funds have been
in existence. The results for any period prior to the Contracts being offered
will be calculated as if the Contracts had been offered during that period of
time, with all charges assumed to be those applicable to the Sub-Accounts, the
Underlying Funds, and (in TABLE 1) assuming that the Contract is 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 Variable Account charges, and expressed as a
percentage of the investment.
The "yield" of the Sub-Account investing in the Money Market Fund of the Trust
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 total return, yield, and effective yield figures are adjusted to reflect the
Sub-Account's asset charges. The total return figures also reflect the $30
annual Contract fee and the contingent deferred sales load which would be
assessed if the investment were completely withdrawn at the end of the specified
period.
The Company also may advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Sub-Account and of the changes of value of the
principal invested (due to realized and unrealized capital gains or losses),
adjusted by the Sub-Account's annual asset charges, and expressed as a
percentage of the investment. Because it is
16
<PAGE>
assumed that the investment is NOT withdrawn at the end of the specified period,
the contingent deferred sales charge is NOT included in the calculation of
supplemental total return. (See TABLE 2)
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons, such as Morningstar, Inc., who rank such
investment products on overall performance or other criteria; or (3) the
Consumer Price Index (a measure for inflation) to assess the real rate of return
from an investment in the Sub-Account. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions for
administrative and management costs and expenses.
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during the 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 Fund 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.
17
<PAGE>
TABLE 1
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR 10 YEARS OR
ENDED SINCE
NAME OF UNDERLYING FUND 12/31/96 5 YEARS INCEPTION*
- ---------------------------------------------------------------------------- ----------- ----------- ---------------
<S> <C> <C> <C>
Select International Equity Fund............................................ 12.07% N/A 9.70%
DGPF International Equity Series............................................ 10.18% N/A 9.82%
Fidelity VIP Overseas Portfolio............................................. 3.46% 6.71% 6.19%
T. Rowe Price International Stock Portfolio................................. 4.90% N/A 5.97%
Select Aggressive Growth Fund............................................... 8.72% N/A 17.25%
Select Capital Appreciation Fund............................................ -0.61% N/A 22.25%
Small-Mid Cap Value Fund.................................................... 18.57% N/A 11.88%
Select Growth Fund.......................................................... 12.14% N/A 10.08%
Growth Fund................................................................. 10.34% 10.47% 13.00%
Fidelity VIP Growth Portfolio............................................... 4.93% 12.81% 13.36%
Equity Index Fund........................................................... 12.42% 12.24% 15.71%
Select Growth and Income Fund............................................... 11.40% N/A 11.22%
Fidelity VIP Equity-Income Portfolio........................................ 4.51% 15.63% 11.97%
Fidelity VIP II Asset Manager Portfolio..................................... 4.83% 8.54% 9.80%
Fidelity VIP High Income Portfolio.......................................... 4.27% 12.60% 9.38%
Investment Grade Income Fund................................................ -5.41% 4.81% 6.62%
Government Bond Fund........................................................ -5.45% 3.05% 4.63%
Money Market Fund........................................................... -3.77% 1.86% 4.21%
</TABLE>
TABLE 2
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR 10 YEARS OR
ENDED SINCE
NAME OF UNDERLYING FUND 12/31/96 5 YEARS INCEPTION*
- ---------------------------------------------------------------------------- ------------ ----------- ---------------
<S> <C> <C> <C>
Select International Equity Fund............................................ 20.07% N/A 11.91%
DGPF International Equity Series............................................ 18.18% N/A 10.70%
Fidelity VIP Overseas Portfolio............................................. 11.46% 7.46% 6.19%
T.Rowe Price International Stock Portfolio.................................. 12.90% N/A 8.22%
Select Aggressive Growth Fund............................................... 16.72% N/A 17.91%
Select Capital Appreciation Fund............................................ 7.11% N/A 26.36%
Small-Mid Cap Value Fund.................................................... 26.57% N/A 13.07%
Select Growth Fund.......................................................... 20.14% N/A 10.89%
Growth Fund................................................................. 18.34% 11.13% 13.00%
Fidelity VIP Growth Portfolio............................................... 12.93% 13.42% 13.36%
Equity Index Fund........................................................... 20.42% 12.86% 15.93%
Select Growth and Income Fund............................................... 19.40% N/A 12.01%
Fidelity VIP Equity-Income Portfolio........................................ 12.51% 16.19% 11.97%
Fidelity VIP II Asset Manager Portfolio..................................... 12.83% 9.52% 9.95%
Fidelity VIP High Income Portfolio.......................................... 12.27% 13.21% 9.38%
Investment Grade Income Fund................................................ 1.93% 5.62% 6.62%
Government Bond Fund........................................................ 1.89% 3.92% 5.24%
Money Market Fund........................................................... 3.71% 2.77% 4.21%
</TABLE>
* The inception dates of the Underlying Funds are: 4/29/85 for Growth Fund,
Investment Grade Income Fund and Money Market Fund; 9/28/90 for Equity Index
Fund; 8/26/91 for Government Bond Fund; 8/21/92 for Select Aggressive Growth
Fund, Select Growth Fund, Select Growth and Income Fund; 4/30/93 for Small-Mid
Cap Value Fund 5/01/94 for Select International Equity Fund; 4/28/95 for
Select Capital Appreciation Fund; 10/09/86 for Fidelity VIP Equity-Income
Portfolio and Fidelity VIP Growth Portfolio; 9/19/85 for Fidelity VIP High
Income Portfolio; 1/28/87 for Fidelity VIP Overseas Portfolio; 9/06/89 for
Fidelity VIP II Asset Manager Portfolio; 10/29/92 for DGPF International
Equity Series; 3/31/94 for the T.Rowe Price International Stock Portfolio.
18
<PAGE>
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE TRUST,
FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF
THE COMPANY. The Company is a life insurance company organized under the laws
of Delaware in July, 1974. Its Principal Office is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, Telephone 508-855-1000. The Company is
subject to the laws of the state of Delaware governing insurance companies and
to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1996, the
Company had over $6.7 billion in assets and over $25.8 billion of life insurance
in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect 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 on October 16, 1995, and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of December 31, 1996, First Allmerica and its subsidiaries
(including the Company) had over $13.3 billion in combined assets and over $45.3
billion in life insurance in force.
THE VARIABLE ACCOUNT. The Variable Account is a separate investment account of
the Company referred to as Separate Account VA-K. The assets used to fund the
variable portions of the Contracts are set aside in the Sub-Accounts of the
Variable Account, and are kept separate and apart from the general assets of the
Company. There are 18 Sub-Accounts available under the Contracts. Each
Sub-Account is administered and accounted for as part of the general business of
the Company, but the income, capital gains, or capital losses of each
Sub-Account are allocated to such Sub-Account, without regard to other income,
capital gains, or capital losses of the Company. Under Delaware law, the assets
of the Variable Account may not be charged with any liabilities arising out of
any other business of the Company.
The Variable Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account meets the definition of a
"separate account" under federal securities law and is registered with the SEC
as a unit investment trust under the 1940 Act. Such registration does not
involve the supervision by the SEC of management or investment practices or
policies of the Variable Account or 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.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust ("Trust") is an
open-end, diversified management investment company registered with the SEC
under the 1940 Act. The Trust was established as a Massachusetts business trust
on October 11, 1984, for the purpose of providing a vehicle for the investment
of assets of various separate accounts established by the Company or other
affiliated insurance companies. Eleven investment portfolios of the Trust are
currently available under the Contract, each issuing a series of shares: the
Growth Fund, Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, Select International Equity Fund, Select Aggressive Growth
Fund, Select Capital Appreciation Fund, Select Growth Fund, Select Growth and
Income Fund and Small-Mid Cap Value Fund. The assets of each Fund are held
separate from the assets of the other Funds. Each Fund operates as a separate
investment vehicle and the income or losses of one Fund have no effect on the
investment performance of another Fund. Shares of the Trust are not offered to
the general public but solely to such variable accounts.
Allmerica Investment Management Company, Inc. ("Allmerica Investment") serves as
investment adviser of the Trust. Allmerica Investment has entered into
sub-advisory agreements with other investment
19
<PAGE>
managers ("Sub-Advisers") who manage the investments of the Funds. See
"Investment Advisory Services to the Trust."
VARIABLE INSURANCE PRODUCTS FUND. Variable Insurance Products Fund ("Fidelity
VIP") managed by Fidelity Management & Research Company ("FMR"), is an open-end,
diversified management investment company organized as a Massachusetts business
trust on November 13, 1981, and registered with the SEC under the 1940 Act. Four
of its investment portfolios are available under the Contract: Fidelity VIP High
Income Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth
Portfolio and Fidelity VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR, is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston, MA. It is composed of a number of different companies, which provide a
variety of financial services and products. FMR is the original Fidelity
company, founded in 1946. It provides a number of mutual funds and other clients
with investment research and portfolio management services. The Portfolios of
Fidelity VIP as part of their operating expenses pay an investment management
fee to FMR. See "Investment Advisory Services to Fidelity VIP and Fidelity VIP
II."
VARIABLE INSURANCE PRODUCTS FUND II. Variable Insurance Products Fund II
("Fidelity VIP II"), managed by FMR (see discussion above) is an open-end,
diversified management investment company organized as a Massachusetts business
trust on March 21, 1988, and registered with the SEC under the 1940 Act. One of
its investment portfolios is available under the Contract: Fidelity VIP II Asset
Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Series,
Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc.
("Price-Fleming") (See "Investment Advisory Services to T. Rowe Price"), is an
open-end, diversified management investment company organized as a Maryland
corporation in 1994 and registered with the SEC under the 1940 Act. One of its
investment portfolios is available under the Contracts: the T. Rowe Price
International Stock Portfolio.
DELAWARE GROUP PREMIUM FUND, INC. Delaware Group Premium Fund, Inc. ("DGPF") is
an open-end, diversified, management investment company registered with the SEC
under the 1940 Act. DGPF was established to provide a vehicle for the investment
of assets of various separate accounts supporting variable insurance contracts.
One investment portfolio ("Series") is available under the Contract, the
International Equity Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). See
"Investment Advisory Services to DGPF."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The Statements of Additional Information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust seeks maximum long-term total return (capital appreciation and income)
primarily by investing in common stocks of established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
seeks long-term growth without undue risk to principal by investing primarily in
equity securities of foreign issuers providing the potential for capital
appreciation and income.
20
<PAGE>
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund of the
Trust seeks long-term growth of capital in a manner consistent with the
preservation of capital. Realization of income is not a significant investment
consideration and any income realized on the Fund's investments will be
incidental to its primary objective. The Fund invests primarily in common stock
of industries and companies which are believed to be experiencing favorable
demand for their products and services, and which operate in a favorable
competitive environment and regulatory climate.
SMALL-MID CAP VALUE FUND -- The Small-Mid Cap Value Fund of the Trust seeks
long-term growth by investing principally in a diversified portfolio of common
stocks of small and mid-size companies whose securities at the time of purchase
are considered by the Sub-Adviser to be undervalued.
SELECT GROWTH FUND -- The Select Growth Fund of the Trust seeks to achieve
long-term growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
GROWTH FUND -- The Growth Fund of the Trust is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Growth Fund is to achieve long-term growth of capital. Realization of
current investment income, if any, is incidental to this objective.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP seeks to
achieve capital appreciation. The Portfolio normally purchases common stocks,
although its investments are not restricted to any one type of security. Capital
appreciation also may be found in other types of securities, including bonds and
preferred stocks.
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund seeks a
combination of long-term growth of capital and current income. The Fund will
invest primarily in dividend-paying common stocks and securities convertible
into common stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP seeks reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, the Portfolio also will consider the
potential for capital appreciation. The Portfolio's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the S & P 500.
The Portfolio may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities. See "Risks of Lower-Rated Debt
Securities" in the Fidelity VIP prospectus.
21
<PAGE>
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
fixed-income instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
seeks to obtain a high level of current income by investing primarily in
high-yielding, lower-rated fixed-income securities (commonly referred to as
"junk bonds"), while also considering growth of capital. These securities often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating. See "Risks of
Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T.ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.
If there is a material change in the investment policy of a Fund, the Owner will
be notified of the change. If the Owner has accumulated Value allocated to that
Fund, he or she may have the Accumulated Value reallocated without charge to
another Fund or to the Fixed Account, where available, on written request
received by the Company within sixty (60) days of the later of (1) the effective
date of such change in the investment policy, or (2) the receipt of the notice
of the Owner's right to transfer.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST. The overall responsibility for the
supervision of the affairs of the Trust vests in the Trustees. The Trustees have
entered into an agreement (" Management Agreement") with Allmerica Investment
Management Company, Inc. ("Manager") to handle the day-to-day affairs of the
Trust. The Manager, subject to review by the Trustees, is responsible for the
general management of the Funds of the Trust. The Manager also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with the Manager.
Other than the expenses specifically assumed by the Manager under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with the
Manager, expenses for proxies, prospectuses, reports to shareholders, and other
expenses.
22
<PAGE>
For providing its services under the Management Agreement, the Manager will
receive a fee, computed daily at an annual rate based on the average daily net
asset value of each Fund of the Trust as follows:
<TABLE>
<CAPTION>
Select International Equity *
Fund 1.00%
<S> <C> <C>
Select Aggressive Growth Fund * 1.00%
Select Capital Appreciation *
Fund 1.00%
First $100
Small-Mid Cap Value Fund million 1.00%
$100 - 250
million 0.85%
$250 - 500
million 0.80%
$500 - 750
million 0.75%
Over $750
million 0.70%
Select Growth Fund * 0.85%
First $50
Growth Fund million 0.60%
$50 - 250
million 0.50%
Over $250
million 0.35%
First $50
Equity Index Fund million 0.35%
$50 - 250
million 0.30%
Over $250
million 0.25%
Select Growth and Income Fund * 0.75%
First $50
Investment Grade Income Fund million 0.50%
$50 - 250
million 0.35%
Over $250
million 0.25%
Government Bond Fund * 0.50%
First $50
Money Market Fund million 0.35%
$50 - 250
million 0.25%
Over $250
million 0.20%
</TABLE>
* For the Government Bond Fund, Select International Equity Fund, Select
Aggressive Growth Fund, Select Capital Appreciation Fund, Select Growth Fund,
and Select Growth and Income Fund, each rate applicable to the Manager does
not vary according to the level of assets in the Fund.
The Manager's fee, computed for each Fund, will be paid from the assets of such
Fund. Pursuant to the Management Agreement with the Trust, the Manager has
entered into agreements ("Sub-Adviser Agreements") with other investment
advisers ("Sub-Advisers") under which each Sub-Adviser manages the investments
of one or more of the Funds of the Trust. Under the Sub-Adviser Agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
applicable Fund, subject to such general or specific instructions as may be
given by the Trustees. The terms of a Sub-Adviser Agreement cannot be materially
changed without the approval of a majority in interest of the shareholders of
the affected Fund. The Manager is solely responsible for the payment of all fees
for investment management services to the Sub-Advisers. Allmerica Asset
Management, Inc., the Sub-Adviser for the Equity Index Fund, the Investment
Grade Income Fund, the Government Bond Fund and the Money Market Fund, is an
indirect wholly owned subsidiary of AFC and an affiliate of the Company.
23
<PAGE>
The Sub-Advisers and the fees they receive from the Manager (computed daily at
an annual rate based on the average daily net asset value of each Fund), are as
follows:
<TABLE>
<CAPTION>
SUB-ADVISER FUND NET ASSET VALUE RATE
- ---------------------------------------- ------------------------------------- ----------------------- ---------
<S> <C> <C> <C>
Bank of Ireland Asset Management Select International Equity Fund First $50 million 0.45%
(U.S.) Limited Next $50 million 0.40%
Over $100 million 0.30%
Nicholas-Applegate Capital Management, Select Aggressive Growth Fund ** 0.60%
L.P.
Janus Capital Corporation Select Capital Appreciation Fund First $100 million 0.60%
Over $100 million 0.55%
CRM Advisors, LLC Small-Mid Cap Value Fund First $100 million 0.60%
$100 - 250 million 0.50%
$250- $500 million 0.40%
$500 - $750 million 0.375%
Over $750 million 0.35%
Putnam Investment Select Growth Fund First $50 million 0.50%
Management, Inc. $50 - 150 million 0.45%
$150 - 250 million 0.35%
$250 - 350 million 0.30%
Over $350 million 0.25%
Miller, Anderson & Sherrerd, LLP Growth Fund * *
Allmerica Asset Management, Inc. Equity Index Fund ** 0.10%
John A. Levin & Co., Inc. Select Growth and Income Fund First $100 million 0.40%
Next $200 million 0.25%
Over $300 million 0.30%
Allmerica Asset Management, Inc. Investment Grade Income Fund ** 0.20%
Allmerica Asset Management, Inc. Government Bond Fund ** 0.20%
Allmerica Asset Management, Inc. Money Market Fund ** 0.10%
</TABLE>
* The Manager will pay a fee to Miller, Anderson & Sherrerd LLP based on the
aggregate assets of the Growth Fund and certain other accounts of First
Allmerica and its affiliates (collectively, the "Affiliated Accounts") which
are managed by Miller, Anderson & Sherrerd LLP, under the following schedule:
<TABLE>
<CAPTION>
AGGREGATE AVERAGE NET
ASSETS RATE
- -------------------------- ---------
<S> <C>
First $50 million 0.500 %
$50 - 100 million 0.375 %
$100 - 500 million 0.250 %
$500 - 850 million 0.200 %
Over $850 million 0.150 %
</TABLE>
** For the Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, and Select Aggressive Growth Fund, each rate applicable
to the Sub-Advisers does not vary according to the level of assets in the
Fund.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds, and
should be read in conjunction with this Prospectus.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II -- For managing
investments and business affairs, each Portfolio pays a monthly fee to FMR. The
prospectuses of Fidelity VIP and VIP II contain
24
<PAGE>
additional information concerning the Portfolios, including information about
additional expenses paid by the Portfolios, and should be read in conjunction
with this Prospectus.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
The fee rates of the Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity
VIP II Asset Manager and Fidelity VIP Overseas Portfolios each are made of two
components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82% of
its average net assets. The Fidelity VIP Equity-Income Portfolio may have a fee
as high as 0.72% of its average net assets. The Fidelity VIP Growth Portfolio
may have a fee as high as 0.82% of its average net assets. The Fidelity VIP II
Asset Manager Portfolio may have a fee as high as 0.77% of its average net
assets. The Fidelity VIP Overseas Portfolio may have a fee as high as 0.97% of
its average net assets. The actual fee rate may be less depending on the total
assets in the funds advised by FMR.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE. The Investment Adviser for the
T. Rowe Price International Stock Portfolio is Rowe Price-Fleming International,
Inc. ("Price-Fleming"). Price-Fleming, founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is
one of America's largest international mutual fund asset managers with
approximately $25 billion under management in its offices in Baltimore, London,
Tokyo and Hong Kong. To cover investment management and operating expenses, the
T. Rowe Price International Stock Portfolio pays Price-Fleming a single,
all-inclusive fee of 1.05% of its average daily net assets.
INVESTMENT ADVISORY SERVICES TO DGPF. Each Series of DGPF pays an investment
adviser an annual fee for managing the Portfolios and making the investment
decisions for the Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). The
annual fee paid by the International Equity Series to Delaware International is
equal to 0.75% of the average daily net assets of the Series.
DESCRIPTION OF THE CONTRACT
A. PAYMENTS.
The Company's underwriting requirements, which include receipt of the initial
payment and allocation instructions by the Company at its Principal Office, must
be met before a Contract can be issued. These requirements also may include the
proper completion of an application; however, where permitted, the Company may
issue a Contract without completion of an application and/or signature for
certain classes of
25
<PAGE>
annuity Contracts. Payments are to be made payable to the Company. A net payment
is equal to the payment received less the amount of any applicable premium tax.
The initial net payment will be credited to the Contract as of the date that all
issue requirements are properly met. If all issue requirements are not complied
with within five business days of the Company's receipt of the initial payment,
the payment will be returned unless the Owner specifically consents to the
holding of the initial payment until completion of any outstanding issue
requirements. Subsequent payments will be credited as of the Valuation Date
received at the Principal Office.
Payments are not limited as to frequency and number, but there are certain
limitations as to amount. Currently, the initial payment must be at least $600
($1,000 in Washington). Under a salary deduction or monthly automatic payment
plan, the minimum initial payment is $50. In all cases, each subsequent payment
must be at least $50. Where the contribution on behalf of an employee under an
employer-sponsored retirement plan is less than $600 but more than $300
annually, the Company may issue a Contract on the employee if the plan's average
annual contribution per eligible plan participant is at least $600. The minimum
allocation to a Guarantee Period Account is $1,000. If less than $1,000 is
allocated to a Guarantee Period Account, the Company reserves the right to apply
that amount to the Money Market Fund.
Generally, unless otherwise requested, all payments will be allocated among the
accounts in the same proportion that the initial net payment is allocated or, if
subsequently changed, according to the most recent allocation instructions. To
the extent permitted by state law, however, if the Contract is issued as an IRA
or is issued in Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina,
Oklahoma, Oregon, South Carolina, Texas, Utah, Washington or West Virginia, any
portion of the initial net payment and additional net payments received during
the Contract's first 15 days measured from the issue date, allocated to any
Sub-Account and/or any Guarantee Period Account, will be held in the Money
Market Fund until the end of the 15-day period. Thereafter, these amounts will
be allocated as requested.
The Owner may change allocation instructions for new payments pursuant to a
written or telephone request. If telephone requests are elected by the Owner, a
properly completed authorization must be on file before telephone requests will
be honored. The policy of the Company and its agents and affiliates is that they
will not be responsible for losses resulting from acting upon telephone requests
reasonably believed to be genuine. The Company will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine; otherwise,
the Company may be liable for any losses due to unauthorized or fraudulent
instructions. The procedures the Company follows for transactions initiated by
telephone include requirements that callers on behalf of an Owner identify
themselves by name and identify the Annuitant by name, date of birth and social
security number. All transfer instructions by telephone are tape recorded.
B. RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY.
An individual purchasing a Contract intended to qualify as an IRA may revoke the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to revoke the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased, to the Principal
Office at 440 Lincoln Street, Worcester, MA 01653, or to an authorized
representative. Mailing or delivery must occur within ten days after receipt of
the Contract for revocation to be effective.
Within seven days, the Company will provide a refund equal to the greater of (1)
gross payments, or (2) the Accumulated Value plus any amounts deducted under the
Contract or by the Underlying Funds for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
26
<PAGE>
C. RIGHT TO REVOKE ALL OTHER CONTRACTS.
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, an Owner may
revoke the Contract at any time within ten days (20 days in Idaho) after receipt
of the Contract, and receive a refund as described under "B. Right to Revoke
Individual Retirement Annuity," above.
In all other states, an Owner may return the Contract at any time within ten
days (or the number of days required by state law if more than ten) after
receipt of the Contract. The Company will pay to the Owner an amount equal to
the sum of (1) the difference between the amount paid, including fees, and any
amount allocated to the Variable Account, and (2) the Accumulated Value of
amounts allocated to the Variable Account as of the date the request is
received. If the Contract was purchased as an IRA, the IRA revocation right
described above may be utilized in lieu of the special surrender right.
D. TRANSFER PRIVILEGE.
Prior to the Annuity Date, the Owner may transfer amounts among available
accounts at any time upon written or telephone request to the Company. As
discussed in "A. Payments," a properly completed authorization form must be on
file before telephone requests will be honored. Transfer values will be based on
the Accumulated Value next computed after receipt of the transfer request.
Transfers to a Guarantee Period Account must be at least $1,000. If the amount
to be transferred to a Guarantee Period Account is less than $1,000, the Company
may transfer that amount to the Money Market Fund.
Currently, the Company makes no charge for transfers. The first 12 transfers in
a Contract year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Contract year, the Company reserves the right to assess
a charge, guaranteed never to exceed $25, to reimburse it for the expense of
processing transfers.
AUTOMATIC TRANSFERS (DOLLAR COST AVERAGING) AND AUTOMATIC ACCOUNT REBALANCING
OPTIONS. The Owner may elect automatic transfers of a predetermined dollar
amount, not less than $100, on a periodic basis (monthly, bi-monthly, quarterly,
semi-annually or annually) from the Money Market Fund, the Government Bond Fund
or the Fixed Account (the"source account") to one or more Underlying Funds.
Automatic transfers may not be made into the Fixed Account, the Guarantee Period
Accounts or, if applicable, the Fund 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
Funds. Automatic transfers will continue until the amount in the source account
on a transfer date is zero or the Owner's request to terminate the option is
received by the Company. If additional amounts are allocated to the source
account after its balance has fallen to zero, this option will not restart
automatically, and the Owner must provide a new request to the Company.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as specified by the Owner, the
Company will review the percentage allocations in the Funds and, if necessary,
transfer amounts to ensure conformity with the designated percentage allocation
mix. If the amount necessary to re-establish the mix on any scheduled date is
less than $100, no transfer will be made. Automatic Account Rebalancing will
continue until the Owner's request to terminate the option is received by the
Company.
The Company reserves the right to limit the number of Funds that may be utilized
for automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. Currently, Dollar Cost Averaging and Automatic Account
Rebalancing may not be in effect simultaneously. Either option may be elected
when the Contract is purchased or at a later date.
27
<PAGE>
E. SURRENDER.
At any time prior to the Annuity Date, the Owner may surrender the Contract and
receive an amount equal to the Surrender Value. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The amount payable to the Owner upon surrender
will be based on the Contract's Accumulated Value as of the Valuation Date on
which the request and the Contract are received at the Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Contract is surrendered if payments have been credited to the Contract during
the last nine full Contract years. See "CHARGES AND DEDUCTIONS." The Contract
fee will be deducted upon surrender of the Contract.
After the Annuity Date, only a Contract under which a commutable period certain
option has been elected may be surrendered. The Surrender Amount is the commuted
value of any unpaid installments, computed on the basis of the assumed interest
rate incorporated in such annuity benefit payments. No contingent deferred sales
charge is imposed after the Annuity Date.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has, by order, permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of a separate account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and withdrawals of
amounts allocated to the Company's Fixed Account and Guarantee Period Accounts
for a period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. WITHDRAWALS.
At any time prior to the Annuity Date, the Owner may withdraw a portion of the
Accumulated Value of his or her Contract, subject to the limits stated below.
The Owner must submit a signed, written request for withdrawal, satisfactory to
the Company, to the Principal Office. The written request must indicate the
dollar amount the Owner wishes to receive and the accounts from which such
amount is to be withdrawn. The amount withdrawn equals the amount requested by
the Owner plus any applicable contingent deferred sales charge, as described
under "CHARGES AND DEDUCTIONS." In addition, amounts withdrawn from a Guarantee
Period Account prior to the end of the applicable Guarantee Period will be
subject to a Market Value Adjustment, as described under "GUARANTEE PERIOD
ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. No withdrawal will be
permitted if the Accumulated Value remaining under the Contract would be reduced
to less than $1,000. Withdrawals will be paid in accordance with the time
limitations described under "E. Surrender."
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "Texas Optional Retirement Program."
28
<PAGE>
For important tax consequences which may result from withdrawals, see "FEDERAL
TAX CONSIDERATIONS."
SYSTEMATIC WITHDRAWALS. The Owner may elect an automatic schedule of
withdrawals (systematic withdrawals) from amounts in the Sub-Accounts and/or the
Fixed Account on a monthly, bi-monthly, quarterly, semi-annual or annual basis.
Systematic withdrawals from Guarantee Period Accounts are not available. The
minimum amount of each automatic withdrawal is $100, and will be subject to any
applicable withdrawal charges. If elected at the time of purchase, the Owner
must designate in writing the specific dollar amount of each withdrawal and the
percentage of this amount which should be taken from each designated Sub-Account
and/or the Fixed Account. Systematic withdrawals then will begin on the 16th day
following the issue date. If elected after the issue date, the Owner may elect,
by written request, a specific dollar amount and the percentage of this amount
to be taken from each designated Sub-Account and/or the Fixed Account, or the
Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first withdrawal will take
place on the date the written request is received at the Principal Office or, if
later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals will be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals 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 a life expectancy distribution ("LED") option by returning
a properly signed LED request form to the Principal Office. The LED option
permits the Owner to make systematic withdrawals from the Contract over his or
her lifetime. The amount withdrawn from the Contract changes each year, because
life expectancy changes each year that a person lives. For example, actuarial
tables indicate that a person age 70 has a life expectancy of 16 years, but a
person who attains age 86 has a life expectancy of another 6.5 years.
If an Owner elects the LED option, in each calendar year a fraction of the
Accumulated Value is withdrawn based on the Owner's then life expectancy. The
numerator of the fraction is 1 (one), and the denominator of the fraction is the
remaining life expectancy of the Owner, as determined annually by the Company.
The resulting fraction, expressed as a percentage, is applied to the Accumulated
Value at the beginning of the year to determine the amount to be distributed
during the year. The Owner may elect monthly, bi-monthly, quarterly,
semi-annual, or annual distributions, and may terminate the LED option at any
time. The Owner also may elect to receive distributions under an LED option
which is determined on the joint life expectancy of the Owner and a beneficiary.
The Company also may offer other systematic withdrawal options.
If an Owner makes withdrawals under the LED option prior to age 59 1/2, the
withdrawals may be treated by the Internal Revenue Service ("IRS") as premature
distributions from the Contract. The payments then would be taxed on an "income
first" basis and be subject to a 10% federal tax penalty. For more information,
see "FEDERAL TAX CONSIDERATIONS," "B. Taxation of the Contracts in General."
G. DEATH BENEFIT.
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the beneficiary a death benefit,
except where the Contract is continued as provided in "H. The Spouse of the
Owner as Beneficiary." The amount of the death benefit and the time requirements
for receipt of payment may vary depending upon whether the Annuitant or an Owner
dies first, and whether death occurs prior to or after the Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the benefit is equal to the
greatest of (1) the Accumulated Value under the Contract increased for any
positive Market Value Adjustment; (2) gross payments compounded daily at 5% per
year
29
<PAGE>
starting on the date each payment is applied, reduced proportionately to reflect
withdrawals (for each withdrawal, the proportionate reduction is calculated as
the death benefit under this option immediately prior to the withdrawal
multiplied by the withdrawal amount and divided by the Accumulated Value
immediately prior to the withdrawal); or (3) the highest Accumulated Value that
would have been payable as a death benefit on any Contract anniversary,
increased for subsequent payments received since that date and reduced
proportionately to reflect withdrawals after that date.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If
an Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by any positive Market Value
Adjustment. The death benefit never will be reduced by a negative Market Value
Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive a life annuity or an annuity for a period certain not extending
beyond the beneficiary's life expectancy, with annuity benefit payments
beginning one year from the date of death.
If distribution of the death benefit is deferred under (1) or (2), any value in
the Guarantee Period Accounts will be transferred to the Sub-Account investing
in the Money Market Fund. The excess, if any, of the death benefit over the
Accumulated Value also will be added to the Money Market Fund. The beneficiary
may, by written request, effect transfers and withdrawals during the deferral
period and prior to annuitization under (2), but may not make additional
payments. The death benefit will reflect any earnings or losses experienced
during the deferral period. If there are multiple beneficiaries, the consent of
all is required.
With respect to the death benefit, the Accumulated Value under the Contract will
be based on the unit values next computed after due proof of the death has been
received.
DEATH OF THE ANNUITANT AFTER THE ANNUITY DATE. If the Annuitant's death occurs
on or after the Annuity Date but before completion of all guaranteed annuity
benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY.
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the Money Market Fund; (2) the excess, if any, of the death
benefit over the Contract's Accumulated Value also will be added to the Money
Market Fund. This value never will be subject to a surrender charge when
withdrawn. Additional payments may be made; however, a surrender charge will
apply to these amounts if they have not been invested in the Contract for more
than nine 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. 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
30
<PAGE>
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 THE ANNUITY DATE.
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age on the issue date of the
Contract is 75 or under, or (2) within ten years from the issue date of the
Contract and before the Annuitant's 90th birthday, if the Annuitant's age on the
issue date is between 76 and 90. The Owner may elect to change the Annuity Date
by sending a request to the Principal Office at least one month before the new
Annuity date. The new Annuity Date must be the first day of any month occurring
before the Annuitant's 90th birthday, and must be within the life expectancy of
the Annuitant. The Company shall determine such life expectancy at the time a
change in Annuity Date is requested. The Internal Revenue Code (the "Code") and
the terms of qualified plans impose limitations on the age at which annuity
benefit payments may commence and the type of annuity option selected. See
"FEDERAL TAX CONSIDERATIONS" for further information.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Contract, by the
annuity option selected, and by the investment performance of the accounts
selected.
To the extent a fixed annuity payout is selected, Accumulated Value will be
transferred to the Fixed Account of the Company, and the annuity benefit
payments will be fixed in amount. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT."
Under a variable annuity payout, 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 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 options selected does not produce
an initial payment which meet this minimum, a single payment may be made. Once
the Company begins making annuity benefit payments, the Annuitant cannot make
withdrawals or surrender the annuity benefit, except where the Annuitant has
elected a commutable period certain option. Beneficiaries entitled to receive
remaining payments under either a commutable or non-commutable "period certain"
option may elect instead to receive a lump sum settlement. See "K. Description
of Variable Annuity Options."
If the Owner does not elect otherwise, a variable life annuity with periodic
payments for ten years guaranteed will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
K. DESCRIPTION OF VARIABLE ANNUITY OPTIONS.
The Company provides the variable annuity options described below. Currently,
variable annuity options may be funded through the Sub-Accounts investing in the
Select Growth and Income Fund, the Equity Index Fund, the Growth Fund and the
Money Market Fund.
31
<PAGE>
The Company also provides these same options funded through the Fixed Account
(fixed annuity payout). Regardless of how payments were allocated during the
accumulation period, any of the variable payout options or the fixed payout
options may be selected, or any of the variable options may be selected in
combination with any of the fixed 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 LIFETIME OF THE ANNUITANT
ONLY. It would be possible under this option for the Annuitant to receive only
one annuity benefit payment if the Annuitant dies prior to the due date of the
second annuity benefit payment, two annuity benefit payments if the Annuitant
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the Annuitant, no matter
how long he or she lives.
UNIT REFUND VARIABLE LIFE ANNUITY. This is an annuity payable periodically
during the lifetime of the payee with the guarantee that if (1) exceeds (2),
then periodic variable annuity benefit payments will continue to the beneficiary
until the number of such payments equals the number determined in (1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant or the beneficiary in the Contract. 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 in the Contract or the
beneficiary. There is no minimum number of payments under this option.
PERIOD CERTAIN VARIABLE ANNUITY. This variable annuity has periodic payments
for a stipulated number of years ranging from one to 30, and may be commutable
or non-commutable. A commutable option provides the Annuitant with the right to
request a lump sum payment of any remaining balance after annuity payments have
commenced. Under a non-commutable period certain option, the Annuitant may not
request a lump sum payment. See "ANNUITY BENEFIT PAYMENT" in the SAI.
It should be noted that the period certain option does not involve a life
contingency. In the computation of the payments under this option, the charge
for annuity rate guarantees, which includes a factor for mortality risks, is
made. Although not contractually required to do so, the Company currently
follows a practice of permitting persons receiving payments under a period
certain option to elect to convert to a variable annuity involving a life
contingency. The Company may discontinue or change this practice at any time,
but not with respect to election of the option made prior to the date of any
change in this practice.
L. ANNUITY BENEFIT PAYMENTS.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity 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
32
<PAGE>
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period, and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Contract.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
periodic annuity benefit payment is based upon the Accumulated Value as of a
date not more than four weeks preceding the date that the first annuity benefit
payment is due. Variable annuity benefit payments are due on the first of a
month, which is the date the payment is to be received by the Annuitant, and
currently are based on unit values as of the 15th day of the preceding month.
The Contract provides annuity rates which determine the dollar amount of the
first periodic payment under each form of annuity for each $1,000 of applied
value. For life contingency options and non-commutable period certain options of
ten or more years, the annuity value is the Accumulated Value less any premium
taxes and adjusted for any Market Value Adjustment. For commutable period
certain options or any period certain option less than ten years, the value is
the Surrender Value less any premium tax. For a death benefit annuity, the
annuity value will be the amount of the death benefit. The annuity rates in the
Contract are based on a modification of the 1983(a) Individual Mortality Table
on rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "M. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3.5% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable annuity benefit payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first periodic annuity benefit payment under life
annuity options and non-commutable period certain options of ten years or more
is determined by multiplying (1) the Accumulated Value applied under that option
(after application of any Market Value Adjustment and less premium tax, if any)
divided by $1,000, by (2) the applicable amount of the first monthly payment per
$1,000 of value. For commutable period certain options and any period certain
option of less than ten years, the Surrender Value less premium taxes, if any,
is used rather than the Accumulated Value. The dollar amount of the first
variable annuity benefit payment is then divided by the value of an Annuity Unit
of the selected Sub-Accounts to determine the number of Annuity Units
represented by the first payment. This number of Annuity Units remains fixed
under all annuity options except the joint and two-thirds survivor annuity
option. For each subsequent payment, the dollar amount of the variable annuity
benefit payment is determined by multiplying this fixed number of Annuity Units
by the value of an Annuity Unit on the applicable Valuation Date. After the
first benefit payment, the dollar amount of each periodic variable annuity
benefit payment will vary with subsequent variations in the value of the Annuity
Unit of the selected Sub-Accounts. The dollar amount of each fixed amount
annuity benefit payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
From time to time, the Company may offer Owners both fixed and variable annuity
rates more favorable than those contained in the Contract. Any such rates will
be applied uniformly to all Owners of the same class.
For an illustration of a variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
M. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
33
<PAGE>
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.
N. COMPUTATION OF VALUES.
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received at the 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 Underlying Funds. The value of an Accumulation Unit
was set at $1.00 on the first Valuation Date for each Sub-Account.
Allocations to the Guarantee Period Accounts and the Fixed Account are not
converted into Accumulation Units, but are credited interest at a rate
periodically set by the Company.
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the Valuation
Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge of 0.20% on an annual basis of the daily value
of the Sub-Account's assets.
The dollar value of an Accumulation Unit as of a given Valuation Date is
determined by multiplying the dollar value of the corresponding Accumulation
Unit as of the immediately preceding Valuation Date by the appropriate net
investment factor.
For an illustration of an Accumulation Unit calculation using a hypothetical
example see the SAI.
CHARGES AND DEDUCTIONS
Deductions under the Contract and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the prospectuses and SAIs of the Trust,
Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF.
34
<PAGE>
A. VARIABLE ACCOUNT DEDUCTIONS.
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Contract. The charge is imposed during both the accumulation
phase and the annuity phase. The mortality risk arises from the Company's
guarantee that it will make annuity benefit payments in accordance with annuity
rate provisions established at the time the Contract is issued for the life of
the Annuitant (or in accordance with the annuity option selected), no matter how
long the Annuitant (or other payee) lives and no matter how long all Annuitants
as a class live. Therefore, the mortality charge is deducted during the annuity
phase on all Contracts, including those that do not involve a life contingency,
even though the Company does not bear direct mortality risk with respect to
variable annuity settlement options that do not involve life contingencies. The
expense risk arises from the Company's guarantee that the charges it makes will
not exceed the limits described in the Contract and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .80% for mortality risk and .45%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.20% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation phase and the
annuity phase. The daily administrative expense charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account, without profits. There is no direct relationship, however, between
the amount of administrative expenses imposed on a given Contract and the amount
of expenses actually attributable to that Contract.
Deductions for the Contract fee (see B. below) and for the administrative
expense charge are designed to reimburse the Company for the cost of
administration and related expenses and are not expected to be a source of
profit. The administrative functions and expense assumed by the Company in
connection with the Variable Account and the Contract include, but are not
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 purchase shares of the Underlying
Funds, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying Funds. The
prospectus and SAI for the Fund contains additional information concerning
expenses of the Underlying Funds.
B. CONTRACT FEE.
A $30 Contract fee currently is deducted on the Contract anniversary date and
upon full surrender of the Contract when the Accumulated Value is less than
$50,000. The Contract fee is waived for 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.
35
<PAGE>
Where permitted by law, the Contract fee also may be waived for Contracts where,
on the date of issue, either the Owner or the Annuitant is within the class of
"eligible persons" as defined under the "Reduction and Elimination of Surrender
Charge" provision below.
C. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
1. if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit payments
begin (the Company reserves the right instead to deduct the premium tax
charge for these Contracts at the time the payments are received); or
2. the premium tax charge is deducted when annuity benefit payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law.
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Contract value at
the time such determination is made.
D. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from payments at the time the payments
are made. A contingent deferred sales charge, however, is deducted from the
Accumulated Value in the case of surrender and/or a withdrawal or at the time
annuity benefit payments begin, within certain time limits described below.
For purposes of determining the contingent deferred sales charge, the
Accumulated Value is divided into three categories: (1) New Payments -- payments
received by the Company during the nine years preceding the date of the
surrender; (2) Old Payments -- accumulated payments not defined as New Payments;
and (3) Earnings -- the amount of Contract value in excess of all payments that
have not been withdrawn previously. For purposes of determining the amount of
any contingent deferred sales charge, surrenders will be deemed to be taken
first from accumulated earnings, then from the remaining withdrawal without
surrender charge amount, if greater than earnings; then from Old Payments, and
then from New Payments. Earnings and any excess withdrawal without surrender
charge amount, if applicable, followed by Old Payments may be withdrawn from the
Contract at any time without the imposition of a contingent deferred sales
charge. If a withdrawal is attributable all or in part to New Payments, a
contingent deferred sales charge may apply.
CHARGES FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered, or if New
Payments are withdrawn while the Contract is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Contract.
For the purpose of calculating surrender charges for New Payments, all amounts
withdrawn are assumed to be deducted first from the earliest New Payment and
then from the next earliest New Payment and so on, until all New Payments have
been exhausted pursuant to the first-in-first-out ("FIFO") method of accounting.
(See "FEDERAL TAX CONSIDERATIONS" for a discussion of how withdrawals are
treated for income tax purposes.)
36
<PAGE>
The contingent deferred sales charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF NEW
PAYMENT PAYMENTS WITHDRAWN
- ------------- ---------------------------
<S> <C>
less than 2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
Thereafter 0%
</TABLE>
The amount withdrawn equals the amount requested by the Owner plus the
contingent deferred sales charge, if any. The charge is applied as a percentage
of the New Payments withdrawn, but in no event will the total contingent
deferred sales charge exceed a maximum limit of 8.0% of total gross New
Payments. Such total charge equals the aggregate of all applicable contingent
deferred sales charges for surrender, withdrawals and annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. Where permitted by state law, the
Company will waive the contingent deferred sales charge in the event that an
Owner (or the Annuitant, if the Owner is not an individual) is: (1) admitted to
a medical care facility after the issue date of the Contract and remains
confined there until the later of one year after the issue date or 90
consecutive days; (2) first diagnosed by a licensed physician as having a fatal
illness after the issue date of the Contract; or (3) physically disabled after
the issue date of the Contract and before attaining age 65. The Company may
require proof of such disability and continuing disability, including written
confirmation of receipt and approval of any claim for Social Security Disability
Benefits and reserves the right to obtain an examination by a licensed physician
of its choice and at its expense.
For purposes of the above provision, "medical care facility" means any
state-licensed facility or, in a state that does not require licensing, a
facility that is operating pursuant to state law, providing medically necessary
inpatient care which is prescribed by a licensed "physician" in writing 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 contingent deferred sales charges have been waived under any one of three
situations discussed above, no additional payments under the Contract will be
accepted unless required by state law.
In addition, from time to time the Company may allow a reduction in or
elimination of the contingent deferred sales charges, the period during which
the charges apply, or both, and/or credit additional amounts on Contracts, when
Contracts are sold to individuals or groups of individuals in a manner that
reduces sales expenses. The Company will consider factors such as the following:
(1) the size and type of group or class, and the persistency expected from that
group or class; (2) the total amount of payments to be received, and the manner
in which payments are remitted; (3) the purpose for which the Contracts are
being purchased, and whether that purpose makes it likely that costs and
expenses will be reduced; (4) other transactions where sales expenses are likely
to be reduced; or (5) the level of commissions paid to registered
representatives, selling broker-dealers or certain financial institutions with
respect to Contracts within the same group or class (for example, broker-dealers
who offer the Contract in connection with financial planning services offered on
a fee-for-service basis). The Company also may reduce or waive the contingent
deferred sales charge, and/or credit additional amounts on contracts, where
either the Owner or the Annuitant on the date of issue is within the following
classes of individuals ("eligible persons"): (1) any employee of the Company
located at its home office or at off-site locations if such employees are
37
<PAGE>
on the Company's home office payroll; (2) any director of the Company; (3) any
retiree who elected to retire on his/her retirement date; (4) the immediate
family members of those persons identified in (1) through (3) above residing in
the same household; and (5) any beneficiary who receives a death benefit under a
deceased employees or retiree's progress sharing plan. For purposes of the above
class of individuals, "the Company" includes affiliates and subsidiaries;
"immediate family members" means children, siblings, parents and grandparents;
"retirement date" means an employee's early, normal or late retirement date as
defined in the Company's pension plan or any successor plan, and "progress
sharing" means the First Allmerica Financial Life Insurance Company Employee's
Matched Savings Plan or any successor plan.
Finally, contingent deferred sales charges will be waived under a Section 403(b)
Contract 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 contingent
deferred sales charge will not discriminate unfairly among purchasers of the
Contract. The Company will not make any changes to this charge where prohibited
by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the contingent
deferred sales charge is modified to effect certain exchanges of existing
annuity contracts issued by the Company for the Contract. See "EXCHANGE OFFER"
in the SAI.
WITHDRAWAL WITHOUT SURRENDER CHARGE. In each calendar year, the Company will
waive the contingent deferred sales charge, if any, on an amount ("Withdrawal
Without Surrender Charge") equal to the greatest of (1), (2) or (3):
Where (1) is: 100% of Cumulative Earnings (calculated as the Accumulated Value
as of the Valuation Date the Company receives the withdrawal
request, or the following day, reduced by total gross payments not
previously withdrawn);
Where (2) is: 10% of the Accumulated Value as of the Valuation Date the Company
receives the withdrawal request, or the following day, reduced by
the total amount of any prior withdrawals made in the same
calendar year to which no contingent deferred sales charge was
applied; and
Where (3) is: The amount calculated under the Company's life expectancy
distribution option (see "Life Expectancy Distributions") whether or not the
withdrawal was part of such distribution (applies only if Annuitant is also an
Owner).
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Withdrawal Without
Surrender Charge of $1,530 which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 10% of Accumulated Value ($1,500); or
(3) LED of 10.2% of Accumulated Value ($1,530).
The Withdrawal Without Surrender Charge first will be deducted 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 contingent deferred sales 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
will 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
applicable contingent deferred sales charge on New
38
<PAGE>
Payments, the Contract fee and any applicable tax withholding, and adjusted for
any applicable Market Value Adjustment. Subject to the same rules applicable to
withdrawals, the Company will not assess a contingent deferred sales charge on
an amount equal to the greater of the Withdrawal Without Surrender Charge
Amount, described above.
Where an Owner who is 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 Accumulated Value under the Contract to other
contracts issued by the Company and owned by the trustee, with no deduction for
any otherwise applicable contingent deferred sales charge. Any such reallocation
will be at the unit values for the Sub-Accounts as of the Valuation Date on
which a written, signed request is received at the Principal Office.
For further information on surrender and withdrawal, including minimum limits on
amount withdrawn and amount remaining under the Contract in the case of
withdrawal, 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 any commutable period
certain option or a non-commutable period certain option for less than ten years
is chosen, a contingent deferred sales charge will be deducted from the
Accumulated Value of the Contract if the Annuity Date occurs at any time when
the surrender charge would still apply had the Contract been surrendered on the
Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any Contract year under an option involving a life contingency or for any
non-commutable period certain option for ten years or more. A Market Value
Adjustment, however, may apply. See "GUARANTEE PERIOD ACCOUNTS." If the Owner of
a fixed annuity contract issued by the Company wishes to elect a variable
annuity option, the Company may permit such Owner to exchange, at the time of
annuitization, the fixed contract for a Contract offered in this Prospectus. The
proceeds of the fixed contract, minus any contingent deferred sales charge
applicable under the fixed contract if a period certain option is chosen, will
be applied towards the variable annuity option desired by the Owner. The number
of Annuity Units under the option will be calculated using the Annuity Unit
values as of the 15th of the month preceding the Annuity Date.
E. TRANSFER CHARGE.
The Company currently makes no charge for processing transfers. The Company
guarantees that the first 12 transfers in a Contract year will be free of
transfer charge, but reserves the right to assess a charge, guaranteed never to
exceed $25, for each subsequent transfer in a Contract year. For more
information, see "D. Transfer Privilege."
GUARANTEE PERIOD ACCOUNTS
Due to certain exemptive and exclusionary provisions in the securities laws,
interests in the Guarantee Period Accounts and the Company's Fixed Account are
not registered as an investment company under the provisions of the Securities
Act of 1933 (the "1933 Act") or the 1940 Act. Accordingly, the staff of the SEC
has not reviewed the disclosures in this Prospectus relating to the Guarantee
Period Accounts or the Fixed Account. Nevertheless, disclosures regarding the
Guarantee Period Accounts and the Fixed Account of the Contract or any fixed
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, Guarantee Periods ranging from two
through ten years may be available. Each Guarantee Period established for the
Owner is accounted for separately in a non-unitized segregated account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions. Once an interest rate is in effect
for a Guarantee Period Account, however, 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%.
39
<PAGE>
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 except that amounts
allocated to the same Guarantee Period on the same day will be treated as one
Guarantee Period Account. The minimum that may be allocated to establish a
Guarantee Period Account is $1,000. If less than $1,000 is allocated, the
Company reserves the right to apply that amount to the Money Market Fund. The
Owner may allocate amounts to any of the Guarantee Periods available.
At least 45 days, but not more than 75 days, prior to the end of a Guarantee
Period, the Company will notify the Owner in writing of the expiration of that
Guarantee Period. At the end of a Guarantee Period the Owner may transfer
amounts to the Sub-Accounts, the Fixed Account or establish a new Guarantee
Period Account of any duration then offered by the Company without a Market
Value Adjustment. If reallocation instructions are not received at the Principal
Office before the end of a Guarantee Period, the account value automatically
will be applied to a new Guarantee Period Account with the same duration unless
(1) less than $1,000 would remain in the Guarantee Period Account on the
expiration date, or (2) the Guarantee Period would extend beyond the Annuity
Date or is no longer available. In such cases, the Guarantee Period Account
value will be transferred to the Money Market Fund. Where amounts have been
renewed automatically in a new Guarantee Period, it is the Company's current
practice to give the Owner an additional 30 days to transfer out of the
Guarantee Period Account without application of a Market Value Adjustment. This
practice may be discontinued or changed at the Company's discretion.
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." All
other transfers, withdrawals, or a surrender prior to the end of a Guarantee
Period will be subject to a Market Value Adjustment, which may increase or
decrease the account value. Amounts applied under an annuity option are treated
as withdrawals when calculating the Market Value Adjustment. The Market Value
Adjustment will be determined by multiplying the amount taken from each
Guarantee Period Account before deduction of any Surrender Charge by the market
value factor. The market value factor for each Guarantee Period Account is equal
to:
[(1+i)/(1+j)](n/365)-1
where: i is the Guaranteed Interest Rate expressed as a decimal (for example 3%
= 0.03) being credited to the current Guarantee Period;
j is the new Guaranteed Interest Rate, expressed as a decimal, for a
Guarantee Period with a duration equal to the number of years remaining
in the current Guarantee Period, rounded to the next higher number of
whole years. If that rate is not available, the Company will use a
suitable rate or index allowed by the Department of Insurance; and
n is the number of days remaining from the Effective Valuation Date to
the end of the current Guarantee Period.
Based on the application of this formula, the value of a Guarantee Period
Account will increase after the Market Value Adjustment is applied if the then
current market rates are lower than the rate being credited to the Guarantee
Period Account. Similarly, the value of a Guarantee Period Account will decrease
after the Market Value Adjustment is applied if the then current market rates
are higher than the rate being credited to the Guarantee Period Account. The
Market Value Adjustment is limited, however, so that even
40
<PAGE>
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 is also affected by the minimum guaranteed
rate of 3% such that the amount that will be added to the Guarantee Period
Account is limited to the difference between the amount earned and the 3%
minimum guaranteed earnings. For examples of how the Market Value Adjustment
works, see APPENDIX B.
WITHDRAWALS. Prior to the Annuity Date, the Owner may make withdrawals of
amounts held in the Guarantee Period Accounts. Withdrawals from these accounts
will be made in the same manner and be subject to the same rules as set forth
under "E. Surrender" and "F. Withdrawals." In addition, the following provisions
also apply to withdrawals from a Guarantee Period Account: (1) a Market Value
Adjustment will apply to all withdrawals, including Withdrawals Without
Surrender Charge, unless made at the end of the Guarantee Period; and (2) the
Company reserves the right to defer payments of amounts withdrawn from a
Guarantee Period Account for up to six months from the date it receives the
withdrawal request. If deferred for 30 days or more, the Company will pay
interest on the amount deferred at a rate of at least 3%.
In the event that a Market Value Adjustment applies to a withdrawal of a portion
of the value of a Guarantee Period Account, it will be calculated on the amount
requested and deducted or added to the amount remaining in the Guarantee Period
Account. If the entire amount in a Guarantee Period Account is requested, the
adjustment will be made to the amount payable. If a contingent deferred sales
charge applies to the withdrawal, it will be calculated as set forth under "D.
Contingent Deferred Sales Charge" after application of the Market Value
Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Contract, on withdrawals
or surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. In
addition, this discussion does not address state or local tax consequences that
may be associated with the Contract.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY CONTRACTS IS NOT EXHAUSTIVE,
DOES NOT PURPORT TO COVER ALL SITUATIONS, AND IS NOT INTENDED AS TAX ADVICE. A
QUALIFIED TAX ADVISER ALWAYS SHOULD BE CONSULTED WITH REGARD TO THE APPLICATION
OF LAW TO INDIVIDUAL CIRCUMSTANCES.
The Company intends to make a charge for any effect which the income, assets, or
existence of the Contract, the Variable Account or the Sub-Accounts may have
upon its tax. The Variable Account presently is not subject to tax, but the
Company reserves the right to assess a charge for taxes should the Variable
Account at any time become subject to tax. Any charge for taxes will be assessed
on a fair and equitable basis in order to preserve equity among classes of
Owners and with respect to each separate account as though that separate account
were a separate taxable entity.
The Variable Account is considered a part of and taxed with the operations of
the Company. The Company is taxed as a life insurance company under Subchapter L
of the Code. The Company files a consolidated tax return with its affiliates.
The IRS has issued regulations relating to the diversification requirements for
variable annuity and variable life insurance contracts under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity contract are adequately diversified if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four
41
<PAGE>
investments. If the investments are not adequately diversified, the income on
the Contract, for any taxable year of the Owner, would be treated as ordinary
income received or accrued by the Owner. It is anticipated that the Funds of the
Trust, the Portfolios of Fidelity VIP and VIP II, the Portfolio of T. Rowe Price
and the Series of DGPF 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.
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, depending on 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 Section D below.
B. TAXATION OF THE CONTRACTS IN GENERAL.
The Company believes that the Contract described in this Prospectus will, with
certain exceptions (see "Non-Natural Owner" below), be considered an annuity
contract under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
contract" is the total of all payments to the contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-qualified
deferred annuity contracts issued by the same insurance company to the same
owner during a single calendar year be treated as one contract in determining
taxable distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Contract, generally a portion of each payment may be
excluded from gross income. The excludable portion generally is determined by a
formula that establishes the ratio that the investment in the Contract bears to
the expected return under the Contract. The portion of the payment in excess of
this excludable amount is taxable as ordinary income. Once all the investment in
the Contract is recovered, the entire payment is taxable. If the Annuitant dies
before the 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
42
<PAGE>
substantially the same. Any modification, other than by reason of death or
disability, of distributions which are part of a series of substantially equal
periodic payments that occurs before the Owner's age 59 1/2 or five years, will
subject the Owner to the 10% penalty tax on the prior distributions. In addition
to the exceptions above, the penalty tax will not apply to withdrawals from a
qualified Contract made to an employee who has terminated employment after
reaching age 55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under the LED option prior to age 59 1/2. Subsequent Private Letter Rulings,
however, have treated LED-type withdrawal programs as effectively avoiding the
10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The transfer also is subject to
federal gift tax provisions. Where the Owner and Annuitant are different
persons, the change of ownership of the Contract to the Annuitant on the Annuity
Date, as required under the Contract, is a gift and will be taxable to the Owner
as such; however, the Owner will not incur taxable income. Instead, the
Annuitant will incur taxable income upon receipt of annuity benefit payments as
discussed above.
NON-NATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a Contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer, and are subject to the claims of the employer's general creditors.
C. TAX WITHHOLDING.
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
43
<PAGE>
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified retirement 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.
Qualified Contracts may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to Owners of non-qualified
Contracts. 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 Contracts to their specific needs and as to applicable Code limitations
and tax consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). IRAs are subject to limits on the amounts
that may be contributed, the persons who may be eligible, and on the time when
distributions may commence. In addition, certain distributions from other types
of retirement plans may be "rolled over," on a tax-deferred basis, to an IRA.
Purchasers of an IRA Contract will be provided with supplementary information as
may be required by the IRS or other appropriate agency, and will have the right
to revoke the Contract as described in this Prospectus. See "B. Right to Revoke
Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
IRAs. Employer contributions that may be made to such plans are larger than the
amounts that may be contributed to regular IRAs and may be deductible to the
employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to 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
44
<PAGE>
additional restrictions are imposed under the Texas Government Code and a prior
opinion of the Texas Attorney General.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company also will furnish an annual
report to the Owner containing a statement of his or her account, including
Accumulation Unit values and other information as required by applicable law,
rules and regulations.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to Owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then-current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated instead to the Money Market Fund.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Funds no longer are available for investment or if, in the Company's
judgment, further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Variable Account or the affected Sub-Account, the
Company may withdraw the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to the 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
underlying fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new sub-accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new sub-accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds also are issued to separate accounts of the
Company and its affiliates which issue variable life contracts ("mixed
funding"). Shares of the Funds 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 neither the Company nor any of the underlying
investment companies currently foresee any such disadvantages to either variable
life owners or variable annuity owners, the Company and the respective
45
<PAGE>
trustees 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 funds 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 endorse the
Contracts 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 is no longer
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, to:
(1) transfer assets from the Variable Account or any of its Sub-Accounts to
another of the Company's separate accounts or sub-accounts having assets of the
same class; (2) to operate the Variable Account or any Sub-Account as a
management investment company under the 1940 Act or in any other form permitted
by law; (3) to deregister the Variable Account under the 1940 Act in accordance
with the requirements of the 1940 Act; (4) to substitute the shares of any other
registered investment company for the Underlying Fund shares held by a
Sub-Account, in the event that Underlying Fund shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Fund 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 above be made without
notice to Owners in accordance with the 1940 Act.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Contract as presently offered, and to make any change to provisions of
the Contract to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation, including but not limited to requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners and, after the Annuity Date,
from the Annuitants. Each person having a voting interest in a Sub-Account will
be provided with proxy materials of the Underlying Fund, 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 Contract in the same proportion. If the
1940 Act or any rules thereunder should be amended or if the present
interpretation of the 1940 Act or such rules should change, and as a result the
Company determines that it is permitted to vote shares in its own right, whether
or not such shares are attributable to the Contract, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Fund. During the
accumulation period, the number of Underlying Fund 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
Underlying Fund share. During the annuity period, the number of Underlying Fund
shares attributable to each Annuitant will be determined by dividing the reserve
held in each Sub-Account for the Annuitant's Variable Annuity by the net asset
value of one Underlying Fund share. Ordinarily, the Annuitant's voting interest
in the Underlying Fund will decrease as the reserve for the Variable Annuity is
depleted.
46
<PAGE>
DISTRIBUTION
The Contracts offered by this Prospectus may be purchased from representatives
of Allmerica Investments, Inc., a registered broker-dealer under the Securities
and Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. ("NASD"). Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, MA 01653, is also the principal underwriter and distributor and is an
indirect wholly owned subsidiary of First Allmerica. The Contract also may be
purchased from certain independent broker-dealers which are NASD members.
The Company pays commissions, not to exceed 5.0% of payments, to registered
representatives of Allmerica Investments, Inc. Alternative commission schedules
are available with lower initial commission amounts based on payments, plus
ongoing annual compensation of up to 1% of Contract value. Managers who
supervise the agents will receive overriding commissions ranging up to no more
than 2% of payments.
The Company intends to recoup commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges and profits from
the Company's General Account. Commissions paid on the Contract, including
additional incentives or payments, do not result in any additional charge to
Owners or to the Variable Account. Any contingent deferred sales charges
assessed on the Contract will be retained by the Company except for amounts it
may pay to Allmerica Investments, Inc. for services it performs and expenses it
may incur as principal underwriter and general distributor. Owners may direct
any inquiries to their financial representative or to Annuity Client Services,
Allmerica Financial Life Insurance and Annuity Company, 440 Lincoln Street,
Worcester, MA 01653, Telephone 1-800-533-7881.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Owners. Currently, the Company receives service fees with respect to the
Fidelity VIP Overseas Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity
VIP Growth Portfolio, Fidelity VIP High Income Portfolio, and Fidelity VIP II
Asset Manager Portfolio, at an annual rate of 0.10% of the aggregate net asset
value, respectively, of the shares of such Underlying Funds held by the Variable
Account. With respect to the T. Rowe Price International Stock Portfolio, the
Company receives service fees an an annual rate of 0.15% per annum of the
aggregate net asset value of shares held by the Variable Account. The Company
may in the future render services for which it will receive compensation from
the investment advisers or other service providers of other Underlying Funds.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party.
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
47
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE FIXED ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the Fixed Account are not generally subject to regulation under the
provisions of the Securities Act of 1933 or the Investment Company Act of 1940.
Disclosures regarding the fixed portion of the annuity contract and the Fixed
Account may be subject to the provisions of the Securities Act of 1933
concerning the accuracy and completeness of statements made in the Prospectus.
The disclosures in this APPENDIX A have not been reviewed by the Securities and
Exchange Commission.
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 Contracts, 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 a Contract is surrendered, or if an amount in excess of the Withdrawal
Without Surrender Charge is withdrawn while the Contract is in force and before
the Annuity Date, a contingent deferred sales charge is imposed if such event
occurs before the payments attributable to the surrender or withdrawal have been
credited to the Contract for at least nine full Contract years.
In Massachusetts, payments and transfers to the Fixed Account are subject to the
following restrictions:
If a 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 the Contract is issued after
the Annuitant's 81st birthday, no payments to the Fixed
Account will be permitted at any time.
If an allocation designated as a Fixed Account allocation
is received at the Principal Office during a period when
the Fixed Account is not available due to the limitations
outlined above, the monies will be allocated to the Money
Market Fund.
The Fixed Account is not available to Owners who purchase the Contract in the
state of Oregon.
A-1
<PAGE>
APPENDIX B
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Withdrawal Without
Surrender Charge Amount is equal to the greater of 10% of the current
Accumulated Value or the accumulated earnings in the Contract. The table below
presents examples of the surrender charge resulting from a full surrender, based
on Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE CHARGE AMOUNT PERCENTAGE CHARGE
- --------- ------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
1 $ 54,000.00 $ 5,400.00 8% $ 3,888.00
2 58,320.00 8,320.00 8% 4,000.00
3 62,985.60 12,985.60 7% 3,500.00
4 68,024.45 18,024.45 6% 3,000.00
5 73,466.40 23,466.40 5% 2,500.00
6 79,343.72 29,343.72 4% 2,000.00
7 85,691.21 35,691.21 3% 1,500.00
8 92,546.51 42,546.51 2% 1,000.00
9 99,950.23 49,950.23 1% 500.00
10 107,946.25 57,946.25 0% 0.00
</TABLE>
WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume that the Withdrawal Without Surrender Charge Amount is equal to
the greater of 10% of the current Accumulated Value or the accumulated earnings
in the Contract and there are withdrawals as detailed below. The table below
presents examples of the surrender charge resulting from withdrawals, based on
Hypothetical Accumulated Value.
<TABLE>
<CAPTION>
HYPOTHETICAL WITHDRAWAL SURRENDER
CONTRACT ACCUMULATED WITHOUT SURRENDER CHARGE SURRENDER
YEAR VALUE WITHDRAWALS CHARGE AMOUNT PERCENTAGE CHARGE
- --------- ------------ ------------ ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1 $ 54,000.00 $ 0.00 $ 5,400.00 8% $ 0.00
2 58,320.00 0.00 8,320.00 8% 0.00
3 62,985.60 0.00 12,985.60 7% 0.00
4 68,024.45 30,000.00 18,024.45 6% 718.53
5 41,066.40 10,000.00 4,106.68 5% 294.67
6 33,551.72 5,000.00 3,355.17 4% 65.79
7 30,835.85 10,000.00 3,083.59 3% 207.49
8 22,502.72 15,000.00 2,250.27 2% 254.99
9 8,102.94 0.00 810.29 1% 0.00
10 8,751.17 0.00 1,248.45 0% 0.00
</TABLE>
PART 2: MARKET VALUE ADJUSTMENT
The market value factor is: [(1+i)/(1+j)](n/365)-1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2555 days) from the expiration date.
B-1
<PAGE>
3. The value of the Guarantee Period Account is equal to $62,985.60 at the
end of three years.
4. No transfers of 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
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 (-.17454 X $62,985.60 or -$8,349.25)
= Minimum (-$10,993.51 or -$8,349.25)
= -$8,349.25
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
The market value factor = [(1+i)/(1+j)](n/365)-1
= [(1+.08)/(1+.06)](2555/365)-1
= (1.01887)7-1
= .13981
The market value adjustment = Minimum of the market value factor multiplied
by the withdrawal or the excess interest earned over 3%
= Minimum of .13981 X $62,985.60 or $8,349.25)
= Minimum of $8,806.02 or $8,349.25)
= $8,349.25
B-2
<PAGE>
APPENDIX C
THE DEATH BENEFIT
PART 1 : DEATH OF THE ANNUITANT
DEATH BENEFIT ASSUMING NO WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals and that the Death Benefit Effective
Annual Yield is equal to 5%. The table below presents examples of the Death
Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE ADJUSTMENT BENEFIT (1) BENEFIT (2) BENEFIT (3) DEATH BENEFIT
--- ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $ 53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (1) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (2) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield reduced proportionately to reflect
withdrawals. Death Benefit (3) is the death benefit that would have 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 (1),
(2), or (3).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below and that
the Death Benefit Effective Annual Yield is equal to 5%. The table below
presents examples of the Death Benefit based on the Hypothetical Accumulated
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH HYPOTHETICAL
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (1) BENEFIT (2) BENEFIT (3) DEATH BENEFIT
--- ------------ ------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $ 53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 3,816.94 3,635.18 3,883.00
4 3,494.70 0.00 500.00 3,994.70 4,007.79 3,883.00 4,007.79
5 3,844.17 0.00 0.00 3,844.17 4,208.18 4,007.79 4,208.18
6 4,228.59 0.00 500.00 4,728.59 4,418.59 4,208.18 4,728.59
7 4,651.45 0.00 0.00 4,651.45 4,639.51 4,728.59 4,728.59
8 5,116.59 0.00 500.00 5,616.59 4,871.49 4,728.59 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,115.07 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 599.51 628.25 691.07
</TABLE>
Death Benefit (1) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (2) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield reduced proportionately to reflect
withdrawals. Death Benefit (3) 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.
C-1
<PAGE>
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (1),
(2), or (3).
PART 2: DEATH OF THE OWNER WHO IS NOT THE ANNUITANT
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are no withdrawals. The table below presents examples of
the Death Benefit based on the Hypothetical Accumulated Values.
<TABLE>
<CAPTION>
HYPOTHETICAL HYPOTHETICAL
ACCUMULATED MARKET VALUE HYPOTHETICAL
YEAR VALUE ADJUSTMENT DEATH BENEFIT
--- ------------ ------------ -------------
<S> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The Hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
C-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
INDIVIDUAL VARIABLE ANNUITY POLICIES FUNDED THROUGH SUBACCOUNTS OF
SEPARATE ACCOUNT VA-K INVESTING IN SHARES OF
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND,
VARIABLE INSURANCE PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC.
AND DELAWARE GROUP PREMIUM FUND, INC.
This Prospectus describes individual variable annuity policies (the "Policies")
offered by Allmerica Financial Life Insurance and Annuity Company ("Company") to
individuals and businesses in connection with retirement plans which may or may
not qualify for special federal income tax treatment. (For information about the
tax status when used with a particular type of plan, see "FEDERAL TAX
CONSIDERATIONS.") The following is a summary of information about these
Policies. More detailed information can be found under the referenced captions
in this Prospectus.
Policy values may accumulate on a variable basis in the Policy's Separate
Account VA-K. The assets of Separate Account VA-K are divided into Sub-Accounts,
each investing exclusively in a corresponding investment portfolio of Allmerica
Investment Trust ("Trust"), Variable Insurance Products Fund ("Fidelity VIP"),
Variable Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price
International Series, Inc. (T. Rowe Price), or Delaware Group Premium Fund,
Inc.("DGPF").
This Prospectus generally describes only the variable accumulation and variable
annuity aspects of the Policies, except where fixed values or fixed annuity
benefit payments are specifically mentioned. Certain additional information
about the Policies is contained in a Statement of Additional Information
("SAI"), dated May 1, 1997, as may be amended from time to time, which has been
filed with the Securities and Exchange Commission and is incorporated herein by
reference. The Table of Contents for the SAI is listed on page 3 of this
Prospectus. The SAI is available upon request and without charge. To obtain the
Statement of Additional Information, fill out and return the attached request
card or contact Annuity Client Services, Allmerica Financial Life Insurance and
Annuity Company, 440 Lincoln Street, Worcester, Massachusetts 01653,
1-800-533-7881.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY CURRENT PROSPECTUSES OF THE
ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE PRODUCTS FUND, VARIABLE INSURANCE
PRODUCTS FUND II, T. ROWE PRICE INTERNATIONAL SERIES, INC., AND DELAWARE GROUP
PREMIUM FUND, INC. THE FIDELITY VIP HIGH INCOME PORTFOLIO INVESTS IN HIGHER
YIELDING, HIGHER RISK, LOWER-RATED DEBT SECURITIES (SEE "INVESTMENT OBJECTIVES
AND POLICIES"). INVESTORS SHOULD RETAIN A COPY OF THIS PROSPECTUS FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE POLICIES ARE OBLIGATIONS OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY
COMPANY, AND ARE DISTRIBUTED BY ALLMERICA INVESTMENTS, INC. THE POLICIES ARE NOT
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR CREDIT
UNION. THE POLICIES ARE NOT INSURED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), OR ANY OTHER FEDERAL AGENCY. INVESTMENTS IN THE
POLICIES ARE SUBJECT TO VARIOUS RISKS, INCLUDING THE FLUCTUATION OF VALUE AND
POSSIBLE LOSS OF PRINCIPAL.
DATED MAY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION 3
SPECIAL TERMS 4
SUMMARY 6
ANNUAL AND TRANSACTION EXPENSES 8
CONDENSED FINANCIAL INFORMATION 12
PERFORMANCE INFORMATION 14
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, THE TRUST,
FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF 16
INVESTMENT OBJECTIVES AND POLICIES 18
INVESTMENT ADVISORY SERVICES 20
WHAT IS AN ANNUITY? 24
CHARGES AND DEDUCTIONS 24
A. Contingent Deferred Sales Charge 24
B. Premium Taxes 27
C. Policy Fee 27
D. Annual Charge Against Separate Account Assets 28
THE VARIABLE ANNUITY POLICIES 29
A. Purchase Payments 29
B. Right to Revoke Individual Retirement Annuity 29
C. Right to Revoke All Other Policies 30
D. Transfer Privilege 30
E. Surrenders 31
F. Partial Redemption 32
G. Death Benefit 32
H. The Spouse of the Owner as Beneficiary 33
I. Assignment 34
J. Electing the Form of Annuity and Annuity Date 34
K. Description of Variable Annuity Options 35
L. NORRIS Decision 36
M. Computation of Policy Values and Annuity Payments 36
FEDERAL TAX CONSIDERATIONS 38
A. Qualified and Non-Qualified Policies 38
B. Taxation of the Policies in General 38
Withdrawals Prior to Annuitization 39
Annuity Payouts After Annuitization 39
Penalty on Distribution 39
Assignments or Transfers 39
Non-Natural Owners 40
Deferred Compensation Plans of State and Local Government and Tax-Exempt
Organizations 40
C. Tax Withholding 40
D. Provisions Applicable to Qualified Employer Plans 40
Corporate and Self-Employed Pension and Profit Sharing Plans 40
Individual Retirement Annuities 40
Tax-Sheltered Annuities 41
Texas Optional Retirement Program 41
LOANS (QUALIFIED POLICIES ONLY) 41
REPORTS 41
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS 42
VOTING RIGHTS 42
CHANGES TO COMPLY WITH LAW AND AMENDMENTS 43
SERVICES 43
LEGAL MATTERS 43
FURTHER INFORMATION 43
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT A-1
APPENDIX B -- INFORMATION APPLICABLE ONLY TO POLICY 3018-91
(AND STATE VARIATIONS) B-1
</TABLE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
GENERAL INFORMATION AND HISTORY 2
TAXATION OF THE SEPARATE ACCOUNT AND THE COMPANY 3
SERVICES 3
UNDERWRITERS 4
ANNUITY BENEFIT PAYMENTS 4
EXCHANGE OFFER 5
PERFORMANCE INFORMATION 7
FINANCIAL STATEMENTS F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATED VALUE: the sum of the value of all Accumulation Units in the
Subaccounts and of the value of all accumulations in the General Account then
credited to the Policy, on any date before the date annuity payments are to
begin.
ACCUMULATION UNIT: a measure of the Policy Owner's interest in a Subaccount
before annuity payments begin.
ANNUITANT: the person designated in the Policy to whom the Annuity is to be
paid.
ANNUITY DATE: the date on which annuity payments begin.
ANNUITY UNIT: a measure of the value of the periodic annuity payments under the
Policy.
FIXED ANNUITY PAYOUT: an Annuity payout option providing for payments which
remain fixed in amount throughout the annuity payment period.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
Separate Account.
SEPARATE ACCOUNT: Separate Account VA-K of the Company. Separate Account VA-K
consists of assets segregated from other assets of the Company. The investment
performance of the assets of the Separate Account is determined separately from
the other assets of the Company. The assets of the Separate Account are not
chargeable with liabilities arising out of any other business which the Company
may conduct.
SUB-ACCOUNT: a subdivision of Separate Account VA-K. Each Sub-Account available
under the Policy invests exclusively in the shares of a corresponding fund of
Allmerica Investment Trust ("Trust"); a corresponding portfolio of the Variable
Insurance Product Fund ("Fidelity VIP"), the Variable Insurance Products Fund II
("Fidelity VIP II) or the International Stock Portfolio of T. Rowe Price
International Series, Inc. ("T. Rowe Price"); or a corresponding series of the
Delaware Group Premium Fund, Inc. ("DGPF").
SURRENDER VALUE: the Accumulated Value of the Policy minus any Policy fee and
contingent deferred sales charge applicable upon surrender.
UNDERLYING FUNDS (OR FUNDS): the Growth Fund, Investment Grade Income Fund,
Money Market Fund, Equity Index Fund, Government Bond Fund, Select International
Equity Fund, Select Aggressive Growth Fund, Select Capital Appreciation Fund,
Select Growth Fund, Select Growth and Income Fund and Small-Mid Cap Value Fund
of Allmerica Investment Trust; Fidelity VIP High Income Portfolio, Fidelity VIP
Equity-Income Portfolio, Fidelity VIP Growth Portfolio and Fidelity VIP Overseas
Portfolio of Variable Insurance Products Fund; the Fidelity VIP II Asset Manager
Portfolio of Variable Insurance Products Fund II; the T. Rowe Price
International Stock Portfolio of T. Rowe Price International Series, Inc.; and
the International Equity Series of Delaware Group Premium Fund, Inc.
UNDERLYING INVESTMENT COMPANIES: Allmerica Investment Trust, Variable Insurance
Products Fund, Variable Insurance Products Fund II, T. Rowe Price International
Series, Inc. and Delaware Group Premium Fund, Inc.
VALUATION DATE: a day on which the net asset value of the shares of any of the
Underlying Funds is determined and Unit values of the Subaccounts are
determined. Valuation dates currently occur on each day on which the New York
Stock Exchange is open for trading, and on such other days (other than a day
during which no payment, partial withdrawal, or surrender of a Policy was
received) when there is a sufficient degree of trading in an Underlying Fund's
portfolio securities such that the current net asset value of the Subaccounts
may be materially affected.
4
<PAGE>
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ANNUITY PAYOUT: an Annuity payout option providing for payments varying
in amount in accordance with the investment experience of the Growth Fund, Money
Market Fund, Equity Index Fund or Select Growth and Income Fund of Allmerica
Investment Trust.
5
<PAGE>
SUMMARY
INVESTMENT OPTIONS. The Policies permit net purchase payments to be allocated
among the Sub-Accounts available under the Policies, which are subdivisions of
Separate Account VA-K ("Separate Account"), a separate account of the Company,
and a fixed account ("General Account") of the Company (together "accounts").
The Separate Account is registered as a unit investment trust under the
Investment Company Act of 1940, as amended, (the "1940 Act") but such
registration does not involve the supervision of the management or investment
practices or policies of the Separate Account by the Securities and Exchange
Commission ("SEC"). For information about the Separate Account and the Company,
see "DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, THE TRUST, FIDELITY VIP,
FIDELITY VIP II, T. ROWE PRICE AND DGPF." For more information about the General
Account see APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Each Sub-Account available under the Policies invests its assets without sales
charge in a corresponding investment series of the Allmerica Investment Trust
(the "Trust"), Variable Insurance Products Fund (" Fidelity VIP"), Variable
Insurance Products Fund II ("Fidelity VIP II"), T. Rowe Price International
Series, Inc. ("T. Rowe Price") or Delaware Group Premium Fund, Inc. ("DGPF").
The Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF are open-end,
diversified series investment companies. Eleven different funds of the Trust are
available under the Policies: the Growth Fund, Investment Grade Income Fund,
Money Market Fund, Equity Index Fund, Government Bond Fund, Select International
Equity Fund, Select Aggressive Growth Fund, Select Capital Appreciation Fund,
Select Growth Fund, Select Growth and Income Fund and Small-Mid Cap Value Fund
of Allmerica Investment Trust. Four of the portfolios of VIP are available under
the Policies: the Fidelity High Income Portfolio, Fidelity Equity-Income
Portfolio, Fidelity Growth Portfolio and Fidelity Overseas Portfolio. One of the
portfolios of Fidelity VIP II is available under the Policies: the Fidelity
Asset Manager Portfolio. One of the portfolios of T. Rowe Price is available
under the Policies: the T. Rowe Price International Stock Portfolio. One of the
series of DGPF is available under the Policies: the International Equity Series.
Each of the Funds, Portfolios and Series available under the Policies (together,
the "Underlying Funds") operates pursuant to different investment objectives,
discussed below.
INVESTMENT IN THE SUB-ACCOUNT. The value of each Sub-Account will vary daily
depending on the performance of the investments made by the respective
Underlying Funds.
There can be no assurance that the investment objectives of the Underlying Funds
can be achieved or that the value of a Policy will equal or exceed the aggregate
amount of the purchase payments made under the Policy. For more information
about the investments of the Underlying Funds, see "DESCRIPTION OF THE COMPANY,
THE SEPARATE ACCOUNT, THE TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE
AND DGPF." The accompanying prospectuses of the Trust, Fidelity VIP, Fidelity
VIP II, T. Rowe Price and DGPF describe the investment objectives and risks of
each of the Underlying Funds.
Dividends or capital gains distributions received from an Underlying Fund are
reinvested in additional shares of that Underlying Fund, which are retained as
assets of the Sub-Account.
TRANSFERS BETWEEN ACCOUNTS. Prior to the Annuity Date, the Policies permit
amounts to be transferred among the Sub-Accounts and between the Sub-Accounts
and the General Account subject to certain limitations described under "Transfer
Privilege."
ANNUITY PAYMENTS. The owner of a Policy ("Owner") may select variable annuity
benefit payments based on one or more of certain Sub-Accounts, fixed annuity
payouts, or a combination of fixed and variable payments. Fixed annuity payouts
are guaranteed by the Company.
See "THE VARIABLE ANNUITY POLICIES" for information about annuity benefit
payment options, selecting the Annuity Date, and how annuity payments are
calculated.
6
<PAGE>
REVOCATION RIGHTS. The Policy Owner may revoke the Policy at any time between
the date of the application and the date 10 days after receipt of the Policy.
For more information about revocation rights, see "RIGHT TO REVOKE OR
SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS. Under the Policies, purchase payments are not
limited as to frequency and number, but no payments may be submitted within one
month of the Annuity Date. Generally, the initial purchase payment must be at
least $600 and subsequent payments must be at least $50. Under a monthly
automatic payment plan or a payroll deduction plan, each purchase payment must
be at least $50. However, in cases 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 Policy on the employee, if the
plan's average annual contribution per eligible plan participant is at least
$600.
The Company reserves the right to set maximum limits on the aggregate purchase
payments made under the Policy. In addition, the Internal Revenue Code (the
"Code") imposes maximum limits on contributions under qualified annuity plans.
CHARGES AND DEDUCTIONS. For a complete discussion of charges, see "CHARGES AND
DEDUCTIONS."
A. CONTINGENT DEFERRED SALES CHARGE. No sales charge is deducted from purchase
payments at the time the payments are made. However, depending on the length of
time that the payments to which the withdrawal is attributed have remained
credited under the Policy a contingent deferred sales charge of up to 8% may be
assessed for a surrender, partial redemption, or election of any commutable
period certain option or a noncommutable period certain option for less than 10
years.
B. ANNUAL POLICY FEE. A Policy Fee equal to the lesser of $30 or 3% of
Accumulated Value will be deducted from the Accumulated Value on a policy
anniverary or upon full surrender when the Accumulated Value is $50,000 or less.
The Policy Fee is waived for policies issued to and maintained by the trustee of
a 401(k) plan.
C. PREMIUM TAXES. A deduction for state and local premium taxes, if any, may be
made as described under "Premium Taxes."
D. SEPARATE ACCOUNT ASSET CHARGES. A daily charge, equivalent to 1.25% per
annum, is made on the value of each Sub-Account at each Valuation Date. The
charge is retained for the mortality and expense risks the Company assumes. In
addition, to cover administrative expenses, the Company deducts a daily charge
of 0.20% per annum of the value of the average net assets in the Sub-Accounts.
E. TRANSFER CHARGE. The Company currently makes no charge for transfers. The
Company guarantees that the first twelve transfers in a Policy year will be free
of 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. If the Policy Owner has elected automatic
transfers, the first automatic transfer will count as one transfer towards the
twelve which are guaranteed to be free of charge.
F. CHARGES OF THE UNDERLYING FUND. In addition to the charges described above,
certain fees and expenses are deducted from the assets of the Underlying Funds.
These charges vary among the Underlying Funds.
SURRENDER OR PARTIAL REDEMPTION. At any time before the Annuity Date, the Owner
has the right either to surrender the Policy in full and receive its current
value, minus the Policy Fee and any applicable contingent deferred sales charge,
or to redeem a portion of the Policy's value subject to certain limits and any
applicable contingent deferred sales charge. There may be tax consequences for
surrender or redemptions. For further information, see "Surrender" and "Partial
Redemption," "Contingent Deferred Sales Charge," and "FEDERAL TAX
CONSIDERATIONS."
DEATH BENEFIT. If the Annuitant or Owner should die before the Annuity Date, a
death benefit will be paid to the beneficiary. Upon death of the Annuitant, the
death benefit is equal to the greatest of (a) the Accumulated Value under the
Policy, or (b) the sum of the gross payment(s) made under the Policy reduced
proportionally to reflect the amount of all partial redemptions, or (c) the
death benefit that would
7
<PAGE>
have been payable on the most recent fifth year Policy Anniversary, increased
for subsequent purchase payments and reduced proportionally to reflect
withdrawals after that date. Upon death of the Owner, the death benefit will
equal the Accumulated Value of the Policy next determined following receipt of
due proof of death at the Principal Office. See "Death Benefit."
SALES OF POLICIES. The Policies are sold by agents of the Company who are
registered representatives of Allmerica Investments, Inc., a broker-dealer
affiliate of the Company. The Policies also may be purchased from certain other
broker-dealers which are members of the National Association of Securities
Dealers, Inc., and whose representatives are authorized by applicable law to
sell variable annuity policies. See "Sales Expense."
ANNUAL AND TRANSACTION EXPENSES
The following tables show the various costs and expenses that an Owner will bear
directly or indirectly under the Policies. The tables reflect charges under the
Policies, expenses of the Sub-Accounts, and expenses of the Underlying Funds. In
addition to the charges and expenses described below, premium taxes may be
applicable in some states.
POLICY OWNER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
POLICY YEAR
AFTER DATE
OF
PURCHASE
PAYMENT CHARGE
----------- ---------
<S> <C> <C>
CONTINGENT DEFERRED SALES CHARGE:
The charge (as a percentage of payments, applied surrendered in 0-2 8%
excess of the amount, if any, which excess of the amount, if any, 3 7%
which excess of the amount, if any, which will be assessed upon 4 6%
surrender, redemption, or annuitization under any commutable 5 5%
period certain less than 10 years. 6 4%
7 3%
8 2%
9 1%
more than 9 0%
TRANSFER CHARGE: None
ANNUAL POLICY FEE: $30
An annual Policy Fee, equal to the lesser of $30 or 3% of
Accumulated Value, is deducted when Accumulated Value is $50,000
or less. The Policy Fee is waived for policies issued to and
maintained by the trustee of a 401(k) plan.
SEPARATE ACCOUNT ANNUAL EXPENSES:
(as a percentage of average account value)
Mortality and Expense Risk Fees 1.25%
Separate Account Administrative Charge 0.20%
---------
Total Annual Expenses: 1.45%
</TABLE>
8
<PAGE>
FUND EXPENSES
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1996. For more information concerning fees and
expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
OTHER FUND
MANAGEMENT EXPENSES (AFTER ANY TOTAL FUND
UNDERLYING FUND FEE APPLICABLE REIMBURSEMENTS) EXPENSES
- --------------------------------------------------------- --------------- ---------------------------- ----------------
<S> <C> <C> <C>
Select International Equity Fund......................... 1.00% 0.23%* 1.23%***
DGPF International Equity Series......................... 0.64% 0.16%** 0.80%
Fidelity VIP Overseas Portfolio.......................... 0.76% 0.17% 0.93%****
T. Rowe Price International Stock Portfolio.............. 1.05% 0.00% 1.05%
Select Aggressive Growth Fund............................ 1.00% 0.08%* 1.08%
Select Capital Appreciation Fund......................... 1.00% 0.13%* 1.13%
Small-Mid Cap Value Fund................................. 0.85% 0.12%* 0.97%
Select Growth Fund....................................... 0.85% 0.08%* 0.93%***
Growth Fund.............................................. 0.44% 0.07%* 0.51%
Fidelity VIP Growth Portfolio............................ 0.61% 0.08% 0.69%****
Equity Index Fund........................................ 0.32% 0.14%* 0.46%
Select Growth and Income Fund............................ 0.75% 0.08%* 0.83%***
Fidelity VIP Equity-Income Portfolio..................... 0.51% 0.07% 0.68%****
Fidelity VIP II Asset Manager Portfolio.................. 0.64% 0.10% 0.74%****
Fidelity VIP High Income Portfolio....................... 0.59% 0.12% 0.71%
Investment Grade Income Fund............................. 0.40% 0.12%* 0.52%
Government Bond Fund..................................... 0.50% 0.16%* 0.66%
Money Market Fund........................................ 0.28% 0.06%* 0.34%
</TABLE>
* Under the Management Agreement with the Trust, Allmerica Investment
Management Company, Inc. ("Allmerica Investment") has declared a voluntary
expense limitation of 1.50% of average net assets for the Select
International Equity Fund, 1.35% for the Select Aggressive Growth Fund and
Select Capital Appreciation Fund, 1.25% for the Small-Mid Cap Value Fund,
1.20% for the Growth Fund and Select Growth Fund, 1.10% for the Select
Growth and Income Fund, 1.00% for the Investment Grade Income Fund, and
Government Bond Fund, and 0.60% for the Money Market Fund and Equity Index
Fund. The total operating expenses of the trust were less than their
respective expense limitations throughout 1996. The declaration of a
voluntary expense limitation in any year does not bind Allmerica Investment
to declare future expense limitations with respect to these funds.
** Delaware International Advisers Ltd., the investment adviser for the
International Equity Series, has agreed to waive its management fee and
reimburse the International Equity Series to limit certain expenses to 8/10
of 1% of the corresponding net assets. This waiver has been in effect from
the commencement of the public offering for the Series and has been
extended through June 30, 1997. Without the expense limitation, in 1996 the
total annual expenses of the International Equity Series would have been
0.99%.
*** These funds have entered into agreements with brokers whereby the brokers
rebate a portion of commissions. Had these amounts been treated as
reductions of expenses the total operating expenses would have been 1.20%
for the Select International Equity Fund, 0.92% for the Select Growth Fund
and 0.80% for the Select Growth and Income Fund.
**** A portion of the brokerage commissions that certain funds pay was used to
reduce portfolio expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest
earned on uninvested cash balances was used to reduce custodian and
transfer agent expenses. Including these reductions, the total operating
expenses presented in the table would have been 0.92% for Fidelity VIP
Overseas Portfolio, 0.67% for Fidelity VIP Growth Portfolio, 0.56% for
Fidelity VIP Equity-Income Portfolio and 0.73% for Fidelity VIP II Asset
Manager Portfolio.
9
<PAGE>
Examples. The following examples demonstrate the cumulative expenses which would
be paid by the Owner at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets, as required by rules of the Securities and
Exchange Commission (the "SEC"). Because the expenses of the Underlying Funds
differ, separate examples are used to illustrate the expenses incurred by an
Owner on an investment in the various Sub-Accounts.
The information given under the following examples should not be considered a
representation of past or future expenses. Actual expenses may be greater or
lesser than those shown.
(1) If, at the end of the applicable period, you surrender the Contract or
annuitize* under a commutable variable period certain option or a non-commutable
period certain option of less than ten years, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Select International Equity Fund....................................... $ 102 $ 154 $ 198 $ 313
DGPF International Equity Series....................................... $ 98 $ 142 $ 177 $ 271
Fidelity VIP Overseas Portfolio........................................ $ 99 $ 146 $ 183 $ 284
T. Rowe Price International Stock Portfolio............................ $ 100 $ 149 $ 189 $ 295
Select Aggressive Growth Fund.......................................... $ 101 $ 150 $ 191 $ 298
Select Capital Appreciation Fund....................................... $ 101 $ 151 $ 193 $ 303
Small-Mid Cap Value Fund............................................... $ 99 $ 147 $ 185 $ 288
Select Growth Fund..................................................... $ 99 $ 146 $ 183 $ 284
Growth Fund............................................................ $ 95 $ 134 $ 162 $ 241
Fidelity VIP Growth Portfolio.......................................... $ 97 $ 139 $ 171 $ 260
Equity Index Fund...................................................... $ 95 $ 132 $ 159 $ 236
Select Growth and Income Fund.......................................... $ 98 $ 143 $ 178 $ 274
Fidelity Equity-Income Portfolio....................................... $ 97 $ 139 $ 170 $ 258
Fidelity VIP II Asset ManagerPortfolio................................. $ 97 $ 140 $ 174 $ 265
Fidelity VIP High Income Portfolio..................................... $ 97 $ 140 $ 172 $ 262
Investment Grade Income Fund........................................... $ 95 $ 134 $ 162 $ 242
Government Bond Fund................................................... $ 97 $ 138 $ 169 $ 256
Money Market Fund...................................................... $ 94 $ 129 $ 153 $ 223
</TABLE>
10
<PAGE>
(2) If you annuitize* under a life option or any non-commutable period certain
option of ten years or more at the end of the applicable time period or if you
do NOT surrender or annuitize the Contract, you would pay the following expenses
on a $1,000 investment, assuming 5% annual return on assets:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Select International Equity Fund....................................... $ 28 $ 87 $ 148 $ 313
DGPF International Equity Series....................................... $ 24 $ 74 $ 127 $ 271
Fidelity VIP Overseas Portfolio........................................ $ 25 $ 78 $ 133 $ 284
T. Rowe Price International Stock Portfolio............................ $ 27 $ 81 $ 139 $ 295
Select Aggressive Growth Fund.......................................... $ 27 $ 82 $ 141 $ 298
Select Capital Appreciation Fund....................................... $ 27 $ 84 $ 143 $ 303
Small-Mid Cap Value Fund............................................... $ 26 $ 79 $ 135 $ 288
Select Growth Fund..................................................... $ 25 $ 78 $ 133 $ 284
Growth Fund............................................................ $ 21 $ 65 $ 112 $ 241
Fidelity VIP Growth Portfolio.......................................... $ 23 $ 71 $ 121 $ 260
Equity Index Fund...................................................... $ 21 $ 64 $ 109 $ 236
Select Growth and Income Fund.......................................... $ 24 $ 75 $ 128 $ 274
Fidelity Equity-Income Portfolio....................................... $ 23 $ 70 $ 120 $ 258
Fidelity VIP II Asset ManagerPortfolio................................. $ 23 $ 72 $ 124 $ 265
Fidelity VIP High Income Portfolio..................................... $ 23 $ 71 $ 122 $ 262
Investment Grade Income Fund........................................... $ 21 $ 65 $ 112 $ 242
Government Bond Fund................................................... $ 23 $ 70 $ 119 $ 256
Money Market Fund...................................................... $ 19 $ 60 $ 103 $ 223
</TABLE>
Pursuant to requirements of the Investment Company Act of 1940 (the "1940 Act"),
the Policy fee has been reflected in the examples by a method intended to show
the "average" impact of the Policy fee on an investment in the Separate Account.
The total Policy fees collected under the Policies by the Company are divided by
the total average net assets attributable to the Policies. The resulting
percentage is 0.12%, and the amount of the Contract fee is assumed to be $1.20
in the examples. The Contract fee is deducted only when the accumulated value is
$50,000 or less. Lower costs apply to Contracts issued and maintained as part of
a 401(k) plan.
* The Policy fee is not deducted after annuitization. No contingent deferred
sales charge is assessed at the time of annuitization in any Policy year under
an option including a life contingency or under any noncommutable period
certain option of ten years or more.
11
<PAGE>
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
SUB-ACCOUNTS 1996 1995 1994 1993 1992
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECT INTERNATIONAL EQUITY FUND**
Unit Value:
Beginning of Period........................................ 1.127 0.956 1.000
--- ---
End of Period.............................................. 1.355 1.127 0.956
--- ---
Number of Units Outstanding at End
of Period (in thousands).................................... 77,485 37,680 12,530
--- ---
DGPF INTERNATIONAL EQUITY SERIES*
Unit Value:
Beginning of Period........................................ 1.284 1.143 1.129 1.000
---
End of Period.............................................. 1.519 1.284 1.143 1.129
---
Number of Units Outstanding at End
of Period (in thousands).................................... 44,416 34,692 26,924 6,681
---
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period........................................ 1.330 1.230 1.226 0.906 1.030
End of Period.............................................. 1.484 1.330 1.230 1.226 0.906
Number of Units Outstanding at End
of Period (in thousands).................................... 63,050 65,256 59,774 25,395 6,728
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO***
Unit Value:
Beginning of Period........................................ 1.064 1.000
--- --- ---
End of Period.............................................. 1.203 1.064
--- --- ---
Number of Units Outstanding at End
of Period (in thousands).................................... 35,915 10,882
--- --- ---
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period........................................ 1.686 1.292 1.342 1.139 1.000
End of Period.............................................. 1.970 1.686 1.292 1.342 1.139
Number of Units Outstanding at End
of Period (in thousands).................................... 89,974 70,349 54,288 26,158 2,019
SELECT CAPITAL APPRECIATION FUND***
Unit Value:
Beginning of Period........................................ 1.383 1.000
--- --- ---
End of Period.............................................. 1.482 1.383
--- --- ---
Number of Units Outstanding at End
of Period (in thousands).................................... 52,927 16,096
--- --- ---
SMALL-MID CAP VALUE FUND*
Unit Value:
Beginning of Period........................................ 1.249 1.075 1.167 1.000
---
End of Period.............................................. 1.580 1.249 1.075 1.167
---
Number of Units Outstanding at End
of Period (in thousands).................................... 60,145 43,433 33,049 9,902
---
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNTS 1996 1995 1994 1993 1992
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
SELECT GROWTH FUND
<S> <C> <C> <C> <C> <C>
Unit Value:
Beginning of Period........................................ 1.259 1.024 1.055 1.058 1.000
End of Period.............................................. 1.514 1.259 1.024 1.055 1.058
Number of Units Outstanding at End
of Period (in thousands).................................... 62,633 47,078 38,415 26,064 3,039
GROWTH FUND
Unit Value:
Beginning of Period........................................ 1.599 1.221 1.236 1.175 1.111
End of Period.............................................. 1.894 1.599 1.221 1.236 1.175
Number of Units Outstanding at End
of Period (in thousands).................................... 135,573 116,008 102,399 72,609 34,373
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period........................................ 1.895 1.419 1.440 1.224 1.135
End of Period.............................................. 2.143 1.895 1.419 1.440 1.224
Number of Units Outstanding at End
of Period (in thousands).................................... 142,450 116,485 90,717 49,136 18,253
EQUITY INDEX FUND
Unit Value:
Beginning of Period........................................ 1.640 1.221 1.266 1.135 1.074
End of Period.............................................. 1.977 1.640 1.221 1.226 1.135
Number of Units Outstanding at End
of Period (in thousands).................................... 57,428 39,534 29,176 22,466 9,535
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period........................................ 1.370 1.066 1.074 0.987 1.000
End of Period.............................................. 1.638 1.370 1.066 1.074 0.987
Number of Units Outstanding at End
of Period (in thousands).................................... 82,434 63,841 51,098 31,846 4,711
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period........................................ 1.185 1.490 1.412 1.211 1.051
End of Period.............................................. 2.236 1.185 1.490 1.412 1.211
Number of Units Outstanding at End
of Period (in thousands).................................... 167,000 139,145 104,356 61,264 17,855
FIDELITY VIP II ASSET MANAGER PORTFOLIO**
Unit Value:
Beginning of Period........................................ 1.127 0.977 1.000
--- ---
End of Period.............................................. 1.273 1.127 0.977
--- ---
Number of Units Outstanding at End
of Period (in thousands).................................... 42,415 33,444 20,720
--- ---
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period........................................ 1.743 1.465 1.510 1.270 1.047
End of Period.............................................. 1.958 1.743 1.465 1.510 1.270
Number of Units Outstanding at End
of Period (in thousands).................................... 53,956 38,042 27,041 13,583 3,625
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNTS 1996 1995 1994 1993 1992
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
INVESTMENT GRADE INCOME FUND
<S> <C> <C> <C> <C> <C>
Unit Value:
Beginning of Period........................................ 1.390 1.073 1.250 1.145 1.073
End of Period.............................................. 1.418 1.390 1.196 1.250 1.145
Number of Units Outstanding at End
of Period (in thousands).................................... 79,054 69,168 57,454 48,488 15,428
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period........................................ 1.285 1.152 1.179 1.112 1.075
End of Period.............................................. 1.311 1.285 1.152 1.179 1.112
Number of Units Outstanding at End
of Period (in thousands).................................... 30,921 31,710 32,519 60,265 29,844
MONEY MARKET FUND
Unit Value:
Beginning of Period........................................ 1.124 1.077 1.051 1.035 1.013
End of Period.............................................. 1.167 1.124 1.077 1.051 1.035
Number of Units Outstanding at End
of Period (in thousands).................................... 92,354 69,311 37,668 30,815 30,778
</TABLE>
* Inception date of Sub-Accounts: 4/30/93
** Inception date of Sub-Accounts: 5/01/94
*** Inception date of Sub-Accounts: 4/28/95
PERFORMANCE INFORMATION
Allmerica Financial may advertise "Total Return" and "Average Annual Total
Return" performance information based on the periods that the Underlying Funds
have been in existence. The results for any period prior to the Policy being
offered will be calculated as if the Policy had been offered during that period
of time, with all charges assumed to be those applicable to the Sub-Accounts,
the Underlying Funds, and (in TABLE 1) assuming that the Policy is 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 Separate Account charges, and expressed as a
percentage of the investment.
The "yield" of the Sub-Account investing in the Money Market Fund of the Trust
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 total return, yield, and effective yield figures are adjusted to reflect the
Sub-Account's asset charges. The total return figures also reflect the $30
annual Policy fee and the contingent deferred sales load which would be assessed
if the investment were completely withdrawn at the end of the specified period.
The Company also may advertise supplemental total return performance
information. Supplemental total return refers to the total of the income
generated by an investment in the Sub-Account and of the changes of value of the
principal invested (due to realized and unrealized capital gains or losses),
adjusted by the Sub-Account's annual asset charges, and expressed as a
percentage of the investment. Because it is
14
<PAGE>
assumed that the investment is NOT withdrawn at the end of the specified period,
the contingent deferred sales charge is NOT included in the calculation of
supplemental total return. (See TABLE 2)
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds and other investment products by overall
performance, investment objectives, and assets, or tracked by other services,
companies, publications, or persons who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during the 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 Fund 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.
TABLE 1
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR 10 YEARS OR
ENDED SINCE
NAME OF UNDERLYING FUND 12/31/96 5 YEARS INCEPTION*
- -------------------------------------------------------------------------- ------------ ----------- ---------------
<S> <C> <C> <C>
Select International Equity Fund.......................................... 12.07% N/A 9.70%
DGPF International Equity Series.......................................... 10.18% N/A 9.82%
Fidelity VIP Overseas Portfolio........................................... 3.46% 6.71% 6.19%
T. Rowe Price International Stock Portfolio............................... 4.90% N/A 5.97%
Select Aggressive Growth Fund............................................. 8.72% N/A 17.25%
Select Capital Appreciation Fund.......................................... - 0.61% N/A 22.25%
Small-Mid Cap Value Fund.................................................. 18.57% N/A 11.88%
Select Growth Fund........................................................ 12.14% N/A 10.08%
Growth Fund............................................................... 10.34% 10.47% 13.00%
Fidelity VIP Growth Portfolio............................................. 4.93% 12.81% 13.36%
Equity Index Fund......................................................... 12.42% 12.24% 15.71%
Select Growth and Income Fund............................................. 11.40% N/A 11.22%
Fidelity VIP Equity-Income Portfolio...................................... 4.51% 15.63% 11.97%
Fidelity VIP II Asset Manager Portfolio................................... 4.83% 8.54% 9.80%
Fidelity VIP High Income Portfolio........................................ 4.27% 12.60% 9.38%
Investment Grade Income Fund.............................................. - 5.41% 4.81% 6.62%
Government Bond Fund...................................................... - 5.45% 3.05% 4.63%
Money Market Fund......................................................... - 3.77% 1.86% 4.21%
</TABLE>
15
<PAGE>
TABLE 2
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1996
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
FOR YEAR 10 YEARS OR
ENDED SINCE
NAME OF UNDERLYING FUND 12/31/96 5 YEARS INCEPTION*
- ---------------------------------------------------------------------------- ------------ ----------- ---------------
<S> <C> <C> <C>
Select International Equity Fund............................................ 20.07% N/A 11.91%
DGPF International Equity Series............................................ 18.18% N/A 10.70%
Fidelity VIP Overseas Portfolio............................................. 11.46% 7.46% 6.19%
T. Rowe Price International Stock Portfolio................................. 12.90% N/A 8.22%
Select Aggressive Growth Fund............................................... 16.72% N/A 17.91%
Select Capital Appreciation Fund............................................ 7.11% N/A 26.36%
Small-Mid Cap Value Fund.................................................... 26.57% N/A 13.07%
Select Growth Fund.......................................................... 20.14% N/A 10.89%
Growth Fund................................................................. 18.34% 11.13% 13.00%
Fidelity VIP Growth Portfolio............................................... 12.93% 13.42% 13.36%
Equity Index Fund........................................................... 20.42% 12.86% 15.93%
Select Growth and Income Fund............................................... 19.40% N/A 12.01%
Fidelity VIP Equity-Income Portfolio........................................ 12.51% 16.19% 11.97%
Fidelity VIP II Asset Manager Portfolio..................................... 12.83% 9.52% 9.95%
Fidelity VIP High Income Portfolio.......................................... 12.27% 13.21% 9.38%
Investment Grade Income Fund................................................ 1.93% 5.62% 6.62%
Government Bond Fund........................................................ 1.89% 3.92% 5.24%
Money Market Fund........................................................... 3.71% 2.77% 4.21%
</TABLE>
* The inception dates of the Underlying Funds are: 4/29/85 for Growth Fund,
Investment Grade Income Fund and Money Market Fund; 9/28/90 for Equity Index
Fund; 8/26/91 for Government Bond Fund; 8/21/92 for Select Aggressive Growth
Fund, Select Growth Fund, Select Growth and Income Fund; 4/30/93 for Small-Mid
Cap Value Fund 5/01/94 for Select International Equity Fund; 4/28/95 for
Select Capital Appreciation Fund; 10/09/86 for Fidelity VIP Equity-Income
Portfolio and Fidelity VIP Growth Portfolio; 9/19/85 for Fidelity VIP High
Income Portfolio; 1/28/87 for Fidelity VIP Overseas Portfolio; 9/06/89 for
Fidelity VIP II Asset Manager Portfolio; 10/29/92 for DGPF International
Equity Series; 3/31/94 for the T. Rowe Price International Stock Portfolio.
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, THE TRUST,
FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF
THE COMPANY. The Company is a life insurance company organized under the laws
of Delaware in July, 1974. Its Principal Office is located at 440 Lincoln
Street, Worcester, Massachusetts 01653, Telephone 508-855-1000. The Company is
subject to the laws of the state of Delaware governing insurance companies and
to regulation by the Commissioner of Insurance of Delaware. In addition, the
Company is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1996, the
Company had over $6.7 billion in assets and over $25.8 billion of life insurance
in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirect 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 on October 16, 1995, and adopted its
present name. First Allmerica is the fifth oldest life insurance company in
America. As of
16
<PAGE>
December 31, 1996, First Allmerica and its subsidiaries (including the Company)
had over $13.3 billion in combined assets and over $45.3 billion in life
insurance in force.
THE SEPARATE ACCOUNT. The Separate Account is a separate investment account of
the Company referred to as Separate Account VA-K. Theassets used to fund the
variable portions of the Policy are set aside in the Sub-Accounts of the
Separate Account, and are kept separate and apart from the general assets of the
Company. There are 18 Sub-Accounts available under the Policy. Each Sub-Account
is administered and accounted for as part of the general business of the
Company, but the income, capital gains, or capital losses of each Sub-Account
are allocated to such Sub-Account, without regard to other income, capital
gains, or capital losses of the Company. Under Delaware law, the assets of the
Separate Account may not be charged with any liabilities arising out of any
other business of the Company.
The Separate Account was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account meets the definition of a
"separate account" under federal securities law and is registered with the SEC
as a unit investment trust under the 1940 Act. Such registration does not
involve the supervision by the SEC of management or investment practices or
policies of the Variable Account or 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.
ALLMERICA INVESTMENT TRUST. Allmerica Investment Trust ("Trust") is an
open-end, diversified management investment company registered with the SEC
under the 1940 Act. The Trust was established as a Massachusetts business trust
on October 11, 1984, for the purpose of providing a vehicle for the investment
of assets of various separate accounts established by the Company or other
affiliated insurance companies. Eleven investment portfolios of the Trust are
currently available under the Policy, each issuing a series of shares: the
Growth Fund, Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, Select International Equity Fund, Select Aggressive Growth
Fund, Select Capital Appreciation Fund, Select Growth Fund, Select Growth and
Income Fund and Small-Mid Cap Value Fund. The assets of each Fund are held
separate from the assets of the other Funds. Each Fund operates as a separate
investment vehicle and the income or losses of one Fund have no effect on the
investment performance of another Fund. Shares of the Trust are not offered to
the general public but solely to such variable accounts.
Allmerica Investment Management Company, Inc. ("Allmerica Investment") serves as
investment adviser of the Trust. Allmerica Investment has entered into
sub-advisory agreements with other investment managers ("Sub-Advisers") who
manage the investments of the Funds. See "Investment Advisory Services to the
Trust."
VARIABLE INSURANCE PRODUCTS FUND. Variable Insurance Products Fund ("Fidelity
VIP") managed by Fidelity Management & Research Company ("FMR"), is an open-end,
diversified management investment company organized as a Massachusetts business
trust on November 13, 1981, and registered with the SEC under the 1940 Act. Four
of its investment portfolios are available under the Policy: Fidelity VIP High
Income Portfolio, Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth
Portfolio and Fidelity VIP Overseas Portfolio.
Various Fidelity companies perform certain activities required to operate
Fidelity VIP. FMR, is one of America's largest investment management
organizations and has its principal business address at 82 Devonshire Street,
Boston, MA. It is composed of a number of different companies, which provide a
variety of financial services and products. FMR is the original Fidelity
company, founded in 1946. It provides a number of mutual funds and other clients
with investment research and portfolio management services. The Portfolios of
Fidelity VIP as part of their operating expenses pay an investment management
fee to FMR. See "Investment Advisory Services to Fidelity VIP and Fidelity VIP
II."
VARIABLE INSURANCE PRODUCTS FUND II. Variable Insurance Products Fund II
("Fidelity VIP II"), managed by FMR (see discussion above) is an open-end,
diversified management investment
17
<PAGE>
company organized as a Massachusetts business trust on March 21, 1988, and
registered with the SEC under the 1940 Act. One of its investment portfolios is
available under the Policy: Fidelity VIP II Asset Manager Portfolio.
T. ROWE PRICE INTERNATIONAL SERIES, INC. T. Rowe Price International Series,
Inc. ("T. Rowe Price"), managed by Rowe Price-Fleming International, Inc.
("Price-Fleming") (See "Investment Advisory Services to T. Rowe Price"), is an
open-end, diversified management investment company organized as a Maryland
corporation in 1994 and registered with the SEC under the 1940 Act. One of its
investment portfolios is available under the Policy: the T. Rowe Price
International Stock Portfolio.
DELAWARE GROUP PREMIUM FUND, INC. Delaware Group Premium Fund, Inc. ("DGPF") is
an open-end, diversified, management investment company registered with the SEC
under the 1940 Act. DGPF was established to provide a vehicle for the investment
of assets of various separate accounts supporting variable insurance Policys.
One investment portfolio ("Series") is available under the Policy, the
International Equity Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). See
"Investment Advisory Services to DGPF."
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of each of the Underlying Funds is set forth
below. The Underlying Funds are listed by general investment risk
characteristics. MORE DETAILED INFORMATION REGARDING THE INVESTMENT OBJECTIVES,
RESTRICTIONS AND RISKS, EXPENSES PAID BY THE UNDERLYING FUNDS AND OTHER RELEVANT
INFORMATION REGARDING THE UNDERLYING INVESTMENT COMPANIES MAY BE FOUND IN THEIR
RESPECTIVE PROSPECTUSES, WHICH ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING. The Statements of Additional Information of the
Underlying Funds are available upon request. There can be no assurance that the
investment objectives of the Underlying Funds can be achieved.
SELECT INTERNATIONAL EQUITY FUND -- The Select International Equity Fund of the
Trust seeks maximum long-term total return (capital appreciation and income)
primarily by investing in common stocks of established non-U.S. companies.
DGPF INTERNATIONAL EQUITY SERIES -- The International Equity Series of DGPF
seeks long-term growth without undue risk to principal by investing primarily in
equity securities of foreign issuers providing the potential for capital
appreciation and income.
FIDELITY VIP OVERSEAS PORTFOLIO -- The Overseas Portfolio of Fidelity VIP seeks
long-term growth of capital primarily through investments in foreign securities
and provides a means for aggressive investors to diversify their own portfolios
by participating in companies and economies outside of the United States.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- The T. Rowe Price International
Stock Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies.
SELECT AGGRESSIVE GROWTH FUND -- The Select Aggressive Growth Fund of the Trust
seeks above-average capital appreciation by investing primarily in common stocks
of companies which are believed to have significant potential for capital
appreciation.
SELECT CAPITAL APPRECIATION FUND -- The Select Capital Appreciation Fund of the
Trust seeks long-term growth of capital in a manner consistent with the
preservation of capital. Realization of income is not a significant investment
consideration and any income realized on the Fund's investments will be
incidental to its primary objective. The Fund invests primarily in common stock
of industries and companies which are believed to be experiencing favorable
demand for their products and services, and which operate in a favorable
competitive environment and regulatory climate. The Sub-Adviser for the Select
Capital Appreciation Fund is Janus Capital Corporation.
18
<PAGE>
SMALL-MID CAP VALUE FUND -- The Small-Mid Cap Value Fund of the Trust seeks
long-term growth by investing principally in a diversified portfolio of common
stocks of small and mid-size companies whose securities at the time of purchase
are considered by the Sub-Adviser to be undervalued.
SELECT GROWTH FUND -- The Select Growth Fund of the Trust seeks to achieve
long-term growth of capital by investing in a diversified portfolio consisting
primarily of common stocks selected on the basis of their long-term growth
potential.
GROWTH FUND -- The Growth Fund of the Trust is invested in common stocks and
securities convertible into common stocks that are believed to represent
significant underlying value in relation to current market prices. The objective
of the Growth Fund is to achieve long-term growth of capital. Realization of
current investment income, if any, is incidental to this objective.
FIDELITY VIP GROWTH PORTFOLIO -- The Growth Portfolio of Fidelity VIP seeks to
achieve capital appreciation. The Portfolio normally purchases common stocks,
although its investments are not restricted to any one type of security. Capital
appreciation also may be found in other types of securities, including bonds and
preferred stocks.
EQUITY INDEX FUND -- The Equity Index Fund of the Trust seeks to provide
investment results that correspond to the aggregate price and yield performance
of a representative selection of United States publicly traded common stocks.
The Equity Index Fund seeks to achieve its objective by attempting to replicate
the aggregate price and yield performance of the Standard & Poor's Composite
Index of 500 Stocks.
SELECT GROWTH AND INCOME FUND -- The Select Growth and Income Fund seeks a
combination of long-term growth of capital and current income. The Fund will
invest primarily in dividend-paying common stocks and securities convertible
into common stocks.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- The Equity-Income Portfolio of Fidelity
VIP seeks reasonable income by investing primarily in income-producing equity
securities. In choosing these securities, the Portfolio also will consider the
potential for capital appreciation. The Portfolio's goal is to achieve a yield
which exceeds the composite yield on the securities comprising the S&P 500. The
Portfolio may invest in high yielding, lower-rated fixed-income securities
(commonly referred to as "junk bonds") which are subject to greater risk than
investments in higher-rated securities. See "Risks of Lower-Rated Debt
Securities" in the Fidelity VIP prospectus.
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- The Asset Manager Portfolio of
Fidelity VIP II seeks high total return with reduced risk over the long term by
allocating its assets among domestic and foreign stocks, bonds and short-term
fixed-income instruments.
FIDELITY VIP HIGH INCOME PORTFOLIO -- The High Income Portfolio of Fidelity VIP
seeks to obtain a high level of current income by investing primarily in
high-yielding, lower-rated fixed-income securities (commonly referred to as
"junk bonds"), while also considering growth of capital. These securities often
are considered to be speculative, and involve greater risk of default or price
changes than securities assigned a high quality rating. See "Risks of
Lower-Rated Debt Securities" in the Fidelity VIP prospectus.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund of the Trust is
invested in a diversified portfolio of fixed income securities with the
objective of seeking as high a level of total return (including both income and
capital appreciation) as is consistent with prudent investment management.
GOVERNMENT BOND FUND -- The Government Bond Fund of the Trust has the investment
objectives of seeking high income, preservation of capital and maintenance of
liquidity, primarily through investments in debt instruments issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and in
related options, futures and repurchase agreements.
19
<PAGE>
MONEY MARKET FUND -- The Money Market Fund of the Trust is invested in a
diversified portfolio of high-quality, short-term money market instruments with
the objective of obtaining maximum current income consistent with the
preservation of capital and liquidity.
CERTAIN UNDERLYING FUNDS HAVE INVESTMENT OBJECTIVES AND/OR POLICIES SIMILAR TO
THOSE OF OTHER UNDERLYING FUNDS. THEREFORE, TO CHOOSE THE SUB-ACCOUNTS WHICH
BEST WILL MEET YOUR NEEDS AND OBJECTIVES, CAREFULLY READ THE PROSPECTUSES OF THE
TRUST, FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF, ALONG WITH THIS
PROSPECTUS. IN SOME STATES, INSURANCE REGULATIONS MAY RESTRICT THE AVAILABILITY
OF PARTICULAR SUB-ACCOUNTS.
If there is a material change in the investment policy of a Fund, the Owner will
be notified of the change. If the Owner has accumulated Value allocated to that
Fund, he or she may have the Accumulated Value reallocated without charge to
another Fund or to the Fixed Account, where available, on written request
received by the Company within sixty (60) days of the later of (1) the effective
date of such change in the investment policy, or (2) the receipt of the notice
of the Owner's right to transfer.
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST. The overall responsibility for the
supervision of the affairs of the Trust vests in the Trustees. The Trustees have
entered into an agreement ("Management Agreement") with Allmerica Investment
Management Company, Inc. ("Manager") to handle the day-to-day affairs of the
Trust. The Manager, subject to review by the Trustees, is responsible for the
general management of the Funds of the Trust. The Manager also performs certain
administrative and management services for the Trust, furnishes to the Trust all
necessary office space, facilities and equipment, and pays the compensation, if
any, of officers and Trustees who are affiliated with the Manager.
Other than the expenses specifically assumed by the Manager under the Management
Agreement, all expenses incurred in the operation of the Trust are borne by it,
including fees and expenses associated with the registration and qualification
of the Trust's shares under the Securities Act of 1933 ("1933 Act"), other fees
payable to the SEC, independent public accountant, legal and custodian fees,
association membership dues, taxes, interest, insurance premiums, brokerage
commissions, fees and expenses of the Trustees who are not affiliated with the
Manager, expenses for proxies, prospectuses, reports to shareholders, and other
expenses.
20
<PAGE>
For providing its services under the Management Agreement, the Manager will
receive a fee, computed daily at an annual rate based on the average daily net
asset value of each Fund of the Trust as follows:
<TABLE>
<CAPTION>
Select International Equity *
Fund 1.00%
<S> <C> <C>
Select Aggressive Growth Fund * 1.00%
Select Capital Appreciation *
Fund 1.00%
First $100
Small-Mid Cap Value Fund million 1.00%
$100 - 250
million 0.85%
$250- $500
million 0.80%
$500 - $750
million 0.75%
Over $750 million 0.70%
Select Growth Fund * 0.85%
Growth Fund First $50 million 0.60%
$50 - 250 million 0.50%
Over $250 million 0.35%
Equity Index Fund First $50 million 0.35%
$50 - 250 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund * 0.75%
Investment Grade Income Fund First $50 million 0.50%
$50 - 250 million 0.35%
Over $250 million 0.25%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
$50 - 250 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Government Bond Fund, Select International Equity Fund, Select
Aggressive Growth Fund, Select Capital Appreciation Fund, Select Growth Fund,
and Select Growth and Income Fund, each rate applicable to the Manager does
not vary according to the level of assets in the Fund.
The Manager's fee, computed for each Fund, will be paid from the assets of such
Fund. Pursuant to the Management Agreement with the Trust, the Manager has
entered into agreements ("Sub-Adviser Agreements") with other investment
advisers ("Sub-Advisers") under which each Sub-Adviser manages the investments
of one or more of the Funds of the Trust. Under the Sub-Adviser Agreement, the
Sub-Adviser is authorized to engage in portfolio transactions on behalf of the
applicable Fund, subject to such general or specific instructions as may be
given by the Trustees. The terms of a Sub-Adviser Agreement cannot be materially
changed without the approval of a majority in interest of the shareholders of
the affected Fund. The Manager is solely responsible for the payment of all fees
for investment management services to the Sub-Advisers. Allmerica Asset
Management, Inc., the Sub-Adviser for the Equity Index Fund, the Investment
Grade Fund, the Government Bond Fund and the Money Market Fund, is an indirect
wholly owned subsidiary of AFC and an affiliate of the Company.
21
<PAGE>
The Sub-Advisers and the fees they receive from the Manager (computed daily at
an annual rate based on the average daily net asset value of each Fund), are as
follows:
<TABLE>
<CAPTION>
SUB-ADVISER FUND NET ASSET VALUE RATE
- ---------------------------------------- ------------------------------------- ----------------------- ---------
<S> <C> <C> <C>
Bank of Ireland Asset Management Select International Equity Fund First $50 million 0.45%
(U.S.) Limited Next $50 million 0.40%
Over $100 million 0.30%
Nicholas-Applegate Capital Select Aggressive Growth Fund ** 0.60%
Management, L.P.
Janus Capital Corporation Select Capital Appreciation Fund First $100 million 0.60%
Over $100 million 0.55%
CRM Advisors, LLC Small-Mid Cap Value Fund First $100 million 0.60%
$100 - 250 million 0.50%
$250- $500 million 0.40%
$500 - $750 million 0.375%
Over $750 million 0.35%
Putnam Investment Management, Inc. Select Growth Fund First $50 million 0.50%
$50 - 150 million 0.45%
$150 - 250 million 0.35%
$250 - 350 million 0.30%
Over $350 million 0.25%
Miller, Anderson & Sherrerd, LLP Growth Fund * *
Allmerica Asset Management, Inc. Equity Index Fund ** 0.10%
John A. Levin & Co., Inc. Select Growth and Income Fund First $100 million 0.40%
Next $200 million 0.25%
Over $300 million** 0.30%
Allmerica Asset Management, Inc. Investment Grade Income Fund ** 0.20%
Allmerica Asset Management, Inc. Government Bond Fund ** 0.20%
Allmerica Asset Management, Inc. Money Market Fund ** 0.10%
</TABLE>
* The Manager will pay a fee to Miller, Anderson & Sherrerd LLP based on the
aggregate assets of the Growth Fund and certain other accounts of First
Allmerica and its affiliates (collectively, the "Affiliated Accounts") which
are managed by Miller, Anderson & Sherrerd LLP, under the following schedule:
<TABLE>
<CAPTION>
AGGREGATE AVERAGE NET
ASSETS RATE
- -------------------------- ---------
<S> <C>
First $50 million 0.500 %
$50 - 100 million 0.375 %
$100 - 500 million 0.250 %
$500 - 850 million 0.200 %
Over $850 million 0.150 %
</TABLE>
** For the Investment Grade Income Fund, Money Market Fund, Equity Index Fund,
Government Bond Fund, and Select Aggressive Growth Fund, each rate applicable
to the Sub-Advisers does not vary according to the level of assets in the
Fund.
The prospectus of the Trust contains additional information concerning the
Funds, including information about additional expenses paid by the Funds, and
should be read in conjunction with this Prospectus.
22
<PAGE>
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP AND FIDELITY VIP II -- For managing
investments and business affairs, each Portfolio pays a monthly fee to FMR. The
prospectuses of Fidelity VIP and VIP II contain additional information
concerning the Portfolios, including information about additional expenses paid
by the Portfolios, and should be read in conjunction with this Prospectus.
The Fidelity VIP High Income Portfolio pays a monthly fee to FMR at an annual
fee rate made up of the sum of two components:
1. A group fee rate based on the monthly average net assets of all the mutual
funds advised by FMR. On an annual basis this rate cannot rise above 0.37%,
and drops as total assets in all these funds rise.
2. An individual fund fee rate of 0.45% of the Fidelity VIP High Income
Portfolio's average net assets throughout the month.
One-twelfth of the annual management fee rate is applied to net assets averaged
over the most recent month, resulting in a dollar amount which is the management
fee for that month.
The fee rates of the Fidelity VIP Equity-Income, Fidelity VIP Growth, Fidelity
VIP II Asset Manager and Fidelity VIP Overseas Portfolios each are made of two
components:
1. A group fee rate based on the monthly average net assets of all of the
mutual funds advised by FMR. On an annual basis, this rate cannot rise above
0.52%, and drops as total assets in all these mutual funds rise.
2. An individual Portfolio fee rate of 0.20% for the Fidelity VIP Equity-Income
Portfolio, 0.30% for the Fidelity VIP Growth Portfolio, 0.25% for the
Fidelity VIP II Asset Manager Portfolio and 0.45% for the Fidelity VIP
Overseas Portfolio.
One-twelfth of the sum of these two rates is applied to the respective
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82% of
its average net assets. The Fidelity VIP Equity-Income Portfolio may have a fee
as high as 0.72% of its average net assets. The Fidelity VIP Growth Portfolio
may have a fee as high as 0.82% of its average net assets. The Fidelity VIP II
Asset Manager Portfolio may have a fee as high as 0.77% of its average net
assets. The Fidelity VIP Overseas Portfolio may have a fee as high as 0.97% of
its average net assets. The actual fee rate may be less depending on the total
assets in the funds advised by FMR.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE. The Investment Adviser for the
International Stock Portfolio is Rowe Price-Fleming International, Inc.
("Price-Fleming"). Price-Fleming, founded in 1979 as a joint venture between T.
Rowe Price Associates, Inc. and Robert Fleming Holdings, Limited, is one of
America's largest international mutual fund asset managers with approximately
$25 billion under management in its offices in Baltimore, London, Tokyo and Hong
Kong. To cover investment management and operating expenses, the T. Rowe Price
International Stock Portfolio pays Price-Fleming a single, all-inclusive fee of
1.05% of its average daily net assets.
INVESTMENT ADVISORY SERVICES TO DGPF. Each Series of DGPF pays an investment
adviser an annual fee for managing the Portfolios and making the investment
decisions for the Series. The investment adviser for the International Equity
Series is Delaware International Advisers Ltd. ("Delaware International"). The
annual fee paid by the International Equity Series to Delaware International is
equal to 0.75% of the average daily net assets of the Series.
23
<PAGE>
WHAT IS AN ANNUITY?
In general, an annuity is a policy designed to provide a retirement income in
the form of monthly payments for the lifetime of the purchaser or an individual
chosen by the purchaser. The retirement income payments are called "annuity
benefit payments" and the individual receiving the payments is called the
"Annuitant." Annuity benefit payments may begin immediately after a lump sum
purchase is made or may begin after an investment period during which the amount
necessary to provide the desired amount of retirement income is accumulated.
Under an annuity policy, the insurance company assumes a mortality risk and an
expense risk. The mortality risk arises from the insurance company's guarantee
that annuity payments will continue for the life of the Annuitant, regardless of
ow long the Annuitant lives or how long all Annuitants as a group live. The
expense risk arises from the insurance company's guarantee that charges will not
be increased beyond the limits specified in the policy, regardless of actual
costs of operations.
The Policy Owner's purchase payments, less any applicable deductions, are
invested by the insurance company. After retirement, annuity payments are paid
to the Annuitant for life or for such other period chosen by the Policy Owner.
In the case of a "fixed" payout annuity, the value of these annuity payments is
guaranteed by the insurance company, which assumes the risk of making the
investments to enable it to make the guaranteed payments. For more information
about fixed payout annuities see "APPENDIX A. MORE INFORMATION ABOUT THE GENERAL
ACCOUNT." With a variable annuity payout, the value of the Policy and the
annuity payments are not guaranteed but will vary depending on the investment
performance of a portfolio of securities. Any investment gains or losses are
reflected in the value of the Policy and in the annuity benefit payments. If the
portfolio increases in value, the value of the Policy increases. If the
portfolio decreases in value, the value of the Policy decreases.
CHARGES AND DEDUCTIONS
Deductions under the Policy and charges against the assets of the Sub-Accounts
are described below. Other deductions and expenses paid out of the assets of the
Underlying Funds are described in the Prospectus and Statement of Additional
Information of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe Price and DGPF.
A. CONTINGENT DEFERRED SALES CHARGE.
No charge for sales expense is deducted from purchase payments at the time the
payments are made. However, a contingent deferred sales charge is deducted from
the Accumulated Value of the Policy in the case of surrender and/or partial
redemption of the Policy or at the time annuity payments begin, within certain
time limits described below.
For purposes of determining the contingent deferred sales charge, the Policy
Value is divided into three categories: (1) New Payments -- purchase payments
received by the Company during the nine years preceding the date of the
surrender; (2) Old Payments -- purchase payments not defined as New Payments;
and (3) Earnings -- the amount of Policy Value in excess of all purchase
payments that have not been previously surrendered. For purposes of determining
the amount of any contingent deferred sales charge, surrenders will be deemed to
be taken first from Old Payments, then from New Payments. Old Payments may be
withdrawn from the Policy at any time without the imposition of a contingent
deferred sales charge. If a withdrawal is attributable all or in part to New
Payments, a contingent deferred sales charge may apply.
Where permitted by state law, no contingent deferred sales charge is imposed,
and no commissions are paid, on Policies issued after December 31, 1992, where
the Policy Owner and Annuitant as of the date of application are both within the
following class of individuals:
All employees of the Company located at the Company's home office (or at
off-site locations if such employees are on the Company's home office payroll);
all directors of the Company; all retired employees;
24
<PAGE>
all spouses and immediate family members of such employees, directors and
retirees, who reside in the same household; and beneficiaries who receive a
death benefit under a deceased employee's or retiree's progress sharing plan.
For purposes of the above class of individuals, "the Company" includes its
affiliates and subsidiaries; "immediate family members" means children,
siblings, parents and grandparents; "retirement date" means an employee's early,
normal or late retirement date, as defined in the First Allmerica's Companies
Pension Plan or any successor plan; and "progress sharing plan" means the First
Allmerica Financial Life Insurance Company Incentive and Profit Sharing Plan or
any successor plan.
CHARGES FOR SURRENDER AND PARTIAL REDEMPTION. If a Policy is surrendered, or if
New Payments are redeemed, while the Policy is in force and before the Annuity
Date, a contingent deferred sales charge may be imposed. The amount of the
charge will depend upon the number of years that the New Payments, if any, to
which the withdrawal is attributed have remained credited under the Policy.
Amounts withdrawn are deducted first from Old Payments. Then, for the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the earliest New Payment and then from the
next earliest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See "FEDERAL
TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for income
tax purposes.)
The Contingent Deferred Sales Charges are as follows:
<TABLE>
<CAPTION>
YEARS FROM DATE OF CHARGE AS PERCENTAGE OF
PAYMENT TO DATE OF NEW PAYMENTS
WITHDRAWL WITHDRAWN
- --------------------- ---------------------------
<S> <C>
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
more than 9 0%
</TABLE>
The amount redeemed equals the amount requested by the Policy Owner plus the
charge, if any. The charge is applied as a percentage of the New Payments
redeemed, but in no event will the total contingent deferred sales charge exceed
a maximum limit of 8% of total gross New Payments. Such total charge equals the
aggregate of all applicable contingent deferred sales charges for surrender,
partial redemptions, and annuitization.
FREE WITHDRAWAL AMOUNTS. In each calendar year, the Company will waive the
contingent deferred sales charge, if any, on an amount ("Free Withdrawal
Amount") equal to the greatest of (1), (2) or (3):
Where (1) is: The Accumulated Value as of the Valuation Date coincident with or
next following the date of receipt of the request for withdrawal,
reduced by total gross payments not previously redeemed
("Cumulative Earnings");
Where (2) is: 10% of the Accumulated Value as of the Valuation Date coincident
with or next following the date of receipt of the request for
withdrawal, reduced by the total amount of any prior partial
redemptions made in the same calendar year to which no contingent
deferred sales charge was applied;
Where (3) is: The amount calculated under the Company's life expectancy
distribution (see "Life Expectancy Distributions," below), whether
or not the withdrawal was part of such distribution (applies only
if the Owner and Annuitant are the same individual).
25
<PAGE>
For example, an 81-year-old Owner/Annuitant with an Accumulated Value of
$15,000, of which $1,000 is Cumulative Earnings, would have a Free Withdrawal
Amount of $1,530, which is equal to the greatest of:
(1) Cumulative Earnings ($1,000);
(2) 10% of Accumulated Value ($1,500); or
(3) LED of 10.2% of Accumulated Value ($1,530).
The Free Withdrawal Amount will be deducted first from Cumulative Earnings. If
the Free Withdrawal Amount exceeds Cumulative Earnings, the excess amount will
be deemed withdrawn from payments not previously redeemed on a last-in-first-out
("LIFO") basis. If more than one partial withdrawal is made during the year, on
each subsequent withdrawal the Company will waive the contingent deferred sales
load, if any, until the entire Free Withdrawal Amount has been redeemed.
LIFE EXPECTANCY DISTRIBUTIONS. An Owner who is also the Annuitant may elect to
make a series of systematic withdrawals from the Policy according to a life
expectancy distribution ("LED"), by returning a properly signed LED request form
to the Principal Office. The LED permits the Owner to make systematic
withdrawals from the Policy over his or her lifetime. The amount withdrawn from
the Policy 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.
If an Owner elects the LED option, in each Policy year a fraction of the
Accumulated Value is withdrawn from the Policy based on the Owner's then life
expectancy. The numerator of the fraction is 1 (one), and the denominator of the
fraction is the remaining life expectancy of the Owner, as determined annually
by the Company. The resulting fraction, expressed as a percentage, is applied to
the Accumulated Value of the Policy at the beginning of the year to determine
the amount to be distributed during the year. The Owner may elect monthly,
bi-monthly, quarterly, semi-annual, or annual distributions, and may terminate
the LED at any time. The Owner also may elect to receive distributions under a
LED which is determined on the joint life expectancy of the Owner and a
beneficiary. The Company also may offer other systematic withdrawal options.
If an Owner makes withdrawals under the LED option prior to age 59 , the
withdrawals may be treated by the IRS as premature distributions from the
Policy. The payments would then be taxed on an "income first" basis, and be
subject to a 10% federal tax penalty. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Policies in General."
SURRENDERS. In the case of a complete surrender, the amount received by the
Owner is equal to the entire Accumulated Value under the Policy, net of the
applicable contingent deferred sales charge on New Payments, the Policy fee, and
any tax withholding, if applicable. Subject to the same rules that are
applicable to partial redemptions, the Company will not assess a contingent
deferred sales charge on a Free Withdrawal Amount. Because Old Payments count in
the calculation of the Free Withdrawal Amount, if Old Payments equal or exceed
the Free Withdrawal Amount, the Company may assess the full applicable
contingent deferred sales charge on New Payments.
Where an Owner who is trustee under a pension plan surrenders, in whole or in
part, a Policy on a terminating employee, the trustee will be permitted to
reallocate all or a part of the total Accumulated Value under the Policy to
other policies issued by the Company and owned by the trustee, with no deduction
for any otherwise applicable contingent deferred sales charge. Any such
reallocation will be at the unit values for the Sub-Accounts as of the valuation
date on which a written, signed request is received at the Principal Office.
For further information on surrender and partial redemption, including minimum
limits on amount redeemed and amount remaining under the Policy in the case of
partial redemption, and important tax considerations, see "C. Surrender" and "D.
Partial Redemption" under "THE VARIABLE ANNUITY POLICIES," and see "FEDERAL TAX
CONSIDERATIONS."
26
<PAGE>
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If a period certain option
is chosen (Option V or the comparable fixed annuity option), a contingent
deferred sales charge will be deducted from the Accumulated Value of the Policy
if the Annuity Date occurs at any time during the surrender charge period. Such
charge is the same as that which would apply had the policy been surrendered on
the Annuity Date.
No contingent deferred sales charge is imposed at the time of annuitization in
any policy year under an option involving a life contingency (Options I, II,
III, IV-A, IV-B or the comparable fixed annuity options) or involving a
non-commutable period certain of a duration of ten years or more.
SALES EXPENSE. The Company pays sales commissions, not to exceed 6% of purchase
payments, to entities which sell the Policies. To the extent permitted by NASD
rules, expense reimbursement allowances and additional payments for other
services not directly related to the sale of the Policies, including the
recruitment and training of personnel, production of promotional literature, and
similar services may also be made.
The Company intends to recoup the commissions and other sales expenses through a
combination of anticipated contingent deferred sales charges, described above,
and the investment earnings on amounts allocated to accumulate on a fixed basis
in excess of the interest credited on fixed accumulations by the Company. There
is no additional charge to Owners or to the Separate Account. Any contingent
deferred sales charges assessed on a Policy will be retained by the Company.
Alternative commission schedules are available with lower initial commission
amounts based on purchase payments, plus ongoing annual compensation of up to 1%
of policy value.
B. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
policies. 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 purchase payments were
received, to the extent permitted in the Policy the premium tax charge is
deducted on a pro-rata basis when partial withdrawals are made, upon
surrender of the Policy, or when annuity benefit payments begin (the Company
reserves the right instead to deduct the premium tax charge for these
Policies at the time the purchase payments are received); or
(2) the premium tax charge is deducted when annuity benefit payments begin.
If no amount for premium tax was deducted at the time the purchase 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 Policy
value at the time such determination is made.
C. POLICY FEE.
A $30 Policy fee currently is deducted on the Policy anniversary date and upon
full surrender of the Policy when the Accumulated Value is $50,000 or less. The
Policy fee is not deducted after annuitization. The Policy fee currently is
waived for Policies issued to a trustee of a 401(k) plan, but the Company
reserves the right to impose the Policy fee on such Policies.
Where Policy value has been allocated to more than one account (General Account
and/or one or more of the Sub-Accounts), a percentage of the total Policy fee
will be deducted from the Policy value in each account. The portion of the
charge deducted from each account will be equal to the percentage which the
Policy value in that account represents of the total Accumulated Value under the
Policy. The deduction of the Policy fee will result in cancellation of a number
of Accumulation Units equal in value to the percentage of the charge deducted
from that account.
27
<PAGE>
D. ANNUAL CHARGES AGAINST SEPARATE ACCOUNT ASSETS.
Mortality and Expense Risk Charge -- The Company makes a charge of 1.25% on an
annual basis of the daily value of each Sub-Account's assets to cover the
mortality and expense risk which the Company assumes in relation to the variable
portion of the Policies. The charge is imposed during both the accumulation
period and the annuity period. The mortality risk arises from the Company's
guarantee that it will make annuity payments in accordance with annuity rate
provisions established at the time the Policy is issued for the life of the
Annuitant (or in accordance with the annuity option selected), no matter how
long the Annuitant (or other payee) lives and no matter how long all Annuitants
as a class live. Therefore, the mortality charge is deducted during the annuity
phase on all Policies, including those that do not involve a life contingency,
even though the Company does not bear direct mortality risk with respect to
variable annuity settlement options that do not involve life contingencies. The
expense risk arises from the Company's guarantee that the charges it makes will
not exceed the limits described in the Policies and in this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
Since mortality and expense risks involve future contingencies which are not
subject to precise determination in advance, it is not feasible to identify
specifically the portion of the charge which is applicable to each. The Company
estimates that a reasonable allocation might be .80% for mortality risk and .45%
for expense risk.
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.20% of the average daily net assets of the
Sub-Account. The charge is imposed during both the accumulation period and the
annuity period. The daily Administrative Expense Charge is assessed to help
defray administrative expenses actually incurred in the administration of the
Sub-Account, without profits. However, there is no direct relationship between
the amount of administrative expenses imposed on a given policy and the amount
of expenses actually attributable to that policy.
Deductions for the Policy Fee (described under C. Policy 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 Separate Account and the Policies 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.
TRANSFER CHARGE. The Company currently makes no charge for transfers. The
Company guarantees that the first twelve transfers in a Policy Year will be free
of 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. If the policy owner has elected automatic
transfers, the first automatic transfer will count as one transfer which are
guaranteed to be free of charge.
If the Policy Owner has elected automatic transfers, the first automatic
transfer will count as one transfer towards the twelve transfers which are
guaranteed to be free of charge. of the other Sub-Accounts or (b) in order to
reallocate Policy Value among the Sub-Accounts. The first automatic transfer
counts as one transfer towards the six transfers which are guaranteed to be free
in each policy year. For more information, see "The Policy Transfer Privilege."
OTHER CHARGES. Because the Sub-Accounts purchase shares of the Underlying
Funds, the value of the net assets of the Sub-Accounts will reflect the
investment advisory fee and other expenses incurred by the Underlying Funds. The
Prospectus and Statement of Additional Information of the Trust, Fidelity VIP,
28
<PAGE>
Fidelity VIP II, T. Rowe Price and DGPF contain additional information
concerning expenses of the Underlying Funds.
THE VARIABLE ANNUITY POLICIES
The Policies are designed for use in connection with several types of retirement
plans as well as for sale to individuals. Participants under such plans, as well
as Policy Owners, Annuitants, and beneficiaries, are cautioned that the rights
of any person to any benefits under such Policies may be subject to the terms
and conditions of the plans themselves, regardless of the terms and conditions
of the Policies.
The Policies offered by the Prospectus may be purchased from representatives of
Allmerica Investments, Inc., a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. (NASD). Allmerica Investments, Inc., 440 Lincoln Street,
Worcester, Massachusetts, 01653, is wholly-owned by the Company. The Policies
also may be purchased from certain independent broker-dealers which are NASD
members.
Policy Owners may direct any inquiries to Annuity Client Services, First
Allmerica Financial Life Insurance Company, 440 Lincoln Street, Worcester,
Massachusetts 01653.
A. PURCHASE PAYMENTS.
Purchase payments are payable to the Company. The initial payment will be
credited to the Policy as of the date that the properly completed application
which accompanies the payment is received by the Company at its principal
office. If an application is incomplete, or does not specify how payments are to
be allocated among the Accounts, the initial purchase payment will be returned
within five business days. After a policy is issued, Accumulation Units will be
credited to the Policy at the unit value computed as of the Valuation Date that
a purchase payment is received at the Company's principal office.
Purchase payments are not limited as to frequency and number, but there are
certain limitations as to amount. Generally, the initial payment must be at
least $600. Under a salary deduction or a monthly automatic payment plan, the
minimum initial payment is $50. In all cases, each subsequent payment must be at
least $50. 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 Policy on the employee, if the plan's average
annual contribution per eligible plan participant is at least $600. Total
payments may not exceed the maximum limit specified in the Policy. If the
payments are divided among two or more accounts, a net amount of at least $10 of
each payment must be allocated to each account.
Generally, payments will be allocated among the Sub-Accounts according to the
Policy Owner's instructions when the Policy is issued. However, for the first 14
days following the date of issue, all Separate Account allocations will be held
in Sub-Account 3 (the Money Market Fund of the Trust). Thereafter, all amounts
will be allocated according to the Policy Owner's instructions. The Policy Owner
may change allocation instructions for new payments pursuant to written or
telephone request. If telephone requests are elected by the Policy Owner, a
properly completed authorization form must be on file before telephone requests
will be honored. The policy of the Company and its agents and affiliates is that
they will not be responsible for losses resulting from acting upon telephone
requests reasonably believed to be genuine. The Company will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine;
otherwise, the Company may be liable for any losses due to unauthorized or
fraudulent instructions. The procedures the Company follows for transactions
initiated by telephone include requirements that callers on behalf of a Policy
Owner identify themselves by name and identify the Annuitant by name, date of
birth and social security number. All transfer instructions by telephone are
tape recorded.
B. RIGHT TO REVOKE INDIVIDUAL RETIREMENT ANNUITY.
An individual purchasing a Policy intended to qualify as an IRA may revoke the
Policy at any time within ten days after receipt of the Policy and receive a
refund. In order to revoke the Policy, the Owner must mail or deliver the Policy
to the agent through whom the Policy was purchased, to the Principal Office at
29
<PAGE>
440 Lincoln Street, Worcester, MA 01653, or to an authorized representative.
Mailing or delivery must occur within ten days after receipt of the Policy for
revocation to be effective.
Within seven days, the Company will provide a refund equal to the greater of (1)
gross payments, or (2) the Accumulated Value plus any amounts deducted under the
Policy or by the Underlying Funds for taxes, charges or fees.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO REVOKE ALL OTHER POLICIES.
In Georgia, Idaho, Indiana, Michigan, Missouri, North Carolina, Oklahoma,
Oregon, South Carolina, Texas, Utah, Washington and West Virginia, an Owner may
revoke the Policy at any time within ten days (20 days in Idaho) after receipt
of the Policy, and receive a refund as described under "B. Right to Revoke
Individual Retirement Annuity," above.
In all other states, an Owner may return the Policy at any time within ten days
(or the number of days required by state law if more than ten) after receipt of
the Policy. The Company will pay to the Owner an amount equal to the sum of (1)
the difference between the amount paid, including fees, and any amount allocated
to the Variable Account, and (2) the Accumulated Value of amounts allocated to
the Variable Account as of the date the request is received. If the Policy was
purchased as an IRA, the IRA revocation right described above may be utilized in
lieu of the special surrender right.
D. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date, subject to the Company's then current
rules, an Owner may have amounts transferred among the Sub-Accounts or between a
Sub-Account and the General Account, where available. Transfer values will be
effected at the Accumulation Value next computed after receipt of the transfer
order. The Company will make transfers pursuant to written request or, if a
properly completed authorization is on file, pursuant to a telephone request.
Currently, the Company makes no charge for transfers. The first 12 transfers in
a Policy year are guaranteed to be free of any transfer charge. For each
subsequent transfer in a Policy year, the Company reserves the right to assess a
charge, guaranteed not to exceed $25, to reimburse it for the expense of
processing transfers.
Except for transfers made under the automatic transfer option (Dollar Cost
Averaging) and for transfers made under policies issued to residents of Texas,
no transfers from the General Account are permitted except during the 30-day
period beginning on each policy anniversary. During this 30-day "window" period,
any amount (up to 100%) of the policy value may be transferred. In Texas,
transfers from the Fixed Account are also permitted if there has been at least a
ninety day period since the last transfer from the General Account and the
amount of the transfer does not exceed the lesser of $100,000 or 25% of the
Accumulated Value.
The Company reserves the right to impose limitations on transfers including, but
not limited to (1) the minimum amount that may be transferred, (2) the minimum
amount that may remain in a Sub-Account following a transfer from that
Sub-Account, (3) the minimum period of time between transfers involving the
General Account, and (4) the maximum amount that may be transferred each time
from the General Account.
The Owner may elect automatic transfers of a pre-determined dollar amount
(Dollar Cost Averaging), not less than $100, on a periodic basis (monthly,
bi-monthly, quarterly, semi-annually or annually) from the Sub-Account investing
in the Money Market Fund or the Government Bond Fund (the "source account") to
one or more of the Sub-Accounts. Automatic transfers may not be made into the
General Account or, if applicable, the Sub-Account being used as the source
account. If an automatic transfer would reduce the
30
<PAGE>
balance in the source account to less than $100, the entire balance will be
transferred proportionately to the chosen Sub-Accounts. Automatic transfers will
continue until the amount in the source account on a transfer date is zero or
the Owner's request to terminate the option is received by the Company. If
additional amounts are allocated to the source account after its balance has
fallen to zero, this option will not restart automatically and the Owner must
provide a new request to the Company.
The General Account may be used as the source account from which automatic
transfers can be made provided that (1) the amount of each monthly transfer
cannot exceed 10% of the value in the General Account as of the date of the
first transfer; (2) the amount of each bi-monthly transfer cannot exceed 20% of
the value of the General Account as of the date of the first transfer and (3)
each quarterly transfer cannot exceed 25% of the value in the General Account as
of the date of the first transfer.
The Owner may request automatic rebalancing of Sub-Account allocations on a
monthly, quarterly, semi-annual or annual basis in accordance with percentage
allocations specified by the Owner. As frequently as requested by the Owner, the
Company will review the percentage allocations in the Sub-Accounts and, if
necessary, transfer amounts to ensure conformity with the designated percentage
allocation mix. If the amount necessary to re-establish the mix on any scheduled
date is less than $100, no transfer will be made. Automatic Account Rebalancing
will continue until the Owner's request to terminate the option is received by
the Company.
The Company reserves the right to limit the number of Sub-Accounts that may be
utilized for automatic transfers and rebalancing, and to discontinue either
option upon advance written notice. The first automatic transfer and all
subsequent transfers of that request in the same Policy year count as one
transfer towards the 12 transfers which are guaranteed to be free of a transfer
charge each Policy year. Currently, automatic transfers and automatic
rebalancing may not be in effect simultaneously.
E. SURRENDER.
At any time prior to the Annuity Date, an Owner may surrender the Policy and
receive its Accumulated Value, less applicable charges ("Surrender Amount"). The
Owner must return the Policy and a signed, written request for surrender,
satisfactory to the Company to the Principal Office. The amount payable to the
Owner upon surrender will be based on the Accumulated Value of the Policy as of
the Valuation Date on which the request and the Policy are received at the
Principal Office.
Before the Annuity Date, a contingent deferred sales charge may be deducted when
a Policy is surrendered if payments have been credited to the Policy during the
last nine full Policy years. See "CHARGES AND DEDUCTIONS." The Policy fee will
be deducted upon surrender of the Policy.
After the Annuity Date, only Policies under which a commutable period certain
option (as specified in Annuity Option V)is elected may be surrendered. The
Surrender Amount is the commuted value of any unpaid installments, computed on
the basis of the assumed interest rate incorporated in such annuity benefit
payments. No contingent deferred sales charge is imposed after the Annuity Date.
Any amount surrendered is normally payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and partial redemptions of amounts in each Sub-Account during
any period which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has by order permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of each Separate Account is not reasonably
practicable.
The right is reserved by the Company to defer surrenders and partial redemptions
of amounts allocated to the Company's General Account for a period not to exceed
six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
31
<PAGE>
For important tax consequences which may result from surrender, see "FEDERAL TAX
CONSIDERATIONS."
F. PARTIAL REDEMPTION.
At any time prior to the Annuity Date, an Owner may redeem a portion of the
Accumulated Value of his or her Policy, subject to the limits stated below. The
Owner must file a signed, written request for redemption, satisfactory to the
Company, at the Principal Office. The written request must indicate the dollar
amount the Owner wishes to receive and the account from which such amount is to
be redeemed. The amount redeemed equals the amount requested by the Owner plus
any applicable contingent deferred sales charge, as described under "CHARGES AND
DEDUCTIONS."
Where allocations have been made to more than one account, a percentage of the
partial redemption may be allocated to each such account. A partial redemption
from a Sub-Account will result in cancellation of a number of units equivalent
in value to the amount redeemed, computed as of the Valuation Date that the
request is received at the Principal Office.
Each partial redemption must be in a minimum amount of $100. No partial
redemption will be permitted if the Accumulated Value remaining under the Policy
would be reduced to less than $1,000. Partial redemptions will be paid in
accordance with the time limitations described under "E. Surrender."
After the Annuity Date, only Policies under which a period certain option has
been elected may be partially redeemed. A partial redemption after the Annuity
Date will result in cancellation of a number of Annuity Units equivalent in
value to the amount redeemed.
For important restrictions on withdrawals which are applicable to Owners who are
participants under Section 403(b) plans or under the Texas ORP, see
"Tax-Sheltered Annuities" and "Texas Optional Retirement Program."
For important tax consequences which may result from partial redemptions, see
"FEDERAL TAX CONSIDERATIONS."
G. DEATH BENEFIT.
If the Annuitant dies (or an Owner predeceases the Annuitant) prior to the
Annuity Date while the Policy is in force, a death benefit will be paid to the
beneficiary, except where the Policy continues as provided in "H. The Spouse of
the Owner as Beneficiary." Upon death of the Annuitant (including an Owner who
is also the Annuitant), the death benefit is equal to the greatest of (1) the
Accumulated Value under the Policy next determined following receipt of due
proof of death at the Principal Office, or (2) the total amount of gross
payments made under the Policy reduced proportionally to reflect the amount of
all prior partial withdrawals, or (3) the death benefit that would have been
payable on the most recent fifth year Policy anniversary, increased for
subsequent purchase payments and reduced proportionally to reflect withdrawals
after that date. A partial withdrawal will reduce the gross payments available
as a death benefit under (2) in the same proportion that the Accumulated Value
was reduced on the date of withdrawal. For each withdrawal, the reduction is
calculated by multiplying the total amount of gross payments by a fraction, the
numerator of which is the amount of the partial withdrawal and the denominator
of which is the Accumulated Value immediately prior to the withdrawal. For
example, if gross payments total $8,000 and a $3,000 withdrawal is made when the
Accumulated Value is $12,000, the proportional reduction of gross payments
available as a death benefit is calculated as follows: The Accumulated Value is
reduced by 1/4 (3,000 divided by 12,000); therefore, the gross amount available
as a death benefit under (2) also will be reduced by 1/4 (8,000 times 1/4 equals
$2,000), so that the $8,000 gross payments are reduced to $6,000. Payments made
after a withdrawal will increase the death benefit available under (2) by the
amount of the payment.
A partial withdrawal after the most recent fifth year Policy anniversary will
decrease the death benefit available under (3) in the same proportion that the
Accumulated Value was reduced on the date of the withdrawal. For example, if the
death benefit that would have been payable on the most recent fifth year
32
<PAGE>
Policy anniversary is $12,000 and partial withdrawals totaling $5,000 are made
thereafter when the Accumulated Value is $15,000, the proportional reduction of
death benefit available under (3) is calculated as follows: The Accumulated
Value is reduced by 1/3 (5,000 divided by 15,000); therefore, the death benefit
that would have been payable on the most recent fifth year Policy anniversary
will also be reduced by 1/3 (12,000 times 1/3 or $4,000), so that the death
benefit available under (3) will be $8,000 ($12,000 minus $4,000). Payments made
after the most recent fifth year Policy anniversary will increase the death
benefit available under (3) by the amount of the payment. Upon death of an Owner
who is not the Annuitant, the death benefit is equal to the Accumulated Value of
the Policy next determined following receipt of due proof of death received at
the Principal Office.
The death benefit generally will be paid to the beneficiary in one sum. The
beneficiary may, however, by written request, elect one of the following
options:
(1) The payment of the one sum may be delayed for a period not to exceed five
years from the date of death.
(2) The death benefit may be paid in installments. Payments must begin within
one year from the date of death, and are payable over a period certain not
extended beyond the life expectancy of the beneficiary.
(3) All or a portion of the death benefit may be used to provide a life
annuity for the beneficiary. Benefits must begin within one year from the
date of death and are payable over a period not extended beyond the life
expectancy of the beneficiary. Any annuity benefits will be provided in
accordance with the annuity options of the Policy.
If there is more than one beneficiary, the death benefit will be paid to such
beneficiaries in one sum unless the Company consents to pay an annuity option
chosen by the beneficiaries.
With respect to any death benefit, the Accumulated Value under the Policy shall
be based on the unit values next computed after due proof of death has been
received at the Principal Office. If the beneficiary elects to receive the death
benefit in one sum, the death benefit will be paid within seven business days.
If the beneficiary (other than a spousal beneficiary of an IRA, See "H. The
Spouse of the Owner as Beneficiary," below) has not elected an annuity option
within one year from the date notice of death is received by the Company, the
Company will pay the death benefit in one sum. The death benefit will reflect
any earnings or losses experienced during the period and any withdrawals.
If the Annuitant's death occurs on or after the Annuity Date but before the
completion of all guaranteed monthly annuity benefit payments, any unpaid
amounts or installments will be paid to the beneficiary. The Company must pay
the remaining payments at least as rapidly as under the payment option in effect
on the date of the Annuitant's death. If there is more than one beneficiary, the
commuted value of the payments, computed on the basis of the assumed interest
rate incorporated in the annuity option table on which such payments are based,
shall be paid to the beneficiaries in one sum.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY.
If the Owner's spouse is named as beneficiary ("spousal beneficiary") and if the
Owner dies (and predeceases the Annuitant if such Owner is not the Annuitant)
prior to the Annuity Date while the Policy is in force, at the written request
of the spousal beneficiary the death benefit will not be paid and the spousal
beneficiary will become the new Owner (and, if the deceased Owner was also the
Annuitant, the new Annuitant). All other rights and benefits provided in the
Policy will continue, except that any subsequent spouse of such new Owner will
not be entitled to continue the Policy upon such new Owner's death.
33
<PAGE>
I. ASSIGNMENT.
The Policy may be assigned by the Owner at any time prior to the Annuity Date
and while the Annuitant is alive. Policies sold in connection with IRA plans and
certain other qualified plans, however, are not assignable. For more information
about these plans, 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 Policy 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
Policy 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 Policy. The interest of the Owner and of any beneficiary will be
subject to any assignment.
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
Subject to certain restrictions described below, the Owner has the right (1) to
select the annuity option under which annuity benefit payments are to be made,
and (2) to determine whether payments are to be made on a fixed basis, a
variable basis, or a combination fixed and variable basis. Annuity benefit
payments are determined according to the annuity tables in the Policy, by the
annuity option selected, and by the investment performance of the Accounts
selected.
To the extent a fixed annuity is selected, Accumulated Value will be transferred
to the General Account of the Company, and the annuity benefit payments will be
fixed in amount. See "APPENDIX A. MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
Under a variable annuity, a payment equal to the value of the fixed number of
Annuity Units in the Sub-Accounts is made each month. Since the value of an
Annuity Unit in a Sub-Account will reflect the investment performance of the
Sub-Account, the amount of each monthly payment will vary.
The annuity option selected must produce an initial payment of at least $50. If
a combination of fixed and variable payments is selected, the initial payment on
each basis must be at least $50. The Company reserves the right to increase
these minimum amounts. If the annuity option selected does not produce initial
payments which meet these minimums, the Company will pay the Accumulated Value
in one sum. Once the Company begins making annuity payments, the Annuitant
cannot make partial redemptions or surrender the annuity benefit, except in the
case where a commutable period certain option (Option V or a comparable fixed
option) has been chosen. Beneficiaries entitled to receive remaining payments
for a "period certain" may elect to instead receive a lump sum settlement.
The Annuity Date is selected by the Owner. To the extent permitted in your
state, the Annuity Date may be the first day of any month (1) before the
Annuitant's 85th birthday, if the Annuitant's age at the date of issue of the
Policy is 75 or under, or (2) within ten years from the date of issue of the
Policy and before the Annuitant's 90th birthday, if the Annuitant's age at the
date of issue is between 76 and 90. The Owner may elect to change the Annuity
Date by sending a request to the Principal Office at least one month before the
new Annuity Date. The new Annuity Date must be the first day of any month
occurring before the Annuitant's 90th birthday. The new Annuity Date must be
within the life expectancy of the Annuitant. The Company shall determine such
life expectancy at the time a change in Annuity Date is requested. The Code and
the terms of qualified plans impose limitations on the age at which annuity
benefit payments may commence and the type of annuity option selected. See
"FEDERAL TAX CONSIDERATIONS" for further information.
If the Owner does not elect otherwise, annuity benefit payments will be made in
accordance with Option I, a variable life annuity with 120 monthly payments
guaranteed. Changes in either the Annuity Date or annuity option can be made up
to one month prior to the Annuity Date.
34
<PAGE>
K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS.
The Company currently provides the variable annuity payout options described
below. Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Select Growth and Income Fund, the Equity Index
Fund, the Growth Fund and the Money Market Fund.
The Company also provides fixed annuity payout options which are comparable to
the variable annuity options. Regardless of how payments were allocated during
the accumulation period, any one of the variable annuity payout options or the
fixed-payout options may be selected, or any one of the variable annuity options
may be selected in combination with any one of the fixed-amount annuity options.
Other annuity options may be offered by the Company.
OPTION I -- VARIABLE LIFE ANNUITY WITH 120 MONTHLY PAYMENTS GUARANTEED. A
variable annuity payable monthly during the lifetime of the payee with the
guarantee that if the payee should die before 120 monthly payments have been
paid, the monthly annuity benefit payments will continue to the beneficiary
until a total of 120 monthly payments have been paid.
OPTION II -- VARIABLE LIFE ANNUITY. A variable annuity payable monthly only
during the lifetime of the Annuitant. It would be possible under this option for
the Annuitant to receive only one annuity benefit payment if the Annuitant dies
prior to the due date of the second annuity benefit payment, two annuity benefit
payments if the Annuitant dies before the due date of the third annuity benefit
payment, and so on. Payments will continue, however, during the lifetime of the
Annuitant, no matter how long he or she lives.
OPTION III -- UNIT REFUND VARIABLE LIFE ANNUITY. A variable annuity payable
monthly during the lifetime of the payee with the guarantee that if (1) exceeds
(2), then monthly variable annuity benefit payments will continue to the
beneficiary until the number of such payments equals the number determined in
(1).
Where: (1) is the dollar amount of the Accumulated Value divided by the dollar
amount of the first monthly payment (which determines the greatest
number of payments payable to the beneficiary), and
(2) is the number of monthly payments paid prior to the death of the
payee.
OPTION IV-A -- JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. A monthly variable
annuity payable jointly to two payees during their joint lifetime, and then
continuing 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 Policy or the beneficiary. There is no
minimum number of payments under this option. See Option IV-B, below.
OPTION IV-B -- JOINT AND TWO-THIRDS SURVIVOR VARIABLE LIFE ANNUITY. A monthly
variable annuity payable jointly to two payees during their joint lifetime, and
then continuing thereafter during the lifetime of the survivor. The amount of
each monthly 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 in the
Policy or the beneficiary. There is no minimum number of payments under this
option. See Option IV-A, above.
OPTION V -- PERIOD CERTAIN VARIABLE ANNUITY. A monthly variable annuity payable
for a stipulated number of years ranging from one to 30 years. This option may
be commutable, that is, the payee reserves the right to receive a lump sum in
place of installments, or it becomes non-commutable. The payee must reserve this
right at the time benefits begin.
It should be noted that Option V does not involve a life contingency. In the
computation of the payments under this option, the charge for annuity rate
guarantees, which includes a factor for mortality risks, is made. Although not
contractually required to do so, the Company currently follows a practice of
permitting persons receiving payments under Option V to elect to convert to a
variable annuity involving a life contingency. The Company may discontinue or
change this practice at any time, but not with respect to
35
<PAGE>
Owners who have elected Option V 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 Option V.
L. NORRIS DECISION.
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a policy 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 male rates described in such Policy, regardless of whether the
Annuitant is male or female.
Although the Company believes that the Supreme Court ruling does not affect
Policies funding IRA plans that are not employer-sponsored, the Company will
apply certain aspects of the ruling to annuity benefits under such Policies,
except in those states in which it is prohibited. Such benefits will be based on
(1) the greater of the guaranteed unisex annuity rates described in the
Policies, or (2) the Company's sex-distinct Non-Guaranteed Current Annuity
Option Rates.
M. COMPUTATION OF POLICY VALUES AND ANNUITY BENEFIT PAYMENTS.
THE ACCUMULATION UNIT. Each net purchase payment is allocated to the accounts
selected by the Owner. Allocations to the Sub-Accounts are credited to the
Policy 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 Policy is equal to the portion of the net purchase
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 at
the 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 partial redemption, 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 Underlying Fund. The value
of an Accumulation Unit was set at $1.00 on the first Valuation Date for each
Sub-Account.
Allocations to the General Account are not converted into Accumulation Units,
but are credited interest at a rate periodically set by the Company. See
APPENDIX A, "MORE INFORMATION ABOUT THE GENERAL ACCOUNT."
The Accumulated Value under the Policy 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 General Account, if any.
ADJUSTED GROSS INVESTMENT RATE. At each Valuation Date an adjusted gross
investment rate for each Sub-Account for the Valuation Period then ended is
determined from the investment performance of that Sub-Account. Such rate is (1)
the investment income of that Sub-Account for the Valuation Period, plus capital
gains and minus capital losses of that Sub-Account for the Valuation Period,
whether realized or unrealized, adjusted for provisions made for taxes, if any,
divided by (2) the amount of that Sub-Account's assets at the beginning of the
Valuation Period. The adjusted gross investment rate may be either positive or
negative.
NET INVESTMENT RATE AND NET INVESTMENT FACTOR. The net investment rate for a
Sub-Account's variable accumulations for any Valuation Period is equal to the
adjusted gross investment rate of the Sub-Account for such Valuation Period
decreased by the equivalent for such period of a charge equal to 1.40% per
annum. This charge cannot be increased.
36
<PAGE>
The net investment factor is 1.000000 plus the applicable net investment rate.
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 "ANNUITY BENEFIT PAYMENTS" in the SAI.
THE ANNUITY UNIT. On and after the Annuity Date the Annuity Unit is a measure
of the value of the Annuitant's monthly annuity benefit payments under a
variable annuity option. The value of an Annuity Unit in each Sub-Account
initially was set at $1.00. The value of an Annuity Unit under a Sub-Account on
any Valuation Date thereafter is equal to the value of such unit on the
immediately preceding Valuation Date, multiplied by the product of (1) the net
investment factor of the Sub-Account for the current Valuation Period, and (2) a
factor to adjust benefits to neutralize the assumed interest rate. The assumed
interest rate, discussed below, is incorporated in the variable annuity options
offered in the Policy.
DETERMINATION OF THE FIRST AND SUBSEQUENT ANNUITY BENEFIT PAYMENTS. The first
monthly annuity benefit payment is based upon the Accumulated Value as of a date
not more than four weeks preceding the date the first annuity benefit payment is
due. Variable annuity benefit payments are due on the first of a month which is
the date the payment is to be received by the Annuitant, and currently are based
on unit values as of the 15th day of the preceding month.
The Policy provides annuity rates which determine the dollar amount of the first
monthly payment under each form of annuity for each $1,000 of applied value
(Accumulated Value applied under a specific annuity option to provide annuity
income payments, minus any applicable premium tax). The annuity rates in the
Policy are based on a modification of the 1983(a) Individual Mortality Table on
rates.
The amount of the first monthly payment depends upon the form of annuity
selected, the sex (however, see "J. NORRIS Decision") and age of the Annuitant
and the value of the amount applied under the annuity option. The variable
annuity options offered by the Company are based on a 3.5% assumed interest
rate. Variable payments are affected by the assumed interest rate used in
calculating the annuity option rates. Variable annuity benefit payments will
increase over periods when the actual net investment result of the Sub-Accounts
funding the annuity exceeds the equivalent of the assumed interest rate for the
period. Variable Annuity Benefit Payments will decrease over periods when the
actual net investment result of the respective Sub-Account is less than the
equivalent of the assumed interest rate for the period.
The dollar amount of the first monthly annuity benefit payment under a life
contingency or a non-commutable period certain option of at least a ten-year
option is determined by multiplying (1) the Accumulated Value applied under that
option (after deduction for premium tax, if any) divided by $1,000, by (2) the
applicable amount of the first monthly payment per $1,000 of value. For any
commutable period certain options and for non-commutable period certain options
the Surrender Value less any premium tax is applied. The dollar amount of the
first monthly variable annuity benefit payment is then divided by the value of
an Annuity Unit of the selected Sub-Accounts to determine the number of Annuity
Units represented by the first payment. This number of Annuity Units remains
fixed under all annuity options except the joint and two-thirds survivor annuity
option. In each subsequent month, the dollar amount of the variable annuity
benefit payment is determined by multiplying this fixed number of Annuity Units
by the value of an Annuity Unit on the applicable Valuation Date.
After the first payment, the dollar amount of each monthly variable annuity
payment will vary with subsequent variations in the value of the Annuity Unit of
the selected Sub-Accounts. The dollar amount of each fixed amount monthly
annuity benefit payment is fixed and will not change, except under the joint and
two-thirds survivor annuity option.
The Company may from time to time offer its Owners both fixed and variable
annuity rates more favorable than those contained in the Policy. Any such rates
will be applied uniformly to all Owners of the same class.
37
<PAGE>
For an illustration of a variable annuity benefit payment calculation using a
hypothetical example, see "ANNUITY BENEFIT PAYMENTS" in the SAI.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of a Policy, 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. In
addition, this discussion does not address state or local tax consequences that
may be associated with this Policy.
IT SHOULD BE RECOGNIZED THAT THE FOLLOWING DISCUSSION OF FEDERAL INCOME TAX
ASPECTS OF AMOUNTS RECEIVED UNDER VARIABLE ANNUITY POLICIES 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 Policy, the Separate Account or the Sub-Accounts may have upon
its tax. The Variable Account presently is not subject to tax, but the Company
reserves the right to assess a charge for taxes should the Variable Account at
any time become subject to tax. Any charge for taxes will be assessed on a fair
and equitable basis in order to preserve equity among classes of Owners and with
respect to each separate account as though that separate account were a separate
taxable entity.
The Separate 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 policies under Section 817(h) of
the Code. The regulations provide that the investments of a segregated asset
account underlying a variable annuity policy are diversified adequately if no
more than 55% of the value of its assets is represented by any one investment,
no more than 70% by any two investments, no more than 80% by any three
investments, and no more than 90% by any four investments. If the investments
are not adequately diversified, the income on a policy, for any taxable year of
the owner, would be treated as ordinary income received or accrued by the owner.
It is anticipated that the Series of DGPF will comply with the current
diversification requirements. In the event that future IRS regulations and/or
rulings would require Policy 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.
A. QUALIFIED AND NON-QUALIFIED POLICIES.
From a federal tax viewpoint there are two types of variable annuity policies:
"qualified" policies and "non-qualified" policies. A qualified policy is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
policy is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, depending on whether they are made from a qualified policy or a non-
qualified policy. For more information on the tax provisions applicable to
qualified policies, see Section D below.
B. TAXATION OF THE POLICIES IN GENERAL.
The Company believes that the Policy described in this Prospectus will, with
certain exceptions (see "Non-Natural Owner" below), be considered an annuity
policy under Section 72 of the Code. This section governs the taxation of
annuities. The following discussion concerns annuities subject to Section 72.
38
<PAGE>
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Policy's Accumulated Value is not taxable to the Owner until it is withdrawn
from the Policy. If the Policy is surrendered or amounts are withdrawn prior to
the annuity date, any withdrawal of investment gain in value over the cost basis
of the Policy will be taxed as ordinary income. Under the current provisions of
the Code, amounts received under an annuity policy 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 policy over the
taxpayer's "investment in the policy." Such amounts will be treated as gross
income subject to federal income taxation. "Investment in the Policy" is the
total of all payments to the Policy 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 policies issued by the same insurance company to the same owner during a
single calendar year be treated as one policy in determining taxable
distributions.
ANNUITY PAYOUTS AFTER ANNUITIZATION. When annuity benefit payments are
commenced under the Policy, 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 cost basis of the Policy bears to the
expected return under the Policy. The portion of the payment in excess of this
excludable amount is taxable as ordinary income. Once all cost basis in the
Policy is recovered, the entire payment is taxable. If the annuitant dies before
the cost basis 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 a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity policy were determined by amortizing the accumulated
value of the policy over the taxpayer's remaining life expectancy (such as under
the Policy's LED option), and the option could be changed or terminated at any
time, the distributions failed to qualify as part of a "series of substantially
equal payments" within the meaning of Section 72 of the Code. The distributions,
therefore, were subject to the 10% federal penalty tax. This Private Letter
Ruling may be applicable to an Owner who receives distributions under the LED
option prior to age 59. Subsequent Private Letter Rulings, however, have treated
LED-type withdrawal programs as effectively avoiding the 10% penalty tax. The
position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Policy 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 Policy to the Annuitant on the Annuity
Date, as required under the Policy, 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.
39
<PAGE>
NON-NATURAL OWNERS. As a general rule, deferred annuity policies owned by
"non-natural persons" (e.g., a corporation) are not treated as annuity policies
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 policies 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 policy 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 policies. Contributions and investment earnings
are not taxable to employees until distributed. With respect to payments made
after February 28, 1986, however, a policy owned by a state or local government
or a tax-exempt organization will not be treated as an annuity under Section 72
. 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 policies and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified policies. In addition, the Code requires reporting to the IRS of
the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Policies offered by this Prospectus will vary according to whether or not the
amount withdrawn or surrendered is allocable to an investment in the Policy made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified retirement 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 policy used to fund such benefits. As such,
the following is simply a general description of various types of qualified
plans that may use the Policy. Before purchasing any annuity policy for use in
funding a qualified plan, more specific information should be obtained.
A qualified Policy may include special provisions (endorsements) changing or
restricting rights and benefits otherwise available to an Owner of a
non-qualified Contract. Individuals purchasing a qualified Policy should review
carefully 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 Policies in
connection with such plans should seek competent advice as to the suitability of
the Policy to their specific needs and as to applicable Code limitations and tax
consequences.
The Company can provide prototype plans for certain pension or profit sharing
plans for review by the plan's legal counsel. For information, ask your
financial representative.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
Individual Retirement Annuity ("IRA"). IRAs are subject to
40
<PAGE>
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 Policy will be provided with
supplementary information as may be required by the IRS or other appropriate
agency, and will have the right to revoke the Policy as described in this
Prospectus. See "Right to Revoke All Other Policies."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or Simple IRA plans for their employees using
the employees 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 Policies 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 policies should
seek competent advice as to eligibility, limitations on permissible payments and
other tax consequences associated with the policies.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA policy after December
31, 1988, may not begin before the employee attains age 59, 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 policy 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.
LOANS (QUALIFIED POLICIES ONLY)
Loans will be permitted only for TSAs and Policies issued to a plan qualified
under Section 401(a) and 401(k) of the Code. Loans are made from the Policy's
value on a pro-rata basis from all accounts. The maximum loan amount is the
amount determined under the Company's maximum loan formula for qualified plans.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Policy. Loans are subject to applicable retirement legislation and their
taxation is determined under the federal income tax laws. The amount borrowed
will be transferred to a fixed, minimum guarantee loan assets account in the
Company's General Account, where it will accrue interest at a specified rate
below the then current loan interest rate. Generally, loans must be repaid
within five years and must be made at least quarterly in substantially equal
amounts. When repayments are received, they will be allocated pro-rata in
accordance with the Owner's most recent allocation instructions.
The amount of the death benefit, the amount payable on a full surrender and the
amount applied to provide an annuity on the Annuity Date will be reduced to
reflect any outstanding loan balance (plus accrued interest thereon). Partial
withdrawals may be restricted by the maximum loan limitation.
REPORTS
An Owner is sent a report semi-annually which states certain financial
information about the Underlying Funds. The Company will also furnish an annual
report to the Owner containing a statement of his or her account, including unit
values and other information required by applicable law, rules and regulations.
41
<PAGE>
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the shares that are held in the
Sub-Accounts or that the Sub-Accounts may purchase. If the shares of any
Underlying Fund are no longer available for investment or if, in the Company's
judgment further investment in any Underlying Fund should become inappropriate
in view of the purposes of the Separate Account or the affected Sub-Account, the
Company may redeem the shares of that Underlying Fund and substitute shares of
another registered open-end management company. The Company will not substitute
any shares attributable to a Policy 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 Separate Account
may, to the extent permitted by law, purchase other securities for other
policies or permit a conversion between policies upon request by an Owner.
The Company also reserves the right to establish additional Sub-Accounts of the
Separate Account, each of which would invest in shares corresponding to a new
Underlying Fund or in shares of another investment company having a specified
investment objective. Subject to applicable law and any required SEC approval,
the Company may, in its sole discretion, establish new Sub-Accounts or eliminate
one or more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Sub-Accounts may be made available to existing
Owners on a basis to be determined by the Company.
Shares of the Underlying Funds are sold to separate accounts of unaffiliated
insurance companies ("shared funding") which issue variable annuity and variable
life policies ("mixed funding"). It is conceivable that in the future such
shared funding or mixed funding may be disadvantageous for variable life
insurance owners or variable annuity owners. Although neither the Company nor
any of the underlying investment companies currently foresees any such
disadvantages to either variable life insurance owners or variable annuity
owners, the Company and the respective trustees intend to monitor events in
order to identify any material conflicts and to determine what action, if any,
should be taken in response thereto.
If any of these substitutions or changes is made, the Company may, by
appropriate endorsement, change the Policy 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 Separate 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 is no longer 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, to
(1) transfer assets from Separate Account VA-K or Sub-Account to another of the
Company's separate accounts or sub-accounts having assets of the same class, (2)
to operate the Separate 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 Separate Account under the 1940 Act in accordance with the
requirements of the 1940 Act, and (4) to substitute the shares of any other
registered investment company for the Underlying Fund shares held by a
Sub-Account, in the event that Underlying Fund shares are unavailable for
investment, or if the Company determines that further investment in such
Underlying Fund shares is inappropriate in view of the purpose of the
Sub-Account. In no event will the changes described above be made without notice
to Owners in accordance with the 1940 Act. The Company reserves the right,
subject to compliance with applicable law, to change the names of the Separate
Account or of the Sub-Accounts.
VOTING RIGHTS
The Company will vote Underlying Fund shares held by each Sub-Account in
accordance with instructions received from Owners and, after the Annuity Date,
from the Annuitants. Each person having a voting interest in a Sub-Account will
be provided with proxy materials of the Underlying Funds, 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 Policies in the same proportion.
42
<PAGE>
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 Policies, the Company reserves the
right to do so.
The number of votes which an Owner or Annuitant may cast will be determined by
the Company as of the record date established by the Underlying Funds.
During the accumulation period, the number of Underlying Fund shares
attributable to each Owner will be determined by dividing the dollar value of
the Accumulation Units of the Sub-Account credited to the Policy by the net
asset value of one Underlying Fund share.
During the annuity period, the number of Underlying Fund shares attributable to
each Annuitant will be determined by dividing the reserve held in each
Sub-Account for the Annuitant's variable annuity by the net asset value of one
Underlying Fund share. Ordinarily, the Annuitant's voting interest in the
Underlying Fund will decrease as the reserve for the variable annuity is
depleted.
CHANGES TO COMPLY WITH LAW AND AMENDMENTS
The Company reserves the right, without the consent of Owners, to suspend sales
of the Policies as presently offered and to make any change to provisions of the
Policys to comply with, or give Owners the benefit of, any federal or state
statute, rule or regulation. Including but not limited ti requirements for
annuity contracts and retirement plans under the Code and pertinent regulations
or any state statute or regulation.
SERVICES
The Company receives fees from the investment advisers or other service
providers of certain Underlying Funds in return for providing certain services
to Owners. Currently, the Company receives service fees with respect to the
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and
Fidelity VIP High Income Portfolio, at an annual rate of 0.10% of the aggregate
net asset value, respectively, of the shares of such Underlying Funds held by
the Separate Account. With respect to the T. Rowe Price International Stock
Portfolio, the Company receives service fees at an annual rate of 0.15% per
annum of the aggregate net asset value of shares held by the Separate Account.
The Company may in the future render services for which it will receive
compensation from the investment advisers or other service providers of other
Underlying Funds.
LEGAL MATTERS
There are no legal proceedings pending to which the Separate Account is a party.
FURTHER INFORMATION
A Registration Statement under the Securities Act of 1933 relating to this
offering has been filed with the SEC. Certain portions of the Registration
Statement and amendments have been omitted from 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.
43
<PAGE>
APPENDIX A
MORE INFORMATION ABOUT THE GENERAL ACCOUNT
Because of exemption and exclusionary provisions in the securities laws,
interests in the General Account are not generally subject to regulation under
the provisions of the 1933 Act or the 1940 Act. Disclosures regarding the fixed
portion of the annuity policy and the General Account may be subject to the
provisions of the 1933 Act concerning the accuracy and completeness of
statements made in the Prospectus. The disclosures in this APPENDIX A have not
been reviewed by the SEC.
The General Account of the Company is made up of all of the general assets of
the Company other than those allocated to any Separate Account. Allocations to
the General Account become part of the assets of the Company and are used to
support insurance and annuity obligations. A portion or all of net purchase
payments may be allocated to accumulate at a fixed rate of interest in the
General Account. Such net amounts are guaranteed by the Company as to principal
and a minimum rate of interest. Under the Policies, the minimum interest which
may be credited on amounts allocated to the General Account is 3% compounded
annually. Additional "Excess Interest" may or may not be credited at the sole
discretion of the Company.
If a Policy is surrendered, or if an Excess Amount is redeemed, while the Policy
is in force and before the Annuity Date, a contingent deferred sales charge is
imposed if such event occurs before the payments attributable to the surrender
or withdrawal have been credited to the Policy less than nine full policy years.
A-1
<PAGE>
APPENDIX B
INFORMATION APPLICABLE ONLY TO
POLICY NO. A3018-91 (AND STATE VARIATIONS THEREOF)
If your Policy is issued on Form No. A3018-91, or a state variation thereof
("original Policy"), your original Policy is substantially similar to the Policy
described in this Prospectus ("new Policy"), except as follows:
1. The minimum interest rate credited to amounts allocated to the General
Account respecting the new Policy is 3% compounded annually. For the original
Policy, the minimum interest rate guarantees are 5% for the first five Policy
years, 4% for the next five Policy years, and 3.5% thereafter.
2. The guaranteed death benefit under the new Policy is reduced proportionately
to reflect partial withdrawals (in the same proportion that the Accumulated
Value was reduced by the withdrawals). Under the original Policy, partial
withdrawals are subtracted from the guaranteed death benefit. Additionally, the
stepped-up death benefit applies to the most recent fifth year Policy
anniversary for the new Policy and applies to the most recent seventh year
Policy anniversary for the original Policy.
3. Under the new Policy, the Free Withdrawal Amount is the greater of (1)
cumulative earnings (Accumulated Value as of the most recent Valuation Date
reduced by total gross payments not previously redeemed), (2) 10% of the
Accumulated Value as of the most recent Valuation Date, reduced by the total
amount of any prior partial redemptions made in the same calendar year to which
no contingent deferred sales charge was applied, or (3) the life expectancy
distribution, if applicable. The Free Withdrawal Amount for the new Policy is
first deducted from cumulative earnings, and any excess will be deemed withdrawn
on a LIFO basis.
Under the original Policy, the Free Withdrawal Amount is the greater of (1) 10%
of the Accumulated Value as of December 31 of the previous calendar year, or (2)
the life expectancy distribution, if applicable. The Free Withdrawal Amount for
the original Policy is deducted first from Old Payments, then from the earliest
New Payments and so on until all New Payments have been exhausted pursuant to
the first-in-first-out ("FIFO") method of accounting (LIFO or last-in-first-out
method in New Jersey).
4. If you surrender the Policy or annuitize under a period certain option at the
end of one, three or five years, the expenses you would pay on a $1,000
investment, assuming 5% annual return on assets, would be slightly less than
shown in the expense examples under "ANNUAL AND TRANSACTION EXPENSES."
B-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
FOR
INDIVIDUAL VARIABLE ANNUITY CONTRACTS FUNDED THROUGH
SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K
INVESTING IN SHARES OF ALLMERICA INVESTMENT TRUST, VARIABLE INSURANCE
PRODUCTS FUND, VARIABLE INSURANCE PRODUCTS FUND II,
T. ROWE PRICE INTERNATIONAL SERIES, INC., AND
DELAWARE GROUP PREMIUM FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS OF THE VARIABLE ACCOUNT DATED MAY
1, 1997, ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ANNUITY
CLIENT SERVICES, ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY,
440 LINCOLN STREET, WORCESTER, MASSACHUSETTS 01653.
DATED: MAY 1, 1997
1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . . . . 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT
AND THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ANNUITY BENEFIT PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 4
EXCHANGE OFFER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 7
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
GENERAL INFORMATION AND HISTORY
Separate Account VA-K (the "Variable Account") is a separate investment account
of Allmerica Financial Life Insurance and Annuity Company (the "Company")
established by vote of its Board of Directors on November 1, 1990. 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, 1996, the
Company had over $6.7 billion in assets and over $25.8 billion of life insurance
in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company, and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is the fifth oldest life insurance company
in America. As of December 31, 1996, First Allmerica and its subsidiaries
(including the company) had over $13.3 billion in combined assets and over
$45.3 billion in life insurance in force.
Currently, 18 Sub-Accounts of the Variable Account are available under the
Contract. Each Sub-Account invests in a corresponding investment portfolio of
Allmerica Investment Trust ("Trust"), Variable Insurance Products Fund ("VIP"),
Variable Insurance Products Fund II ("VIP II"), T. Rowe Price International
Series, Inc. ("T. Rowe Price"), or Delaware Group Premium Fund, Inc. ("DGPF").
The Trust is managed by Allmerica Investment Management Company, Inc. VIP and
VIP II are managed by Fidelity Management and Research Company ("Fidelity
Management"). The T. Rowe Price International Stock Portfolio of T. Rowe Price
is managed by Rowe Price-Fleming International, Inc. ("Price-Fleming"). The
International Equity Series of DGPF is managed by Delaware International
Advisers Ltd. ("International Advisers").
The Trust, VIP, VIP II, T. Rowe Price and DGPF are open-end, diversified
management investment companies. Eleven different Funds of the Trust are
available under the Contract: the Growth Fund, Investment Grade Income Fund,
Money Market Fund, Equity Index Fund, Government Bond Fund, Select International
Growth Fund, Select Aggressive Growth Fund, Select Capital Appreciation Fund,
Select Growth Fund, Select Growth and Income Fund and Small-Mid Cap Value Fund.
Certain of these Funds may not be available in all states. Four Portfolios of
VIP
2
<PAGE>
are available under the Contract: the Fidelity VIP High Income Portfolio,
Fidelity VIP Equity-Income Portfolio, Fidelity VIP Growth Portfolio, and
Fidelity VIP Overseas Portfolio. One Portfolio of VIP II is available under the
Contract: the Fidelity VIP II Asset Manager Portfolio. One Portfolio of T. Rowe
Price is available under the Contract: the T. Rowe Price International Stock
Portfolio. The International Equity Series is the only Series of DGPF available
under the Contract. Each Fund, Portfolio and Series available under the
Contract (together, the "Underlying Funds") has its own investment objectives
and certain attendant risks.
TAXATION OF THE CONTRACT, THE VARIABLE
ACCOUNT AND THE COMPANY
The Company currently imposes no charge for taxes payable in connection with the
Contract, other than for state and local premium taxes and similar assessments
when applicable. The Company reserves the right to impose a charge for any
other taxes that may become payable in the future in connection with the
Contract or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code ("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 Fund shares 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 Fund and is not represented by any
transferable stock certificates.
EXPERTS. The financial statements of Allmerica Financial Life Insurance
and Annuity Company prepared in accordance with generally accepted accounting
principles as of and for the year ended December 31, 1996, the
statutory basis financial statements of Allmerica Financial Life Insurance
and Annuity Company for 1995 and each of the three years ended December 31,
1995 and the financial statements of Separate Account VA-K of the Company at
December 31, 1996 and for the periods indicated, included in this Statement
of Additional Information ("SAI"), 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 Allmerica Financial Life Insurance and Annuity
Company included herein should be considered only as bearing on the ability
of Allmerica Financial Life Insurance and Annuity Company to meet its
obligations under the Policies.
UNDERWRITERS
Allmerica Investments, Inc. ("Allmerica Investments"), a registered
broker-dealer under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. ("NASD"), serves as principal
underwriter 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 NASD registered representatives of Allmerica Investments and from
certain independent broker-dealers which are NASD members and whose
representatives are authorized by applicable law to sell variable annuity
contracts.
Commissions are paid by the Company to its licensed insurance agents on sales of
the Contract. The Company intends to recoup the commission and other sales
expense through a combination of anticipated surrender, withdrawal and/or
annuitization charges, 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.
3
<PAGE>
All persons selling the Contract are required to be licensed by their respective
state insurance authorities for the sale of variable annuity policies.
Registered representatives of Allmerica Investments receive commissions equal to
5% (4% on contracts originally issued as part of a 401(k) plan) of purchase
payments. Independent broker-dealers receive commissions of 5%, of which a
portion is paid to their registered representatives.
The aggregate amounts of commissions paid to representatives of Allmerica
Investments, Inc. with respect to sales of the Contract were $32,978,859.65 in
1996, $24,033,700.75 in 1995, and $25,409,365.52 in 1994.
Commissions are paid by the Company, and do not result in any charge to Owners
or to the Separate Account in addition to the charges described under "CHARGES
AND DEDUCTIONS" in the Prospectus.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
(1) Accumulation Unit Value -- Previous Valuation Period..............$ 1.135000
(2) Value of Assets -- Beginning of Valuation Period .................$5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses.........$1,675
(4) Adjusted Gross Investment Rate for the Valuation
Period (3) DIVIDED BY (2)..........................................0.000335
(5) Annual Charge (one-day equivalent of 1.45% per annum)...............0.000040
(6) Net Investment Rate (4) - (5).......................................0.000295
(7) Net Investment Factor 1.000000 + (6)................................1.000295
(8) Accumulation Unit Value -- Current Period (1) x (7)...............$ 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 First and Subsequent Annuity Benefit Payments"
in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example: Assume
an Annuitant has 40,000 Accumulation Units in a Separate Account, and that the
value of an Accumulation Unit on the Valuation Date used to determine the amount
of the first variable annuity benefit payment is $1.120000. Therefore, the
Accumulation Value of the Contract is $44,800 (40,000 X $1.120000). Assume also
that the Owner elects an option for which the first monthly payment is $6.57 per
$1,000 of Accumulated Value applied. Assuming no premium tax or contingent
deferred sales charge, the first monthly payment would be 44.800 multiplied by
$6.57, or $294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum
for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the
4
<PAGE>
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 Growth Account 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 on 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.
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
contracts 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.
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 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 Exchanged Contract and,
in the case of an exchange of a Single Payment Exchanged Contract, applies the
charge for a greater number of years. In addition, if an Elective Payment
Exchanged Contract was issued more than nine years before the date of an
exchange under this offer, additional payments to the Exchanged Contract would
not be subject to a surrender charge. New payments to the new Contract may be
subject to a charge if withdrawn prior to the surrender charge period described
in the Prospectus.
5
<PAGE>
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k) plan. No
Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Exchanged Contract if the
Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.15% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
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 offer 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,
the prior purchase payments made under the Exchanged Contract (if higher than
the Exchanged Contract's Accumulated Value) is no longer 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 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
6
<PAGE>
and Sub-Accounts of the reinstated contract in the same proportion that the
value in the Fixed Account and the value in each Sub-Account bore to the
transferred Accumulated Value on the date of the exchange of the contract for
the new Contract. For purposes of calculating any contingent deferred sales
charge under the reinstated contract, the reinstated contract will be deemed to
have been issued and to have received past purchase payments as if there had
been no exchange.
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on various
topics of interest to Owners and prospective Owners. These topics may include
the relationship between sectors of the economy and the economy as a whole and
its effect on various securities markets, investment strategies and techniques
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management 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 may be advertised based on the period of time
that an Underlying Portfolio has been in existence, even if longer than the
period of time that the Contract has been offered. The results for any period
prior to a Contract being offered will be calculated as if the Contract had been
offered during that period of time, with all charges assumed to be those
applicable to the Contract.
TOTAL RETURN
"Total Return" refers to the total of the income generated by an investment in a
Sub-Account and of the changes of value of the principal invested (due to
realized and unrealized capital gains or losses) for a specific period, reduced
by the Sub-Accounts 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:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
ERV = the ending redeemable value of the $1,000 payment at the end of the
specified period
The calculation of Total Return includes the annual charges against the assets
of the Sub-Account. This charge is 1.45% on an annual basis. The calculation
of ending redeemable value assumes (1) the Contract was issued at the beginning
of the period, and (2) a complete surrender of the Contract at the end of the
period. The deduction of the contingent deferred sales charge, if any,
applicable at the end of the period is included in the calculation, according to
the following schedule:
Contract Year From Date Charge as Percentage of
of Payment in Which New Payments Withdrawn*
Surrender Occurs
0-2 8%
3 7%
7
<PAGE>
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
Thereafter 0%
*Subject to the maximum limit described in the Prospectus.
No contingent deferred sales charge is deducted upon expiration of the periods
specified above. In all calendar years, an amount equal to the greater of
Cumulative Earnings, 10% of the Accumulated Value under the Contract or the life
expectancy distribution, is not subject to the contingent deferred sales charge.
The calculations of Total Return include the deduction of the $30 annual
Contract fee.
SUPPLEMENTAL TOTAL RETURN INFORMATION
The Supplemental Total Return Information in this section refers to the total of
the income generated by an investment in a Sub-Account and of the changes of
value of the principal invested (due to realized and unrealized capital gains or
losses) for a specified period reduced by the Sub-Account's asset charges. 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:
P(1 + T)n = EV
Where: P = a hypothetical initial payment to the Variable Account of $1,000
T = average annual total return
n = number of years
EV = the ending value of the $1,000 payment at the end of the specified
period
The calculation of Supplemental Total Return reflects the 1.45% annual charge
against the assets of the Sub-Accounts. The ending value assumes that the
Contract is NOT surrendered at the end of the specified period, and there is
therefore no adjustment for the contingent deferred sales charge that would be
applicable if the Contract was surrendered at the end of the period.
The calculations of Supplemental Total Return include the deduction of the $30
annual Contract fee.
YIELD AND EFFECTIVE YIELD -- MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1996:
Yield 4.07%
Effective Yield 4.15%
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
8
<PAGE>
to obtain the base period return, and then multiplying the return for a
seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
Effective Yield = [(base period return + 1) (365/7)] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for the Sub-Accounts of Separate Account VA-K investing in
the Underlying Funds.
9
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying balance sheet and the related statement of
income, of shareholder's equity, and of cash flows present fairly, in all
material respects, the financial position of Allmerica Financial Life Insurance
and Annuity Company at December 31, 1996, and the results of their operations
and their cash flows for the year in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 3, 1997
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
REVENUES
Premiums..................................... $ 32.7
Universal life and investment product
policy fees............................... 176.2
Net investment income...................... 171.7
Net realized investment losses............. (3.6)
Other income............................... 0.9
---------
Total revenues......................... 377.9
---------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses....................... 192.6
Policy acquisition expenses................ 49.9
Other operating expenses................... 86.6
---------
Total benefits, losses and expenses.... 329.1
---------
Income before federal income taxes............. 48.8
---------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 26.9
Deferred................................... (9.8)
---------
Total federal income tax expense....... 17.1
---------
Net income..................................... $ 31.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------------------- ----------
<S> <C>
ASSETS
Investments:
Fixed maturities-at fair value (amortized cost of
$1,660.2).......................................... $ 1,698.0
Equity securities-at fair value (cost of $33.0)..... 41.5
Mortgage loans...................................... 221.6
Real estate......................................... 26.1
Policy loans........................................ 131.7
Other long-term investments......................... 7.9
----------
Total investments............................... 2,126.8
----------
Cash and cash equivalents............................. 18.8
Accrued investment income............................. 37.7
Deferred policy acquisition costs..................... 632.7
----------
Reinsurance receivables:
Future policy benefits.............................. 68.1
Outstanding claims, losses and loss adjustment
expenses........................................... 3.5
Other............................................... 0.9
----------
Total reinsurance receivables................... 72.5
----------
Other assets.......................................... 8.2
Separate account assets............................... 4,524.0
----------
Total assets.................................... $ 7,420.7
----------
----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,163.0
Outstanding claims, losses and loss adjustment
expenses........................................... 15.4
Unearned premiums................................... 2.7
Contractholder deposit funds and other policy
liabilities........................................ 32.8
----------
Total policy liabilities and accruals........... 2,213.9
----------
Expenses and taxes payable............................ 77.3
Deferred federal income taxes......................... 60.2
Separate account liabilities.......................... 4,523.6
----------
Total liabilities............................... 6,875.0
----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,518 shares issued and outstanding...... 2.5
Additional paid-in-capital............................ 346.3
Unrealized appreciation on investments, net........... 20.5
Retained earnings..................................... 176.4
----------
Total shareholder's equity...................... 545.7
----------
Total liabilities and shareholder's equity...... $ 7,420.7
----------
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
COMMON STOCK
Balance at beginning of year............... $ 2.5
Issued during year......................... --
---------
Balance at end of year..................... 2.5
---------
ADDITIONAL PAID-IN-CAPITAL
Balance at beginning of year............... 324.3
Contributed from parent.................... 22.0
---------
Balance at end of year..................... 346.3
---------
RETAINED EARNINGS
Balance at beginning of year............... 144.7
Net income................................. 31.7
---------
Balance at end of year..................... 176.4
---------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS
Balance at beginning of year............... 23.8
---------
Appreciation (depreciation) during the
period:
Net appreciation (depreciation) on
available-for-sale securities........... (5.1)
(Provision) benefit for deferred
federal income taxes.................... 1.8
---------
(3.3)
---------
Balance at end of year................. 20.5
---------
Total shareholder's equity......... $ 545.7
---------
---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(IN MILLIONS) 1996
-------------------------------------------- ----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 31.7
Adjustments to reconcile net income to
net cash provided by operating
activities:
Net realized losses................. 3.6
Net amortization and depreciation... 3.5
Deferred federal income taxes
(benefits)........................... (9.8)
Change in deferred policy
acquisition costs.................... (66.8)
Change in premiums and notes
receivable, net of reinsurance
payable.............................. (0.2)
Change in accrued investment
income............................... 1.2
Change in policy liabilities and
accruals, net........................ (39.9)
Change in reinsurance receivable.... (1.5)
Change in expenses and taxes
payable.............................. 32.3
Separate account activity, net...... 10.5
Other, net.......................... (0.2)
----------
Net cash provided by operating
activities.................... (35.6)
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................. 809.4
Proceeds from disposals of equity
securities............................. 1.5
Proceeds from disposals of other
investments............................ 17.5
Proceeds from mortgages matured or
collected.............................. 34.0
Purchase of available-for-sale fixed
maturities............................. (795.8)
Purchase of equity securities........... (13.2)
Purchase of other investments........... (36.2)
Other investing activities, net......... (2.1)
----------
Net cash (used in) provided by
investing activities.......... 15.1
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in........................ 22.0
----------
Net cash provided by financing
activities.................... 22.0
----------
Net change in cash and cash equivalents..... 1.5
Cash and cash equivalents, beginning of
year....................................... 17.3
----------
Cash and cash equivalents, end of year...... $ 18.8
----------
----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3.4
Income taxes paid....................... $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly-owned
subsidiary of SMA Financial Corporation, which is wholly owned by First
Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum
level of 5% of general account assets by FAFLIC in accordance with a policy
established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
B. VALUATION OF INVESTMENTS
The Company classifies all debt and equity securities as available-for-sale.
Realized gains and losses on sales of fixed maturities and equity securities
are determined on the specific-identification basis using amortized cost for
fixed maturities and cost for equity securities. Fixed maturities and equity
securities with other than temporary declines in fair value are written down to
estimated fair value resulting in the recognition of realized losses.
Mortgage loans on real estate are stated at unpaid principal balances, net
of unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by management to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which management believes may not be collectible in
full. In establishing reserves, management considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
Real estate that has been acquired through the foreclosure of mortgage loans
is valued at the estimated fair value at the time of foreclosure. The Company
considers several methods in determining fair value at foreclosure, using
primarily third-party appraisals and discounted cash flow analyses. After
foreclosure, the Company makes a determination as to whether the asset should be
held for production of income or held for sale.
Real estate investments held for the production of income and held for sale
are carried at depreciated cost less valuation allowances, if necessary, to
reduce the carrying value to fair value. Depreciation is generally calculated
using the straight-line method.
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans and real
estate are included in realized investment gains or losses.
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions
involving various types of financial instruments, including debt, investments
such as fixed maturities, mortgage loans and equity securities, and investment
and loan commitments. These instruments involve credit risk and also may be
subject to risk of loss due to interest rate fluctuation. The Company evaluates
and monitors each financial instrument individually and, when appropriate,
obtains collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other
costs, which vary with, and are primarily related to, the production of
revenues. Acquisition costs related to universal life and group variable
universal life products and contractholder deposit funds are deferred and
amortized in proportion to total estimated gross profits over the expected life
of the contracts using a revised interest rate applied to the remaining benefit
period. Acquisition costs related to annuity and other life insurance businesses
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination.
Although realization of deferred policy acquisition costs is not assured,
management believes it is more likely than not that all of these costs will be
realized. The amount of deferred policy acquisition costs considered realizable,
however, could be reduced in the near term if the estimates of gross profits or
total revenues discussed above are reduced. The amount of amortization of
deferred policy acquisition costs could be revised in the near term if any of
the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of certain pension,
variable annuity and variable life insurance contractholders. Assets consist
principally of bonds, common stocks, mutual funds, and short-term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the contractholders and, therefore, are not included in the
Company's net income. Appreciation and depreciation of the Company's interest in
the separate accounts, including undistributed net investment income, is
reflected in shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, health and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for individual life and annuity policies, and are based upon
estimates as to future investment yield, mortality and withdrawals that include
provisions for adverse deviation. Future policy benefits for individual life
insurance and annuity policies are computed using interest rates ranging from 2
1/2% to 6% for life insurance and 2% to 9 1/2% for annuities. Mortality,
morbidity and withdrawal assumptions for all policies are based on the Company's
own experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Individual health benefit liabilities for active lives are estimated using
the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported. These liabilities are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all claims incurred but not paid. These estimates are continually
reviewed and adjusted as necessary; such adjustments are reflected in current
operations.
Premiums for individual accident and health insurance are reported as earned
on a pro-rata basis over the contract period. The unexpired portion of these
premiums is recorded as unearned premiums.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates
discussed above. Although the adequacy of these amounts cannot be assured,
management believes that it is more likely than not that policy liabilities and
accruals will be sufficient to meet future obligations of policies in force. The
amount of liabilities and accruals, however, could be revised in the near term
if the estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and health insurance and individual annuity
products, excluding universal life and investment-related products, are
considered revenue when due. Individual accident and health insurance premiums
are recognized as revenue over the related contract periods. Benefits, losses
and related expenses are matched with premiums, resulting in their recognition
over the lives of the contracts. This matching is accomplished through the
provision for future benefits, estimated and unpaid losses and amortization of
deferred policy acquisition costs. Revenues for investment-related products
consist of net investment income and contract charges assessed against the fund
values. Related benefit expenses primarily consist of net investment income
credited to the fund values after deduction for investment and risk charges.
Revenues for universal life and group variable universal life products consist
of net investment income, and mortality, administration and surrender charges
assessed against the fund values. Related benefit expenses include universal
life benefits in excess of fund values and net investment income credited to
universal life fund values.
I. FEDERAL INCOME TAXES
AFC, FAFLIC, AFLIAC and FAFLIC's non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life tax losses that can be applied to offset life company taxable
income.
The Board of Directors has delegated to AFC management the development and
maintenance of appropriate Federal Income Tax allocation policies and
procedures, which are subject to written agreement between the companies. The
Federal income tax for all subsidiaries in the consolidated life-nonlife return
of AFC is calculated on a separate return basis. Any current tax liability is
paid to AFC. Tax benefits resulting from taxable operating losses or credits of
AFC's subsidiaries are not reimbursed to the subsidiary until such losses or
credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities
have different values for financial statement and tax reporting purposes, and
for other temporary taxable and deductible differences
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
as defined by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109). These differences result primarily from loss
reserves, policy acquisition expenses, and unrealized appreciation/depreciation
on investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In March, 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued. This statement
requires companies to write down to fair value long-lived assets whose carrying
value is greater than the undiscounted cash flows of those assets. The statement
also requires that long-lived assets of which management is committed to
dispose, either by sale or abandonment, be valued at the lower of their carrying
amount or fair value less costs to sell. This statement is effective for fiscal
years beginning after December 15, 1995. The adoption of this statement has not
had a material effect on the financial statements.
2. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of SFAS No. 115. The
amortized cost and fair value of available-for-sale fixed maturities and equity
securities were as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------
GROSS GROSS
DECEMBER 31 AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 15.7 $ 0.5 $ 0.2 $ 16.0
States and political subdivisions....... 8.9 1.6 -- 10.5
Foreign governments..................... 53.2 2.9 -- 56.1
Corporate fixed maturities.............. 1,437.2 38.6 6.1 1,469.7
Mortgage-backed securities.............. 145.2 2.2 1.7 145.7
---------- -------- --------- --------
Total fixed maturities
available-for-sale..................... $1,660.2 $45.8 $ 8.0 $1,698.0
---------- -------- --------- --------
Equity securities....................... $ 33.0 $10.2 $ 1.7 $ 41.5
---------- -------- --------- --------
---------- -------- --------- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In March 1994, AFLIAC voluntarily withdrew its license in New York in order
to provide for certain commission arrangements prohibited by New York comparable
to AFLIAC's competitors. In connection with the withdrawal, FAFLIC, which is
licensed in New York, became qualified to sell the products previously sold by
AFLIAC in New York. AFLIAC agreed with the New York Department of Insurance to
maintain, through a custodial account in New York, a security deposit, the
market value of which will at all times equal 102% of all outstanding general
account liabilities of AFLIAC for New York policyholders, claimants and
creditors. At December 31, 1996, the amortized cost and market value of assets
on deposit were $284.9 million and $292.2 million, respectively. In addition,
fixed maturities, excluding those securities on deposit in New York, with an
amortized cost of $4.2 million were on deposit with various state and
governmental authorities at December 31, 1996.
There were no contractual fixed maturity investment commitments at December
31, 1996.
The amortized cost and fair value by maturity periods for fixed maturities
are shown below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
obligations with or without call or prepayment penalties, or the Company may
have the right to put or sell the obligations back to the issuers. Mortgage
backed securities are included in the category representing their ultimate
maturity.
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 129.2 $ 130.0
Due after one year through five years....................... 459.0 473.4
Due after five years through ten years...................... 735.1 751.1
Due after ten years......................................... 336.9 343.5
--------- ---------
Total................................................... $1,660.2 $1,698.0
--------- ---------
--------- ---------
</TABLE>
The proceeds from voluntary sales of available-for-sale securities and the
gross realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ ------------------ ----- ------
<S> <C> <C> <C>
1996
Fixed maturities............................................ $496.6 $4.3 $8.3
------- ----- ------
Equity securities........................................... $ 1.5 $0.4 $0.1
------- ----- ------
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEAR ENDED DECEMBER 31 FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- ------
<S> <C> <C> <C>
1996
Net appreciation (depreciation), beginning of year.......... $ 20.4 $ 3.4 $ 23.8
---------- ------ ------
Net (depreciation) appreciation on available-for-sale
securities............................................... (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities.............. 9.0 -- 9.0
Provision for deferred federal income taxes............... 4.1 (2.3) 1.8
---------- ------ ------
(7.7) 4.4 (3.3)
---------- ------ ------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ ------
---------- ------ ------
</TABLE>
(1) Includes net appreciation on other investments of $2.2 million.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Mortgage loans.......................... $221.6
------
Real estate:
Held for sale......................... 26.1
Held for production of income......... --
------
Total real estate................... 26.1
------
Total mortgage loans and real estate.... $247.7
------
------
</TABLE>
Reserves for mortgage loans were $9.5 million at December 31, 1996.
During 1996, non-cash investing activities included real estate acquired
through foreclosure of mortgage loans, which had a fair value of $0.9 million.
At December 31, 1996, contractual commitments to extend credit under
commercial mortgage loan agreements amounted to approximately $16.0 million.
These commitments generally expire within one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- ---------------------------------------- ------
<S> <C>
Property type:
Office building....................... $ 86.1
Residential........................... 39.0
Retail................................ 55.9
Industrial / warehouse................ 52.6
Other................................. 25.3
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
Geographic region:
South Atlantic........................ $ 72.9
Pacific............................... 37.0
East North Central.................... 58.3
Middle Atlantic....................... 35.0
West South Central.................... 5.7
New England........................... 21.9
Other................................. 28.1
Valuation allowances.................. (11.2)
------
Total................................... $247.7
------
------
</TABLE>
At December 31, 1996, scheduled mortgage loan maturities were as follows:
1997 -- $58.6 million; 1998 -- $53.1 million; 1999 -- $21.5 million; 2000 --
$52.3 million; 2001 -- $7.7 million; and $28.4 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1996, the Company refinanced $7.8 million of mortgage
loans based on terms which differed from those granted to new borrowers.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED BALANCE AT
DECEMBER 31 BALANCE AT DECEMBER
(IN MILLIONS) JANUARY 1 ADDITIONS DEDUCTIONS 31
- ------------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Mortgage loans........... $12.5 $4.5 $7.5 $ 9.5
Real estate.............. 2.1 -- 0.4 1.7
---------- --------- ---------- ----------
Total................ $14.6 $4.5 $7.9 $11.2
---------- --------- ---------- ----------
---------- --------- ---------- ----------
</TABLE>
The carrying value of impaired loans was $21.5 million with related reserves
of $7.3 million as of December 31, 1996. All impaired loans were reserved as of
December 31, 1996.
The average carrying value of impaired loans was $26.3 million, with related
interest income while such loans were impaired, of $3.4 million as of December
31, 1996.
D. OTHER
At December 31, 1996, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
3. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- ------
<S> <C>
Fixed maturities............................. $137.2
Mortgage loans............................... 22.0
Equity securities............................ 0.7
Policy loans................................. 10.2
Real estate.................................. 6.2
Other long-term investments.................. 0.8
Short-term investments....................... 1.4
------
Gross investment income...................... 178.5
Less investment expenses..................... (6.8)
------
Net investment income........................ $171.7
------
------
</TABLE>
At December 31, 1996, mortgage loans on non-accrual status were $5.0
million, including restructured loans of $2.6 million. The effect of
non-accruals, compared with amounts that would have been recognized in
accordance with the original terms of the investments, was to reduce net income
by $0.1 million in 1996. There were no fixed maturities on non-accrual status at
December 31, 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $25.4 million at December 31, 1996. Interest income on
restructured mortgage loans that would have been recorded in accordance with the
original terms of such loans amounted to $3.6 million in 1996. Actual interest
income on these loans included in net investment income aggregated $2.2 million
in 1996.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
There were no fixed maturities or mortgage loans which were non-income
producing for the twelve months ended December 31, 1996.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Fixed maturities............................. $(3.3)
Mortgage loans............................... (3.2)
Equity securities............................ 0.3
Real estate.................................. 2.5
Other........................................ 0.1
-----
Net realized investment losses............... $(3.6)
-----
-----
</TABLE>
Proceeds from voluntary sales of investments in fixed maturities were $496.6
million in 1996. Realized gains on such sales were $4.3 million, and realized
losses were $8.3 million for 1996.
4. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information about certain financial instruments
(insurance contracts, real estate, goodwill and taxes are excluded) for which it
is practicable to estimate such values, whether or not these instruments are
included in the balance sheet. The fair values presented for certain financial
instruments are estimates which, in many cases, may differ significantly from
the amounts which could be realized upon immediate liquidation. In cases where
market prices are not available, estimates of fair value are based on discounted
cash flow analyses which utilize current interest rates for similar financial
instruments which have comparable terms and credit quality.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
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 are
limited to the lesser of the present value of the cash flows or book value.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
REINSURANCE RECEIVABLES
The carrying amount of the reinsurance receivable for outstanding claims, losses
and loss adjustment expenses. reported in the balance sheet approximates fair
value.
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1996
--------------------
DECEMBER 31 CARRYING FAIR
(IN MILLIONS) VALUE VALUE
- --------------------------------------------- --------- --------
<S> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents.................. $ 18.8 $ 18.8
Fixed maturities........................... 1,698.0 1,698.0
Equity securities.......................... 41.5 41.5
Mortgage loans............................. 221.6 229.3
Policy loans............................... 131.7 131.7
Reinsurance receivables.................... 72.5 72.5
--------- --------
$2,184.1 $2,191.8
--------- --------
--------- --------
FINANCIAL LIABILITIES
Individual annuity contracts............... 910.2 703.6
Supplemental contracts without life
contingencies............................. 15.9 15.9
Other individual contract deposit funds.... 0.3 0.3
--------- --------
$ 926.4 $ 719.8
--------- --------
--------- --------
</TABLE>
5. DEBT
During 1996, the Company utilized repurchase agreements to finance certain
investments. Although the repurchase agreements were entirely settled by year
end, management may utilize this policy again in future periods.
Interest expense was $3.4 million in 1996, relating to interest payments on
repurchase agreements, and is recorded in other operating expenses.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of SFAS No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -----
<S> <C>
Federal income tax expense (benefit)
Current.................................... $26.9
Deferred................................... (9.8)
-----
Total........................................ $17.1
-----
-----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
The deferred tax (assets) liabilities are comprised of the following at
December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31
(IN MILLIONS) 1996
- --------------------------------------------- -------
<S> <C>
Deferred tax (assets) liabilities
Loss reserves.............................. (137.0)
Deferred acquisition costs................. 186.9
Investments, net........................... 14.2
Bad debt reserve........................... (1.1)
Other, net................................. (2.8)
-------
Deferred tax liability, net.................. $ 60.2
-------
-------
</TABLE>
Gross deferred income tax liabilities totaled $201.1 million at December 31,
1996. Gross deferred income tax assets totaled $140.9 million at December 31,
1996.
Management believes, based on the Company's recent earnings history and its
future expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, management considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS,
and provisions are routinely made in the financial statements in anticipation of
the results of these audits. The IRS has examined the life-nonlife consolidated
group's federal income tax returns through 1991. The Company is currently
considering its response to certain adjustments proposed by the IRS with respect
to the life-nonlife consolidated group's federal income tax returns for 1989,
1990, and 1991. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these tax liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $112.4 million in 1996. The net amounts payable to FAFLIC
and affiliates for accrued expenses and various other liabilities and
receivables were $13.3 million at December 31, 1996.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a life company) or its net income
(not including realized capital gains) for the preceding calendar year (if such
insurer is not a life company). Any dividends to be paid by an insurer, whether
or not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance.
At January 1, 1997, AFLIAC could pay dividends of $11.9 million to FAFLIC
without prior approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of SFAS No. 113.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy. Reinsurance
contracts do not relieve the Company from its obligations to policyholders.
Failure of reinsurers to honor their obligations could result in losses to the
Company; consequently, allowances are established for amounts deemed
uncollectible. The Company determines the appropriate amount of reinsurance
based on evaluation of the risks accepted and analyses prepared by consultants
and reinsurers and on market conditions (including the availability and pricing
of reinsurance). The Company also believes that the terms of its reinsurance
contracts are consistent with industry practice in that they contain standard
terms with respect to lines of business covered, limit and retention,
arbitration and occurrence. Based on its review of its reinsurers' financial
statements and reputations in the reinsurance marketplace, the Company believes
that its reinsurers are financially sound.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
----------------------------------------------- ---------
<S> <C>
Life insurance premiums:
Direct....................................... $ 53.3
Assumed...................................... 3.1
Ceded........................................ (23.7)
---------
Net premiums................................... $ 32.7
---------
Life insurance and other individual policy
benefits, claims, losses and loss adjustment
expenses:
Direct....................................... $ 206.4
Assumed...................................... 4.5
Ceded........................................ (18.3)
---------
Net policy benefits, claims, losses and loss
adjustment expenses........................... $ 192.6
---------
---------
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. DEFERRED POLICY ACQUISITION EXPENSES
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
(IN MILLIONS) 1996
-------------------------------------------------- --------
<S> <C>
Balance at beginning of year...................... $ 555.7
Acquisition expenses deferred................... 116.6
Amortized to expense during the year............ (49.9)
Adjustment to equity during the year............ 10.3
--------
Balance at end of year............................ $ 632.7
--------
--------
</TABLE>
11. LIABILITIES FOR INDIVIDUAL ACCIDENT AND HEALTH BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are reflected in
results of operations in the year such changes are determined to be needed and
recorded.
The liability for future policy benefits and outstanding claims, losses and
loss adjustment expenses related to the Company's accident and health business
was $178.6 million at December 31, 1996. Accident and health claim liabilities
have been re-estimated for all prior years and were increased by $3.2 million in
1996.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number
of insurance companies that are under regulatory supervision. This may result in
an increase in mandatory assessments by state guaranty funds, or voluntary
payments by solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Mandatory assessments, which are subject
to statutory limits, can be partially recovered through a reduction in future
premium taxes in some states. The Company is not able to reasonably estimate the
potential effect on it of any such future assessments or voluntary payments.
LITIGATION
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements. However,
liabilities related to these proceedings could be established in the near term
if estimates of the ultimate resolution of these proceedings are revised.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles for
stock life insurance companies primarily because policy acquisition costs are
expensed when incurred, investment
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
reserves are based on different assumptions, life insurance reserves are based
on different assumptions and income tax expense reflects only taxes paid or
currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1996
--------------------------------------------------- ---------
<S> <C>
Statutory net income............................... $ 5.4
Statutory Surplus.................................. $ 234.0
---------
</TABLE>
14. SUBSEQUENT EVENT (UNAUDITED)
On April 14, 1997, the Company entered into an agreement in principle to
transfer the Company's individual disability income business under a 100%
coinsurance agreement to Metropolitan Life Insurance Company. The consummation
of the transaction is subject to the negotiation of definitive arrangements and
regulatory approvals and is expected to occur on or before October 1, 1997. In
connection with this transaction, the Company has recorded an after-tax charge
of $35 million net income in the first quarter of 1997 related to the
reinsurance of this business.
F-17
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
(FORMERLY SMA LIFE ASSURANCE COMPANY)
STATUTORY FINANCIAL STATEMENTS
DECEMBER 31, 1995
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DECEMBER 31, 1995
<TABLE>
<S> <C>
Statutory Financial Statements
Report of Independent Accountants....................................................... 1
Statement of Assets, Liabilities, Surplus and Other Funds............................... 3
Statement of Operations and Changes in Capital and Surplus.............................. 4
Statement of Cash Flows................................................................. 5
Notes to Statutory Financial Statements................................................. 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
We have audited the accompanying statutory basis statement of assets,
liabilities, surplus and other funds of Allmerica Financial Life Insurance and
Annuity Company as of December 31, 1995 and 1994, and the related statutory
basis statements of operations and changes in capital and surplus, and of cash
flows for each of the three years ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Note 1 to the financial statements, the Company
prepared these financial statements using accounting practices prescribed or
permitted by the Insurance Department of the State of Delaware, which practices
differ from generally accepted accounting principles. The effects on the
financial statements of the variances between the statutory basis of accounting
and generally accepted accounting principles, although not reasonably
determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Allmerica Financial Life Insurance and Annuity Company as of December 31,
1995 and 1994, or the results of its operations or its cash flows for each of
the three years ended December 31, 1995.
<PAGE>
TO THE BOARD OF DIRECTORS AND STOCKHOLDER OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(FORMERLY KNOWN AS SMA LIFE ASSURANCE COMPANY)
Page 2
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, surplus and other funds of
Allmerica Financial Life Insurance and Annuity Company as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years ended December 31, 1995, on the basis of accounting described in
Note 1.
As discussed in Note 1 to the financial statements, the Company's parent, State
Mutual Life Assurance Company of America, converted from a Massachusetts mutual
life insurance company to a Massachusetts stock life insurance company on
October 16, 1995. In connection with this transaction, the Company changed its
name to Allmerica Financial Life Insurance and Annuity Company and its parent
became a wholly-owned subsidiary of Allmerica Financial Corporation.
[LOGO]
Price Waterhouse LLP
Boston, MA
February 5, 1996
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF ASSETS, LIABILITIES, SURPLUS AND OTHER FUNDS
AS OF DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 1995 1994
---------- ----------
<S> <C> <C>
Cash......................................... $ 7,791 $ 7,248
Investments:
Bonds...................................... 1,659,575 1,595,275
Stocks..................................... 18,132 12,283
Mortgage loans............................. 239,522 295,532
Policy loans............................... 122,696 116,600
Real estate................................ 40,967 51,288
Short term investments..................... 3,500 45,239
Other invested assets...................... 40,196 27,443
---------- ----------
Total cash and investments............. 2,132,379 2,150,908
Premiums deferred and uncollected............ (1,231) 5,452
Investment income due and accrued............ 38,413 39,442
Other assets................................. 6,060 10,569
Assets held in separate accounts............. 2,978,409 1,869,695
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
LIABILITIES, SURPLUS AND OTHER FUNDS
Liabilities:
Policy liabilities:
Life reserves.............................. $ 856,239 $ 890,880
Annuity and other fund reserves............ 865,216 928,325
Accident and health reserves............... 167,246 121,580
Claims payable............................. 11,047 11,720
---------- ----------
Total policy liabilities............... 1,899,748 1,952,505
Expenses and taxes payable................... 20,824 17,484
Other liabilities............................ 27,499 36,466
Asset valuation reserve...................... 31,556 20,786
Obligations related to separate account
business.................................... 2,967,547 1,859,502
---------- ----------
Total liabilities...................... 4,947,174 3,886,743
---------- ----------
Surplus and Other Funds:
Common stock, $1,000 par value
Authorized -- 10,000 shares
Issued and outstanding -- 2,517
shares.................................... 2,517 2,517
Paid-in surplus............................ 199,307 199,307
Unassigned surplus (deficit)............... 4,282 (13,621)
Special contingency reserves............... 750 1,120
---------- ----------
Total surplus and other funds.......... 206,856 189,323
---------- ----------
$5,154,030 $4,076,066
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF OPERATIONS AND CHANGES IN CAPITAL AND SURPLUS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
REVENUE 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Premiums and other considerations:
Life..................................... $ 156,864 $ 195,633 $ 189,285
Annuities................................ 729,222 707,172 660,143
Accident and health...................... 31,790 31,927 35,718
Reinsurance commissions and reserve
adjustments............................. 20,198 4,195 2,309
----------- ----------- -----------
Total premiums and other
considerations........................ 938,074 938,927 887,455
Net investment income...................... 167,470 170,430 177,612
Realized capital losses, net of tax........ (2,295) (17,172) (7,225)
Other revenue.............................. 37,466 26,065 19,055
----------- ----------- -----------
Total revenue.......................... 1,140,715 1,118,250 1,076,897
----------- ----------- -----------
POLICY BENEFITS AND OPERATING EXPENSES
Policy benefits:
Claims, surrenders and other benefits.... 391,254 331,418 275,290
Increase (decrease) in policy reserves... (22,669) 40,113 15,292
----------- ----------- -----------
Total policy benefits.................. 368,585 371,531 290,582
Operating and selling expenses............. 150,215 164,175 160,928
Taxes, except capital gains tax............ 26,536 22,846 19,066
Net transfers to separate accounts......... 556,856 553,295 586,539
----------- ----------- -----------
Total policy benefits and operating
expenses.............................. 1,102,192 1,111,847 1,057,115
----------- ----------- -----------
NET INCOME................................... 38,523 6,403 19,782
Capital and Surplus, Beginning of Year....... 189,323 182,216 171,941
Unrealized capital gains (losses) on
investments............................... 8,279 12,170 (9,052)
Transfer from (to) asset valuation
reserve................................... (10,770) (9,822) 1,974
Other adjustments.......................... (18,499) (1,644) (2,429)
----------- ----------- -----------
CAPITAL AND SURPLUS, END OF YEAR............. $ 206,856 $ 189,323 $ 182,216
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
CASH FLOW FROM OPERATING ACTIVITIES 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Premiums, deposits and other income......... $ 964,129 $ 962,147 $ 902,725
Allowances and reserve adjustments on
reinsurance ceded......................... 20,693 3,279 22,185
Net investment income...................... 170,949 173,294 182,843
Net increase in policy loans............... (6,096) (7,585) (7,812)
Benefits to policyholders and
beneficiaries............................. (393,472) (330,900) (298,612)
Operating and selling expenses and taxes... (153,504) (193,796) (171,533)
Net transfers to separate accounts......... (608,480) (600,760) (634,021)
Federal income tax (excluding tax on
capital gains)............................ (6,771) (19,603) (4,828)
Other sources (applications)............... (13,642) 19,868 7,757
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................. (26,194) 5,944 (1,296)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Sales and maturities of long term
investments:
Bonds.................................... 572,640 478,512 386,414
Stocks................................... 481 63 64
Real estate and other invested assets.... 13,008 3,008 11,094
Repayment of mortgage principal.......... 55,202 65,334 79,844
Capital gains tax........................ (400) (968) (3,296)
Acquisition of long term investments:
Bonds.................................... (640,339) (508,603) (466,086)
Stocks................................... (44) -- --
Real estate and other invested assets.... (11,929) (24,544) (2,392)
Mortgage loans........................... (415) (364) (2,266)
Other investing activities............... (3,206) 18,934 (27,254)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................. (15,002) 31,372 (23,878)
---------- ---------- ----------
Net change in cash and short term
investments................................. (41,196) 37,316 (25,174)
CASH AND SHORT TERM INVESTMENTS
Beginning of the year...................... 52,487 15,171 40,345
---------- ---------- ----------
End of the year............................ $ 11,291 $ 52,487 $ 15,171
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION -- Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial" or the "Company", formerly SMA Life
Assurance Company) is a wholly owned subsidiary of SMA Financial Corp., which is
wholly owned by First Allmerica Financial Life Insurance Company ("First
Allmerica", formerly, State Mutual Life Assurance Company of America), a stock
life insurance company. On October 16, 1995, First Allmerica converted from a
mutual life insurance company to a stock life insurance company. Concurrent with
this transaction, First Allmerica became a wholly owned subsidiary of Allmerica
Financial Corporation ("AFC").
The stockholder's equity of the Company is being maintained at a minimum level
of 5% of general account assets by First Allmerica in accordance with a policy
established by vote of First Allmerica's Board of Directors.
The Company's financial statements have been prepared on the basis of accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware and in conformity with practices prescribed by the National Association
of Insurance Commissioners (NAIC), which while common in the industry, vary in
some respects from generally accepted accounting principles. Significant
differences include:
- Bonds considered to be "available-for-sale" or "trading" are
not carried at fair value and changes in fair value are not
recognized through surplus or the statement of operations,
respectively;
- The Asset Valuation Reserve, represents a reserve against
possible losses on investments and is recorded as a liability
through a charge to surplus. The Interest Maintenance Reserve
is designed to include deferred realized gains and losses (net
of applicable federal income taxes) due to interest rate
changes and is also recorded as a liability, however, the
deferred net realized investment gains and losses are amortized
into future income generally over the original period to
maturity of the assets sold. These liabilities are not required
under generally accepted accounting principles;
- Total premiums, deposits and benefits on certain
investment-type contracts are reflected in the statement of
operations, instead of using the deposit method of accounting;
- Policy acquisition costs, such as commissions, premium taxes
and other items, are not deferred and amortized in relation to
the revenue/gross profit streams from the related contracts;
- Benefit reserves are determined using statutorily prescribed
interest, morbidity and mortality assumptions instead of using
more realistic expense, interest, morbidity, mortality and
voluntary withdrawal assumptions with provision made for
adverse deviation;
- Amounts recoverable from reinsurers for unpaid losses are not
recorded as assets, but as offsets against the respective
liabilities;
- Deferred federal income taxes are not provided for temporary
differences between amounts reported in the financial
statements and those included in the tax returns;
6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
- Certain adjustments related to prior years are recorded as
direct charges or credits to surplus;
- Certain assets, designated as "non-admitted" assets
(principally agents' balances), are not recorded as assets, but
are charged to surplus; and,
- Costs related to other postretirement benefits are recognized
only for employees that are fully vested.
The preparation of financial statements in accordance with practices prescribed
or permitted by the Insurance Department of the State of Delaware and in
conformity with practices prescribed by the NAIC requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
VALUATION OF INVESTMENTS -- Investments in bonds are carried principally at
amortized cost, in accordance with NAIC guidelines. Preferred stocks are carried
generally at cost and common stocks are carried at market value. Policy loans
are carried principally at unpaid principal balances.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts. Mortgage loans are reduced for losses expected by
management to be realized on transfers of mortgage loans to real estate (upon
foreclosure), on the disposition or settlement of mortgage loans and on mortgage
loans which management believes may not be collectible in full. In determining
the amount of the loss, management considers, among other things, the estimated
fair value of the underlying collateral. Investment real estate and real estate
acquired through foreclosure are carried at the lower of depreciated cost or
market value. Depreciation is generally calculated using the straight-line
method.
An asset valuation reserve (AVR) for bonds, mortgage loans, stocks, real estate,
and other invested assets is maintained by appropriations from surplus in
accordance with a formula specified by the NAIC and is classified as a
liability.
FINANCIAL INSTRUMENTS -- In the normal course of business, the Company enters
into transactions involving various types of financial instruments including
investments such as bonds, stocks and mortgage loans and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuations. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
RECOGNITION OF PREMIUM INCOME AND ACQUISITION COSTS -- In general, premiums are
recognized as revenue over the premium paying period of the policies;
commissions and other costs of acquiring the policies are charged to operations
when incurred.
SEPARATE ACCOUNTS -- Separate account assets and liabilities represent
segregated funds administered and invested by the Company for the benefit of
certain variable annuity and variable life contract holders. Assets consist
principally of bonds, common stocks, mutual funds, and short term obligations at
market value. The investment income, gains, and losses of these accounts
generally accrue to the
7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
contract holders and therefore, are not included in the Company's net income.
Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in capital
and surplus.
INSURANCE RESERVES AND ANNUITY AND OTHER FUND RESERVES -- Reserves for life
insurance, annuities, and accident and health insurance are established in
amounts adequate to meet the estimated future obligations of policies in force.
These liabilities are computed based upon mortality, morbidity and interest rate
assumptions applicable to these coverages, including provision for adverse
deviation. Reserves are computed using interest rates ranging from 3% to 6% for
individual life insurance policies, 3% to 5 1/2% for accident and health
policies and 3 1/2% to 9 1/2% for annuity contracts. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. The assumptions vary by plan, age at issue,
year of issue and duration. Claims reserves are computed based on historical
experience modified for expected trends in frequency and severity. Withdrawal
characteristics of annuity and other fund reserves vary by contract. At December
31, 1995 and 1994, approximately 84% and 77%, respectively, of the contracts
(included in both the general account and separate accounts of the Company) were
not subject to discretionary withdrawal or were subject to withdrawal at book
value less surrender charge.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, management
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
FEDERAL INCOME TAXES -- AFC, its life insurance subsidiaries, First Allmerica
and Allmerica Financial and its non-insurance domestic subsidiaries file a
life-nonlife consolidated United States federal income tax return. Entities
included within the consolidated group are segregated into either a life
insurance or non-life insurance company subgroup. The consolidation of these
subgroups is subject to certain statutory restrictions on the percentage of
eligible non-life taxable operating losses that can be applied to offset life
company taxable income. Allmerica P&C and its subsidiaries file a separate
United States Federal income tax return.
The federal income tax allocation policies and procedures are subject to written
agreement between the companies. The federal income tax for all subsidiaries in
the consolidated return of AFC is calculated on a separate return basis. Any
current tax liability is paid to AFC. Tax benefits resulting from taxable
operating losses or credits of AFC's subsidiaries are not reimbursed to the
subsidiary until such losses or credits can be utilized by the subsidiary on a
separate return basis.
CAPITAL GAINS AND LOSSES -- Realized capital gains and losses, net of applicable
capital gains tax or benefit, exclusive of those transferred to the interest
maintenance reserve ("IMR"), are included in the statement of operations.
Unrealized capital gains and losses are reflected as direct credits or charges
to capital and surplus. The IMR, which is included in other liabilities,
establishes a reserve for realized gains and losses, net of tax, resulting from
changes in interest rates on short and long term fixed income investments. Net
realized gains and losses charged to the IMR are amortized into net investment
income over the remaining life of the investment sold. The Company uses the
seriatim method of amortization for interest related gains and losses arising
from the sale of mortgages, and uses the group method to amortize interest
related gains and losses arising from all other fixed income investments.
8
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 2 -- INVESTMENTS
BONDS -- The carrying value and fair value of investments in bonds are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds................................ $ 67,039 $ 3,063 $ -- $ 70,102
State, local and government agency bonds................ 13,607 2,290 23 15,874
Foreign government bonds................................ 12,121 772 249 12,644
Corporate securities.................................... 1,471,422 55,836 6,275 1,520,983
Mortgage-backed securities.............................. 95,385 951 -- 96,336
---------- ------------- ------------- ----------
Total................................................... $1,659,574 $62,912 $ 6,457 $1,715,939
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
(IN THOUSANDS) VALUE APPRECIATION DEPRECIATION VALUE
---------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Federal government bonds................................ $ 17,651 $ 8 $ 762 $ 16,897
State, local and government agency bonds................ 1,110 54 -- 1,164
Foreign government bonds................................ 31,863 83 3,735 28,211
Corporate securities.................................... 1,462,871 8,145 56,011 1,415,005
Mortgage-backed securities.............................. 81,780 268 1,737 80,311
---------- ------------- ------------- ----------
Total................................................... $1,595,275 $ 8,558 $62,245 $1,541,588
---------- ------------- ------------- ----------
---------- ------------- ------------- ----------
</TABLE>
The carrying value and fair value by contractual maturity at December 31, 1995,
are shown below. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties or the Company may have the right to put or
sell the obligation back to the issuer. Mortgage-backed securities are
classified based on expected maturities.
<TABLE>
<CAPTION>
CARRYING FAIR
(IN THOUSANDS) VALUE VALUE
--------------------
<S> <C> <C>
Due in one year or less................. $ 250,578 $ 258,436
Due after one year through five years... 736,003 763,179
Due after five years through ten
years.................................. 538,897 558,445
Due after ten years..................... 134,097 135,880
--------------------
Total................................... $1,659,575 $1,715,940
--------------------
--------------------
</TABLE>
9
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
MORTGAGE LOANS AND REAL ESTATE -- Mortgage loans and real estate investments,
are diversified by property type and location. Real estate investments have been
obtained primarily through foreclosure. Mortgage loans are collateralized by the
related properties and are generally no more than 75% of the property value at
the time the original loan is made. At December 31, 1995 and 1994, mortgage loan
and real estate investments were distributed by the following types and
geographic regions:
<TABLE>
<CAPTION>
(IN THOUSANDS)
PROPERTY TYPE 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
Office buildings........................ $127,149 $140,292
Residential............................. 59,934 57,061
Retail.................................. 29,578 72,787
Industrial/Warehouse.................... 38,192 39,424
Other................................... 25,636 37,256
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
<CAPTION>
GEOGRAPHIC REGION 1995 1994
- ---------------------------------------- -------- --------
<S> <C> <C>
South Atlantic.......................... $ 86,410 $ 92,934
East North Central...................... 55,991 72,704
Middle Atlantic......................... 38,666 48,688
Pacific................................. 32,803 39,892
West North Central...................... 21,486 27,377
Mountain................................ 9,939 12,211
New England............................. 24,886 26,613
East South Central...................... 5,487 6,224
West South Central...................... 4,821 20,177
-------- --------
Total................................... $280,489 $346,820
-------- --------
-------- --------
</TABLE>
Reserves for mortgage loans and real estate reflected in the above amounts were
$18.9 million and $21.0 million at December 31, 1995 and 1994, respectively.
NET INVESTMENT INCOME -- The components of net investment income for the year
ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $122,318 $123,495 $126,729
Stocks....................................... 1,653 1,799 953
Mortgage loans............................... 26,356 31,945 40,823
Real estate.................................. 9,139 8,425 9,493
Policy loans................................. 9,486 8,797 8,215
Other investments............................ 3,951 1,651 674
Short term investments....................... 2,252 1,378 840
-------- -------- --------
175,155 177,490 187,727
Less investment expenses................... 9,703 9,138 11,026
-------- -------- --------
Net investment income, before IMR
amortization................................ 165,452 168,352 176,701
IMR amortization........................... 2,018 2,078 911
-------- -------- --------
Net investment income........................ $167,470 $170,430 $177,612
-------- -------- --------
-------- -------- --------
</TABLE>
10
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
REALIZED CAPITAL GAINS AND LOSSES -- Realized capital gains (losses) on
investments for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Bonds........................................ $ 727 $ 645 $ 10,133
Stocks....................................... (263) (62) 16
Mortgage loans............................... (1,083) (17,142) (83)
Real estate.................................. (1,892) 605 (2,044)
-------- -------- --------
(2,511) (15,954) 8,022
Less income tax.............................. 400 968 3,296
-------- -------- --------
Net realized capital gains (losses) before
transfer to IMR............................. (2,911) (16,922) 4,726
Net realized capital gains transferred to
IMR......................................... 616 (250) (11,951)
-------- -------- --------
Net realized capital gains (losses).......... $ (2,295) $(17,172) $ (7,225)
-------- -------- --------
-------- -------- --------
</TABLE>
Proceeds from voluntary sales of investments in bonds during 1995, 1994 and 1993
were $22.4 million, $17.9 million, and $13.2 million, respectively. Gross gains
of $4.3 million, $3.0 million, and $4.5 million and gross losses of $5.2
million, $4.6 million, and $.5 million, respectively, were realized on those
sales.
NOTE 3 -- FAIR VALUE DISCLOSURES OF FINANCIAL INFORMATION
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about certain financial instruments (insurance contracts, real estate, goodwill
and taxes are excluded) for which it is practicable to estimate such values,
whether or not these instruments are included in the balance sheet. The fair
values presented for certain financial instruments are estimates which, in many
cases, may differ significantly from the amounts which could be recognized upon
immediate liquidation. In cases where market prices are not available, estimates
of fair value are based on discounted cash flow analyses which utilize current
interest rates for similar financial instruments which have comparable terms and
credit quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FINANCIAL ASSETS:
CASH AND SHORT TERM INVESTMENTS -- The carrying amounts reported in the
statement of assets, liabilities, surplus and other funds approximate fair
value.
BONDS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models using
discounted cash flow analyses.
STOCKS -- Fair values are based on quoted market prices, if available. If a
quoted market price is not available, fair values are estimated using
independent pricing sources or internally developed pricing models.
MORTGAGE LOANS -- Fair values are estimated by discounting the future
contractual cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings. The fair value of below
investment grade mortgage loans is limited to the lesser of the present value of
the cash flows or book value.
11
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
POLICY LOANS -- The carrying amount reported in the statement of assets,
liabilities, surplus and other funds approximates fair value since policy loans
have no defined maturity dates and are inseparable from the insurance contracts.
FINANCIAL LIABILITIES:
ANNUITY AND OTHER FUND RESERVES (WITHOUT MORTALITY/MORBIDITY FEATURES) -- Fair
values for the Company's liabilities under individual annuity contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments as of December 31 were as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash.................................. $ 7,791 $ 7,791 $ 7,248 $ 7,248
Short term investments................ 3,500 3,500 45,239 45,239
Bonds................................. 1,659,575 1,715,940 1,595,275 1,541,588
Stocks................................ 18,132 18,414 12,283 12,590
Mortgage loans........................ 239,522 250,196 295,532 291,704
Policy loans.......................... 122,696 122,696 116,600 116,600
Financial Liabilities:
Individual annuity contracts.......... 803,099 797,024 869,230 862,662
Supplemental contracts without life
contingencies........................ 16,796 16,796 16,673 16,673
Other contract deposit funds............ 632 632 1,105 1,105
</TABLE>
NOTE 4 -- FEDERAL INCOME TAXES
The federal income tax provisions for 1995, 1994 and 1993 were $17.4
million, $13.1 million and $8.6 million, respectively, which include taxes
applicable to realized capital gains of $.4 million, $1.0 million and $3.3
million.
The effective federal income tax rates were 27%, 67% and 30% in 1995, 1994 and
1993, respectively. The differences between the federal statutory rate and the
Company's effective tax rates are primarily related to decreases in taxable
income for the write-offs of mortgage loans; and increases in taxable income for
differences in policyholder liabilities for federal income tax purposes and
financial reporting purposes and the deferral of policy acquisition costs for
federal tax purposes.
The consolidated federal income tax returns are routinely audited by the
Internal Revenue Service (IRS) and provisions are routinely made in the
financial statements in anticipation of the results of these audits. The IRS has
completed its examination of all of the consolidated federal income tax returns
through 1988. In management's opinion, adequate tax liabilities have been
established for all years. However, the amount of these liabilities could be
revised in the near term if estimates of the Company's ultimate liability are
revised.
12
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
NOTE 5 -- REINSURANCE
The Company participates in reinsurance to reduce overall risks, including
exposure to large losses and to permit recovery of a portion of direct losses.
Reinsurance contracts do not relieve the Company from its obligation to its
policyholders. Reinsurance financial data for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Reinsurance premiums assumed................. $ 3,442 $ 3,788 $ 4,190
Reinsurance premiums ceded................... 42,914 17,430 14,798
Deduction from insurance liability including
reinsurance recoverable on unpaid claims.... 82,227 46,734 42,805
</TABLE>
Individual life premiums ceded to First Allmerica aggregated $6.8 million, $7.8
million and $9.0 million in 1995, 1994 and 1993, respectively. The Company has
also entered into various reinsurance agreements with First Allmerica under
which certain insurance risks related to individual accident and health
business, premium income and related expenses are assumed by the Company from
First Allmerica. Premiums assumed pursuant to these agreements aggregated $3.4
million, $3.8 million and $4.2 million in 1995, 1994 and 1993, respectively .
During the year Allmerica Financial entered into a coinsurance agreement to
reinsure substantially all of its yearly renewable term life insurance. Premiums
ceded and reinsurance credits taken under this agreement amounted to $25.4
million and $20.7 million, respectively. At December 31, 1995, the deduction
from insurance liability, including reinsurance recoverable on unpaid claims
under this agreement was $12.7 million.
NOTE 6 -- ACCIDENT AND HEALTH POLICY AND CLAIM LIABILITIES
The Company regularly updates its estimates of policy and claims liabilities
as new information becomes available and further events occur which may impact
the resolution of unsettled claims for its accident and health line of business.
Changes in prior estimates are generally reflected in results of operations in
the year such changes are determined to be needed and recorded.
The policy and claims liabilities related to the Company's accident and health
business were $169.7 million and $123.5 million at December 31, 1995 and 1994,
respectively. Accident and health policy and claims liabilities have been
re-estimated for all prior years and were increased by $42.5 million, $10.9
million and $13.2 million, in 1995, 1994 and 1993, respectively, including $21.9
million and $2.8 million recorded as an adjustment to surplus in 1995 and 1993,
respectively. The unfavorable development is primarily due to reserve
strengthening and adverse experience in the Company's individual accident and
health line of business.
NOTE 7 -- DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders
by insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its statutory policyholder surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a life company) or its net
income (not including realized capital gains) for the preceding calendar year
(if such insurer is not a life company). Any dividends to be paid by an insurer,
whether or
13
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(A WHOLLY OWNED SUBSIDIARY OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY)
NOTES TO STATUTORY FINANCIAL STATEMENTS --CONTINUED
not in excess of the aforementioned threshold, from a source other than
statutory earned surplus would also require the prior approval of the Delaware
Commissioner of Insurance. At January 1, 1996, the Company could pay dividends
of $4.3 million to First Allmerica, without prior approval.
NOTE 8 -- OTHER RELATED PARTY TRANSACTIONS
First Allmerica provides management, operating personnel and facilities on a
cost reimbursement basis to the Company. Expenses for services received from
First Allmerica were $85.8 million, $102.5 million and $98.9 million in 1995,
1994 and 1993, respectively. The net amounts payable to First Allmerica and
affiliates for accrued expenses and various other liabilities and receivables
were $12.6 million and $8.3 million at December 31, 1995 and 1994, respectively.
NOTE 9 -- FUNDS ON DEPOSIT
In March 1994, the Company voluntarily withdrew from being licensed in New
York. In connection with the withdrawal First Allmerica, which is licensed in
New York, became qualified to sell the products previously sold by Allmerica
Financial in New York. The Company agreed with the New York Department of
Insurance to maintain, through a custodial account in New York, a security
deposit, the market value of which will at all times equal 102% of all
outstanding general account liabilities of the Company for New York
policyholders, claimants and creditors. As of December 31, 1995, the carrying
value and fair value of the assets or deposit was $295.0 million and $303.6
million, respectively, which is in excess of the required amount.
Additional securities with a carrying value of $4.2 million and $3.9 million
were on deposit with various other state and governmental authorities as of
December 31, 1995 and 1994, respectively.
NOTE 10 -- LITIGATION
The Company has been named a defendant in various legal proceedings arising
in the normal course of business. In the opinion of management, based on the
advice of legal counsel, the ultimate resolution of these proceedings will not
have a material effect on the Company's financial statements.
14
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE ANNUITY/EXECANNUITY PLUS
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SELECT
INVESTMENT GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX BOND GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4 5 6
------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.......................... $256,759,207 $112,127,479 $107,817,230 $113,554,413 $40,522,460 $177,261,404
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- -- -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 89,282 33,621 7,485 88,999 -- --
------------ ------------ ------------ ------------ ------------ --------------
Total assets............................ 256,848,489 112,161,100 107,824,715 113,643,412 40,522,460 177,261,404
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- -- -- 1,111 420
------------ ------------ ------------ ------------ ------------ --------------
Net assets.............................. $256,848,489 $112,161,100 $107,824,715 $113,643,412 $40,521,349 $177,260,984
------------ ------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ ------------ --------------
Net asset distribution by category:
Qualified variable annuity policies....... $177,888,905 $74,023,638 $75,681,165 $76,631,463 $25,032,884 $123,634,644
Non-qualified variable annuity policies... 78,959,584 38,137,462 32,143,550 37,011,949 15,488,465 53,626,340
------------ ------------ ------------ ------------ ------------ --------------
$256,848,489 $112,161,100 $107,824,715 $113,643,412 $40,521,349 $177,260,984
------------ ------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ ------------ --------------
Qualified units outstanding, December 31,
1996...................................... 93,928,188 52,189,376 64,827,099 38,755,058 19,101,271 62,754,147
Net asset value per qualified unit, December
31, 1996.................................. $ 1.893882 $ 1.418366 $ 1.167431 $ 1.977328 $ 1.310535 $ 1.970143
Non-qualified units outstanding, December
31, 1996.................................. 41,691,923 26,888,308 27,533,575 18,718,163 11,818,429 27,219,517
Net asset value per non-qualified unit,
December 31, 1996......................... $ 1.893882 $ 1.418366 $ 1.167431 $ 1.977328 $ 1.310535 $ 1.970143
<CAPTION>
SELECT
SELECT GROWTH AND SMALL CAP
GROWTH INCOME VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
7 8 9
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.......................... $94,811,398 $135,015,046 $95,056,924
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 4,610 108,165 --
------------ ------------ -------------
Total assets............................ 94,816,008 135,123,211 95,056,924
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- 475
------------ ------------ -------------
Net assets.............................. $94,816,008 $135,123,211 $95,056,449
------------ ------------ -------------
------------ ------------ -------------
Net asset distribution by category:
Qualified variable annuity policies....... $67,347,270 $91,125,910 $67,153,229
Non-qualified variable annuity policies... 27,468,738 43,997,301 27,903,220
------------ ------------ -------------
$94,816,008 $135,123,211 $95,056,449
------------ ------------ -------------
------------ ------------ -------------
Qualified units outstanding, December 31,
1996...................................... 44,490,234 55,637,383 42,489,351
Net asset value per qualified unit, December
31, 1996.................................. $ 1.513754 $1.637854 $ 1.580472
Non-qualified units outstanding, December
31, 1996.................................. 18,146,105 26,862,773 17,654,992
Net asset value per non-qualified unit,
December 31, 1996......................... $ 1.513754 $1.637854 $ 1.580472
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE ANNUITY/EXECANNUITY PLUS
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SELECT SELECT DGPF
INTERNATIONAL CAPITAL INTERNATIONAL VIPF VIPF VIPF
EQUITY APPRECIATION EQUITY HIGH INCOME EQUITY-INCOME GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
11 12 20 102 103 104
------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.......................... $105,000,252 $78,461,853 -- -- -- --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. -- -- -- $105,690,757 $373,411,333 $ 305,202,798
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- $67,449,088 -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 404 935 -- -- -- --
------------ ------------ ------------ ------------ ------------ --------------
Total assets............................ 105,000,656 78,462,788 67,449,088 105,690,757 373,411,333 305,202,798
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- 24 2,366 7,320 4,481
------------ ------------ ------------ ------------ ------------ --------------
Net assets.............................. $105,000,656 $78,462,788 $67,449,064 $105,688,391 $373,404,013 $ 305,198,317
------------ ------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ ------------ --------------
Net asset distribution by category:
Qualified variable annuity policies....... $72,644,836 $52,426,082 $46,534,850 $70,580,786 $251,821,559 $ 212,486,819
Non-qualified variable annuity policies... 32,355,820 26,036,706 20,914,214 35,107,605 121,582,454 92,711,498
------------ ------------ ------------ ------------ ------------ --------------
$105,000,656 $78,462,788 $67,449,064 $105,688,391 $373,404,013 $ 305,198,317
------------ ------------ ------------ ------------ ------------ --------------
------------ ------------ ------------ ------------ ------------ --------------
Qualified units outstanding, December 31,
1996...................................... 53,608,864 35,364,200 30,643,862 36,038,388 112,621,751 99,175,748
Net asset value per qualified unit, December
31, 1996.................................. $ 1.355090 $ 1.482462 $ 1.518570 $ 1.958489 $ 2.235994 $ 2.142528
Non-qualified units outstanding, December
31, 1996.................................. 23,877,248 17,563,152 13,772,307 17,925,863 54,375,125 43,272,012
Net asset value per non-qualified unit,
December 31, 1996......................... $ 1.355090 $ 1.482462 $ 1.518570 $ 1.958489 $ 2.235994 $ 2.142528
<CAPTION>
VIPF II T. ROWE PRICE
VIPF ASSET INTERNATIONAL
OVERSEAS MANAGER STOCK
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
105 106 150
------------ ------------ --------------
<S> <C> <C> <C>
ASSETS (NOTES 3 AND 7):
Investments in shares of Allmerica
Investment Trust.......................... -- -- --
Investments in shares of Fidelity Variable
Insurance Products Funds.................. $93,592,563 $53,975,699 --
Investment in shares of T. Rowe Price
International Series, Inc................. -- -- $43,197,003
Investment in shares of Delaware Group
Premium Fund, Inc......................... -- -- --
Receivable from Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... -- -- 324
------------ ------------ --------------
Total assets............................ 93,592,563 53,975,699 43,197,327
LIABILITIES:
Payable to Allmerica Financial Life
Insurance and Annuity Company (Sponsor)... 2,034 714 --
------------ ------------ --------------
Net assets.............................. $93,590,529 $53,974,985 $43,197,327
------------ ------------ --------------
------------ ------------ --------------
Net asset distribution by category:
Qualified variable annuity policies....... $67,002,425 $36,487,008 $29,810,775
Non-qualified variable annuity policies... 26,588,104 17,487,977 13,386,552
------------ ------------ --------------
$93,590,529 $53,974,985 $43,197,327
------------ ------------ --------------
------------ ------------ --------------
Qualified units outstanding, December 31,
1996...................................... 45,137,168 28,672,018 24,785,492
Net asset value per qualified unit, December
31, 1996.................................. $ 1.484418 $ 1.272565 $ 1.202751
Non-qualified units outstanding, December
31, 1996.................................. 17,911,466 13,742,306 11,129,945
Net asset value per non-qualified unit,
December 31, 1996......................... $ 1.484418 $ 1.272565 $ 1.202751
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE ANNUITY/EXECANNUITY PLUS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INVESTMENT
GROWTH GRADE INCOME MONEY MARKET EQUITY INDEX GOVERNMENT BOND
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
1 2 3 4 5
----------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $27,368,476 $6,826,803 $4,784,592 $ 3,193,814 $2,466,140
----------- ------------ ------------ ------------ ---------------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 2,752,441 1,307,117 1,153,323 1,082,653 526,445
Administrative expense charges............ 448,072 212,787 187,750 176,246 85,700
----------- ------------ ------------ ------------ ---------------
Total expenses.......................... 3,200,513 1,519,904 1,341,073 1,258,899 612,145
----------- ------------ ------------ ------------ ---------------
Net investment income (loss)............ 24,167,963 5,306,899 3,443,519 1,934,915 1,853,995
----------- ------------ ------------ ------------ ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 583,526 (88,512) -- 294,898 (274,955)
Net unrealized gain (loss)................ 12,762,050 (2,794,631) -- 14,215,583 (865,212)
----------- ------------ ------------ ------------ ---------------
Net realized and unrealized gain (loss)
on investments........................ 13,345,576 (2,883,143) -- 14,510,481 (1,140,167)
----------- ------------ ------------ ------------ ---------------
Net increase in net assets from
operations............................ $37,513,539 $2,423,756 $3,443,519 $16,445,396 $ 713,828
----------- ------------ ------------ ------------ ---------------
----------- ------------ ------------ ------------ ---------------
<CAPTION>
SELECT SELECT SMALL CAP
AGGRESSIVE GROWTH SELECT GROWTH GROWTH AND INCOME VALUE
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
6 7 8 9
----------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $12,271,598 $13,669,248 $11,220,281 $4,812,436
----------------- ------------- ----------------- -----------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 1,876,643 922,501 1,368,436 901,656
Administrative expense charges............ 305,500 150,174 222,769 146,781
----------------- ------------- ----------------- -----------
Total expenses.......................... 2,182,143 1,072,675 1,591,205 1,048,437
----------------- ------------- ----------------- -----------
Net investment income (loss)............ 10,089,455 12,596,573 9,629,076 3,763,999
----------------- ------------- ----------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 1,721,837 1,249,972 693,442 291,090
Net unrealized gain (loss)................ 10,323,357 (501,535) 9,192,493 12,648,113
----------------- ------------- ----------------- -----------
Net realized and unrealized gain (loss)
on investments........................ 12,045,194 748,437 9,885,935 12,939,203
----------------- ------------- ----------------- -----------
Net increase in net assets from
operations............................ $22,134,649 $13,345,010 $19,515,011 $16,703,202
----------------- ------------- ----------------- -----------
----------------- ------------- ----------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE ANNUITY/EXECANNUITY PLUS
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SELECT SELECT DGPF VIPF
INTERNATIONAL EQUITY CAPITAL APPRECIATION INTERNATIONAL EQUITY HIGH INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
11 12 20 102
-------------------- -------------------- -------------------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $ 2,191,676 $ 160,083 $1,807,535 $6,255,577
-------------------- ----------- ----------- -----------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 905,409 638,995 724,450 1,072,079
Administrative expense charges............ 147,392 104,022 62,996 174,524
-------------------- ----------- ----------- -----------
Total expenses.......................... 1,052,801 743,017 787,446 1,246,603
-------------------- ----------- ----------- -----------
Net investment income (loss)............ 1,138,875 (582,934) 1,020,089 5,008,974
-------------------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 233,807 65,521 202,240 61,634
Net unrealized gain (loss)................ 13,004,420 1,595,519 7,982,226 4,747,081
-------------------- ----------- ----------- -----------
Net realized and unrealized gain (loss)
on investments........................ 13,238,227 1,661,040 8,184,466 4,808,715
-------------------- ----------- ----------- -----------
Net increase in net assets from
operations............................ $14,377,102 $1,078,106 $9,204,555 $9,817,689
-------------------- ----------- ----------- -----------
-------------------- ----------- ----------- -----------
<CAPTION>
VIPF VIPF VIPF VIPF II T. ROWE PRICE
EQUITY-INCOME GROWTH OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
103 104 105 106 150
------------- ----------- ----------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................................. $13,009,442 $16,298,590 $2,138,961 $2,503,984 $ 654,944
------------- ----------- ----------- ------------- -------------------
EXPENSES (NOTE 4):
Mortality and expense risk fees........... 4,113,153 3,389,764 1,166,378 563,231 329,928
Administrative expense charges............ 669,583 551,822 189,875 91,689 53,709
------------- ----------- ----------- ------------- -------------------
Total expenses.......................... 4,782,736 3,941,586 1,356,253 654,920 383,637
------------- ----------- ----------- ------------- -------------------
Net investment income (loss)............ 8,226,706 12,357,004 782,708 1,849,064 271,307
------------- ----------- ----------- ------------- -------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss).................. 1,281,527 1,050,118 1,774,886 204,553 9,240
Net unrealized gain (loss)................ 30,117,679 18,654,327 7,589,072 3,552,611 2,935,111
------------- ----------- ----------- ------------- -------------------
Net realized and unrealized gain (loss)
on investments........................ 31,399,206 19,704,445 9,363,958 3,757,164 2,944,351
------------- ----------- ----------- ------------- -------------------
Net increase in net assets from
operations............................ $39,625,912 $32,061,449 $10,146,666 $5,606,228 $3,215,658
------------- ----------- ----------- ------------- -------------------
------------- ----------- ----------- ------------- -------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE ANNUITY/EXECANNUITY PLUS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INVESTMENT GRADE INCOME
GROWTH MONEY MARKET
SUB-ACCOUNT 1 SUB-ACCOUNT 2 SUB-ACCOUNT 3
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
-------------------------- ------------------------- ----------------------------
1996 1995 1996 1995 1996 1995
------------ ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).......... $ 24,167,963 $ 15,363,413 $ 5,306,899 $ 4,353,554 $ 3,443,519 $ 2,976,219
Net realized gain (loss) on
investments......................... 583,526 471,117 (88,512) (102,223) -- --
Net unrealized gain (loss) on
investments......................... 12,762,050 25,008,311 (2,794,631) 7,745,991 -- --
------------ ------------ ------------ ----------- ------------- -------------
Net increase in net assets from
operations.......................... 37,513,539 40,842,841 2,423,756 11,997,322 3,443,519 2,976,219
------------ ------------ ------------ ----------- ------------- -------------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments................. 20,595,265 13,742,118 10,951,302 9,491,335 298,492,423 201,473,549
Terminations.......................... (5,864,428) (4,542,987) (4,384,636) (3,235,445) (7,512,308) (4,345,244)
Annuity benefits...................... (1,709,262) (1,243,289) (392,318) (579,139) (541,611) (610,861)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... 20,841,421 11,635,582 7,432,318 9,729,761 (263,988,724) (162,154,545)
Net increase (decrease) in investment
by Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... -- -- -- -- -- --
------------ ------------ ------------ ----------- ------------- -------------
Net increase (decrease) in net assets
from capital transactions........... 33,862,996 19,591,424 13,606,666 15,406,512 26,449,780 34,362,899
------------ ------------ ------------ ----------- ------------- -------------
Net increase (decrease) in net
assets.............................. 71,376,535 60,434,265 16,030,422 27,403,834 29,893,299 37,339,118
NET ASSETS:
Beginning of year..................... 185,471,954 125,037,689 96,130,678 68,726,844 77,931,416 40,592,298
------------ ------------ ------------ ----------- ------------- -------------
End of year........................... $256,848,489 $185,471,954 $112,161,100 $96,130,678 $ 107,824,715 $ 77,931,416
------------ ------------ ------------ ----------- ------------- -------------
------------ ------------ ------------ ----------- ------------- -------------
<CAPTION>
EQUITY INDEX GOVERNMENT BOND SELECT AGGRESSIVE GROWTH
SUB-ACCOUNT 4 SUB-ACCOUNT 5 SUB-ACCOUNT 6
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------- ------------------------ --------------------------
1996 1995 1996 1995 1996 1995
------------ ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).......... $ 1,934,915 $ 3,396,509 $ 1,853,995 $ 1,667,053 $ 10,089,455 $ (1,343,443)
Net realized gain (loss) on
investments......................... 294,898 131,325 (274,955) (277,027) 1,721,837 407,947
Net unrealized gain (loss) on
investments......................... 14,215,583 10,323,131 (865,212) 2,609,018 10,323,357 25,617,337
------------ ----------- ----------- ----------- ------------ ------------
Net increase in net assets from
operations.......................... 16,445,396 13,850,965 713,828 3,999,044 22,134,649 24,681,841
------------ ----------- ----------- ----------- ------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments................. 11,191,450 4,829,857 9,020,225 5,523,208 17,468,556 11,583,326
Terminations.......................... (3,074,583) (1,667,459) (2,255,180) (1,890,896) (5,302,000) (2,739,644)
Annuity benefits...................... (867,246) (489,017) (104,686) (181,706) (466,539) (539,012)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... 25,096,134 12,683,245 (7,590,353) (4,192,092) 24,807,278 15,452,200
Net increase (decrease) in investment
by Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... -- -- -- -- -- --
------------ ----------- ----------- ----------- ------------ ------------
Net increase (decrease) in net assets
from capital transactions........... 32,345,755 15,356,626 (929,994) (741,486) 36,507,295 23,756,870
------------ ----------- ----------- ----------- ------------ ------------
Net increase (decrease) in net
assets.............................. 48,791,151 29,207,591 (216,166) 3,257,558 58,641,944 48,438,711
NET ASSETS:
Beginning of year..................... 64,852,261 35,644,670 40,737,515 37,479,957 118,619,040 70,180,329
------------ ----------- ----------- ----------- ------------ ------------
End of year........................... $113,643,412 $64,852,261 $40,521,349 $40,737,515 $177,260,984 $118,619,040
------------ ----------- ----------- ----------- ------------ ------------
------------ ----------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE ANNUITY/EXECANNUITY PLUS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT GROWTH AND INCOME
SELECT GROWTH SMALL CAP VALUE
SUB-ACCOUNT 7 SUB-ACCOUNT 8 SUB-ACCOUNT 9
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------ ------------------------- ------------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).......... $12,596,573 $ (711,852) $ 9,629,076 $ 3,417,243 $ 3,763,999 $ 1,161,706
Net realized gain (loss) on
investments......................... 1,249,972 366,903 693,442 179,764 291,090 172,520
Net unrealized gain (loss) on
investments......................... (501,535) 9,903,003 9,192,493 14,000,181 12,648,113 5,419,123
----------- ----------- ------------ ----------- ----------- -----------
Net increase in net assets from
operations.......................... 13,345,010 9,558,054 19,515,011 17,597,188 16,703,202 6,753,349
----------- ----------- ------------ ----------- ----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments................. 7,656,410 4,331,083 10,198,883 6,393,379 8,104,038 5,284,030
Terminations.......................... (2,662,329) (1,431,104) (3,912,344) (1,945,264) (2,121,840) (984,390)
Annuity benefits...................... (418,227) (176,573) (688,916) (686,151) (169,850) (205,991)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... 17,636,282 7,611,742 22,522,204 11,633,921 18,357,727 10,049,138
Net increase (decrease) in investment
by Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... -- -- -- -- -- (2,271,360)
----------- ----------- ------------ ----------- ----------- -----------
Net increase (decrease) in net assets
from capital transactions........... 22,212,136 10,335,148 28,119,827 15,395,885 24,170,075 11,871,427
----------- ----------- ------------ ----------- ----------- -----------
Net increase (decrease) in net
assets.............................. 35,557,146 19,893,202 47,634,838 32,993,073 40,873,277 18,624,776
NET ASSETS:
Beginning of year..................... 59,258,862 39,365,660 87,488,373 54,495,300 54,183,172 35,558,396
----------- ----------- ------------ ----------- ----------- -----------
End of year........................... $94,816,008 $59,258,862 $135,123,211 $87,488,373 $95,056,449 $54,183,172
----------- ----------- ------------ ----------- ----------- -----------
----------- ----------- ------------ ----------- ----------- -----------
<CAPTION>
SELECT INTERNATIONAL SELECT CAPITAL DGPF INTERNATIONAL
EQUITY EQUITY
SUB-ACCOUNT 11 APPRECIATION SUB-ACCOUNT 20
YEAR ENDED SUB-ACCOUNT 12 YEAR ENDED
DECEMBER 31, PERIOD FROM DECEMBER 31,
------------------------- YEAR ENDED 4/28/95* ------------------------
1996 1995 12/31/96 TO 12/31/95 1996 1995
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).......... $ 1,138,875 $ 204,614 $ (582,934 ) $ 330,290 $ 1,020,089 $ 342,929
Net realized gain (loss) on
investments......................... 233,807 9,938 65,521 (25) 202,240 94,997
Net unrealized gain (loss) on
investments......................... 13,004,420 3,850,684 1,595,519 2,095,451 7,982,226 4,026,445
------------ ----------- ----------- ------------ ----------- -----------
Net increase in net assets from
operations.......................... 14,377,102 4,065,236 1,078,106 2,425,716 9,204,555 4,464,371
------------ ----------- ----------- ------------ ----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments................. 12,226,159 5,626,878 11,984,495 2,923,430 4,666,445 3,724,846
Terminations.......................... (1,901,008) (568,996) (1,217,813 ) (73,682) (1,845,502) (1,170,699)
Annuity benefits...................... (133,263) (114,312) (174,201 ) (16,743) (187,152) (253,818)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... 37,949,246 21,496,077 44,538,912 16,994,661 11,077,558 6,984,991
Net increase (decrease) in investment
by Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... (131) -- (293 ) 200 -- --
------------ ----------- ----------- ------------ ----------- -----------
Net increase (decrease) in net assets
from capital transactions........... 48,141,003 26,439,647 55,131,100 19,827,866 13,711,349 9,285,320
------------ ----------- ----------- ------------ ----------- -----------
Net increase (decrease) in net
assets.............................. 62,518,105 30,504,883 56,209,206 22,253,582 22,915,904 13,749,691
NET ASSETS:
Beginning of year..................... 42,482,551 11,977,668 22,253,582 -- 44,533,160 30,783,469
------------ ----------- ----------- ------------ ----------- -----------
End of year........................... $105,000,656 $42,482,551 $78,462,788 $22,253,582 $67,449,064 $44,533,160
------------ ----------- ----------- ------------ ----------- -----------
------------ ----------- ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
* Date of initial investment.
F-6
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE ANNUITY/EXECANNUITY PLUS
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VIPF HIGH INCOME VIPF EQUITY-INCOME VIPF GROWTH
SUB-ACCOUNT 102 SUB-ACCOUNT 103 SUB-ACCOUNT 104
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------- -------------------------- --------------------------
1996 1995 1996 1995 1996 1995
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).......... $ 5,008,974 $ 2,211,486 $ 8,226,706 $ 10,169,761 $ 12,357,004 $ (1,836,828)
Net realized gain (loss) on
investments......................... 61,634 (20,657) 1,281,527 70,339 1,050,118 326,751
Net unrealized gain (loss) on
investments......................... 4,747,081 6,271,173 30,117,679 49,887,571 18,654,327 48,672,346
------------ ----------- ------------ ------------ ------------ ------------
Net increase in net assets from
operations.......................... 9,817,689 8,462,002 39,625,912 60,127,671 32,061,449 47,162,269
------------ ----------- ------------ ------------ ------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments................. 12,564,879 8,175,783 34,071,530 24,781,019 29,657,949 20,641,427
Terminations.......................... (3,616,342) (1,842,667) (11,517,852) (5,939,348) (9,812,911) (5,159,445)
Annuity benefits...................... (445,261) (244,876) (1,409,576) (1,107,657) (961,460) (877,038)
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... 21,073,787 12,112,647 36,401,824 42,833,647 33,492,890 30,177,077
Net increase (decrease) in investment
by Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... -- -- -- -- -- --
------------ ----------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets
from capital transactions........... 29,577,063 18,200,887 57,545,926 60,567,661 52,376,468 44,782,021
------------ ----------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets... 39,394,752 26,662,889 97,171,838 120,695,332 84,437,917 91,944,290
NET ASSETS:
Beginning of year..................... 66,293,639 39,630,750 276,232,175 155,536,843 220,760,400 128,816,110
------------ ----------- ------------ ------------ ------------ ------------
End of year........................... $105,688,391 $66,293,639 $373,404,013 $276,232,175 $305,198,317 $220,760,400
------------ ----------- ------------ ------------ ------------ ------------
------------ ----------- ------------ ------------ ------------ ------------
<CAPTION>
T. ROWE PRICE
VIPF OVERSEAS VIPF II ASSET MANAGER
SUB-ACCOUNT 105 SUB-ACCOUNT 106 INTERNATIONAL STOCK
YEAR ENDED YEAR ENDED SUB-ACCOUNT 150
DECEMBER 31, DECEMBER 31, PERIOD FROM
------------------------ ------------------------ YEAR ENDED 5/1/95*
1996 1995 1996 1995 12/31/96 TO 12/31/95
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss).......... $ 782,708 $ (580,403) $ 1,849,064 $ 43,442 $ 271,307 $ (49,192)
Net realized gain (loss) on
investments......................... 1,774,886 425,086 204,553 97,545 9,240 949
Net unrealized gain (loss) on
investments......................... 7,589,072 6,735,500 3,552,611 4,455,138 2,935,111 400,200
----------- ----------- ----------- ----------- ----------- ------------
Net increase in net assets from
operations.......................... 10,146,666 6,580,183 5,606,228 4,596,125 3,215,658 351,957
----------- ----------- ----------- ----------- ----------- ------------
FROM CAPITAL TRANSACTIONS (NOTE 5):
Net purchase payments................. 7,035,437 8,126,741 4,827,217 5,020,963 4,861,610 1,443,988
Terminations.......................... (3,677,313) (2,796,746) (1,588,737) (1,077,562) (654,412 ) (52,127)
Annuity benefits...................... (338,356) (459,579) (159,528) (88,135) (128,344 ) --
Other transfers from (to) the General
Account of Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... (6,387,483) 1,817,312 7,610,207 8,982,562 24,322,230 9,836,800
Net increase (decrease) in investment
by Allmerica Financial Life
Insurance and Annuity Company
(Sponsor)........................... -- -- -- -- (233 ) 200
----------- ----------- ----------- ----------- ----------- ------------
Net increase (decrease) in net assets
from capital transactions........... (3,367,715) 6,687,728 10,689,159 12,837,828 28,400,851 11,228,861
----------- ----------- ----------- ----------- ----------- ------------
Net increase (decrease) in net assets... 6,778,951 13,267,911 16,295,387 17,433,953 31,616,509 11,580,818
NET ASSETS:
Beginning of year..................... 86,811,578 73,543,667 37,679,598 20,245,645 11,580,818 --
----------- ----------- ----------- ----------- ----------- ------------
End of year........................... $93,590,529 $86,811,578 $53,974,985 $37,679,598 $43,197,327 $11,580,818
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
* Date of initial investment.
F-7
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE
ANNUITY/EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- ORGANIZATION
Separate Account VA-K -- Allmerica Advantage Variable Annuity/ExecAnnuity
Plus (VA-K) is a separate investment account of Allmerica Financial Life
Insurance and Annuity Company (the Company), established on November 1, 1990 for
the purpose of separating from the general assets of the Company those assets
used to fund certain variable annuity policies issued by the Company. The
Company is a wholly-owned subsidiary of First Allmerica Financial Life Insurance
Company (First Allmerica). First Allmerica is a wholly-owned subsidiary of
Allmerica Financial Corporation (AFC). Under applicable insurance law, the
assets and liabilities of VA-K are clearly identified and distinguished from the
other assets and liabilities of the Company. VA-K cannot be charged with
liabilities arising out of any other business of the Company.
VA-K is registered as a unit investment trust under the Investment Company
Act of 1940, as amended (the 1940 Act). VA-K currently offers eighteen
Sub-Accounts under the ExecAnnuity Plus policies. Each Sub-Account invests
exclusively in a corresponding investment portfolio of the Allmerica Investment
Trust (the Trust) managed by Allmerica Investment Management Company, Inc., a
wholly-owned subsidiary of First Allmerica, of the Variable Insurance Products
Fund (VIPF) or the Variable Insurance Products Fund II (VIPF II) managed by
Fidelity Management & Research Company (FMR), of T. Rowe Price International
Series, Inc. (T. Rowe) managed by Rowe Price-Fleming International, Inc., or of
the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware International
Advisers, Ltd. The Trust, VIPF, VIPF II, T. Rowe, and DGPF (the Funds) are
open-end, diversified management investment companies registered under the 1940
Act.
Separate Account VA-K has two types of variable annuity policies,
"qualified" policies and "non-qualified" policies. A qualified policy is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408 of the Internal Revenue Code, while a
non-qualified policy is one that is not purchased in connection with one of the
indicated retirement plans. The tax treatment for certain partial redemptions or
surrenders will vary according to whether they are made from a qualified policy
or a non-qualified policy.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Trust, VIPF, VIPF II, T. Rowe, or
DGPF. Net realized gains and losses on securities sold are determined on the
average cost method. Dividends and capital gain distributions are recorded on
the ex-dividend date and are reinvested in additional shares of the respective
investment portfolio of the Trust, VIPF, VIPF II, T. Rowe, or DGPF at net asset
value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Internal Revenue Code and files a consolidated federal
income tax return with First Allmerica. The Company anticipates no tax liability
resulting from the operations of VA-K. Therefore, no provision for income taxes
has been charged against VA-K.
F-8
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE
ANNUITY/EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Trust, VIPF, VIPF II, T. Rowe, and DGPF at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
SUB-ACCOUNT INVESTMENT PORTFOLIO SHARES COST PER SHARE
----------- --------------------------------------------------------- ----------- ------------ ---------
<S> <C> <C> <C> <C>
Allmerica Investment Trust:
1 Growth................................................. 110,055,382 $229,024,225 $ 2.333
2 Investment Grade Income................................ 103,438,633 113,627,174 1.084
3 Money Market........................................... 107,817,230 107,817,230 1.000
4 Equity Index........................................... 52,450,075 88,367,039 2.165
5 Government Bond........................................ 39,114,343 41,424,326 1.036
6 Select Aggressive Growth............................... 87,020,817 139,817,764 2.037
7 Select Growth.......................................... 66,301,677 85,143,561 1.430
8 Select Growth and Income............................... 96,096,118 112,789,176 1.405
9 Small Cap Value........................................ 62,909,943 77,793,900 1.511
11 Select International Equity............................ 77,433,814 88,522,121 1.356
12 Select Capital Appreciation............................ 52,836,265 74,770,882 1.485
Delaware Group Premium Fund, Inc.:
20 International Equity................................... 4,463,871 54,978,549 15.110
Fidelity Variable Insurance Products Fund:
102 High Income............................................ 8,441,754 95,895,412 12.520
103 Equity-Income.......................................... 17,756,126 286,139,438 21.030
104 Growth................................................. 9,800,989 232,839,711 31.140
105 Overseas............................................... 4,967,758 76,554,441 18.840
Fidelity Variable Insurance Products Fund II:
106 Asset Manager.......................................... 3,188,169 46,462,707 16.930
T. Rowe Price International Series, Inc.:
150 International Stock.................................... 3,417,484 39,861,692 12.640
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum to each Sub-Account based on
the average daily net assets of such Sub-Account at each valuation date for
mortality and expense risks. The Company also charges each Sub-Account .20% per
annum based on the average daily net assets of each Sub-Account for
administrative expenses. These charges are deducted from the daily value of each
Sub-Account but are paid to the Company on a monthly basis.
For policies issued on Form A3018-91 and A3021-93 (ExecAnnuity Plus 91 and
ExecAnnuity Plus 93), a policy fee is deducted on the policy anniversary date
and upon full surrender of the policy when the accumulated value is $50,000 or
less. The policy fee is the lesser of $30 or 3% of the Accumulated Value under
the Policy on the policy anniversary or full surrender date. For policies issued
on Form A3025-96
F-9
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE
ANNUITY/EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
(Allmerica Advantage), a policy fee of $30 is deducted on the policy anniversary
date and upon full surrender when the accumulated value is less than $50,000.
The policy fee on all policies is currently waived for policies originally
issued as part of a 401(k) plan. For the year ended December 31, 1996 policy
fees deducted from accumulated value in VA-K amounted to $948,112. These amounts
are included on the statements of changes in net asset with other transfers to
the General Account.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of VA-K, and does not receive any compensation for sales of the VA-K --
Allmerica Advantage Variable Annuity/ExecAnnuity Plus policies. Commissions are
paid to registered representatives of Allmerica Investments by the Company. As
the current series of policies have a contingent deferred sales charge, no
deduction is made for sales charges at the time of the sale. For the year ended
December 31, 1996, the Company received $1,850,380 for contingent deferred sales
charges applicable to VA-K.
NOTE 5 -- POLICYOWNERS AND SPONSOR TRANSACTIONS
Transactions from policyowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sub-Account 1 -- Growth
Issuance of units..................... 37,874,673 $ 67,936,404 35,304,977 $ 51,743,998
Redemption of units................... (18,262,119) (34,073,408) (21,696,178) (32,152,574)
------------ ------------- ------------ -------------
Net increase........................ 19,612,554 $ 33,862,996 13,608,799 $ 19,591,424
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 2 -- Investment Grade Income
Issuance of units..................... 25,730,455 $ 36,242,689 22,251,158 $ 29,805,978
Redemption of units................... (15,821,186) (22,636,023) (10,536,284) (14,399,466)
------------ ------------- ------------ -------------
Net increase........................ 9,909,269 $ 13,606,666 11,714,874 $ 15,406,512
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 3 -- Money Market
Issuance of units..................... 350,202,366 $ 402,733,717 282,297,450 $ 311,415,988
Redemption of units................... (327,153,184) (376,283,937) (250,653,905) (277,053,089)
------------ ------------- ------------ -------------
Net increase........................ 23,049,182 $ 26,449,780 31,643,545 $ 34,362,899
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 4 -- Equity Index
Issuance of units..................... 24,872,139 $ 46,502,660 15,684,631 $ 23,678,043
Redemption of units................... (6,933,313) (14,156,905) (5,326,619) (8,321,417)
------------ ------------- ------------ -------------
Net increase........................ 17,938,826 $ 32,345,755 10,358,012 $ 15,356,626
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
F-10
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE
ANNUITY/EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5 -- POLICYOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sub-Account 5 -- Government Bond
Issuance of units..................... 18,890,805 $ 24,443,790 14,112,537 $ 17,853,327
Redemption of units................... (19,681,101) (25,373,784) (14,921,644) (18,594,813)
------------ ------------- ------------ -------------
Net decrease........................ (790,296) $ (929,994) (809,107) $ (741,486)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 6 -- Select Aggressive
Growth
Issuance of units..................... 35,763,170 $ 68,639,135 27,081,256 $ 41,466,865
Redemption of units................... (16,138,007) (32,131,840) (11,020,255) (17,709,995)
------------ ------------- ------------ -------------
Net increase........................ 19,625,163 $ 36,507,295 16,061,001 $ 23,756,870
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 7 -- Select Growth
Issuance of units..................... 27,922,379 $ 40,585,154 17,304,437 $ 21,604,967
Redemption of units................... (12,364,447) (18,373,018) (8,640,922) (11,269,819)
------------ ------------- ------------ -------------
Net increase........................ 15,557,932 $ 22,212,136 8,663,515 $ 10,335,148
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 8 -- Select Growth and
Income
Issuance of units..................... 30,744,252 $ 47,965,411 21,862,840 $ 27,624,594
Redemption of units................... (12,085,117) (19,845,584) (9,119,386) (12,228,709)
------------ ------------- ------------ -------------
Net increase........................ 18,659,135 $ 28,119,827 12,743,454 $ 15,395,885
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 9 -- Small Cap Value
Issuance of units..................... 25,449,281 $ 37,695,132 17,986,247 $ 23,543,827
Redemption of units................... (8,737,786) (13,525,057) (7,602,047) (11,672,400)
------------ ------------- ------------ -------------
Net increase........................ 16,711,495 $ 24,170,075 10,384,200 $ 11,871,427
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 11 -- Select International
Equity
Issuance of units..................... 49,870,637 $ 61,358,213 29,103,954 $ 31,035,726
Redemption of units................... (10,064,967) (13,217,210) (3,953,031) (4,596,079)
------------ ------------- ------------ -------------
Net increase........................ 39,805,670 $ 48,141,003 25,150,923 $ 26,439,647
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 12 -- Select Capital
Appreciation
Issuance of units..................... 42,762,596 $ 64,669,269 17,501,260 $ 21,616,195
Redemption of units................... (5,931,868) (9,538,169) (1,404,636) (1,788,329)
------------ ------------- ------------ -------------
Net increase........................ 36,830,728 $ 55,131,100 16,096,624 $ 19,827,866
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
F-11
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE
ANNUITY/EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5 -- POLICYOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995
--------------------------- ---------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sub-Account 20 -- DGPF International
Equity
Issuance of units..................... 16,626,938 $ 24,352,808 14,117,462 $ 18,997,169
Redemption of units................... (6,903,129) (10,641,459) (6,349,120) (9,711,849)
------------ ------------- ------------ -------------
Net increase........................ 9,723,809 $ 13,711,349 7,768,342 $ 9,285,320
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 102 -- VIPF High Income
Issuance of units..................... 22,860,033 $ 43,304,569 16,043,384 $ 26,770,767
Redemption of units................... (6,937,900) (13,727,506) (5,042,507) (8,569,880)
------------ ------------- ------------ -------------
Net increase........................ 15,922,133 $ 29,577,063 11,000,877 $ 18,200,887
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 103 -- VIPF Equity-Income
Issuance of units..................... 45,899,476 $ 105,655,085 47,872,325 $ 85,011,509
Redemption of units................... (18,047,315) (48,109,159) (13,083,657) (24,443,848)
------------ ------------- ------------ -------------
Net increase........................ 27,852,161 $ 57,545,926 34,788,668 $ 60,567,661
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 104 -- VIPF Growth
Issuance of units..................... 43,350,053 $ 91,090,978 41,188,868 $ 73,809,217
Redemption of units................... (17,387,359) (38,714,510) (15,420,587) (29,027,196)
------------ ------------- ------------ -------------
Net increase........................ 25,962,694 $ 52,376,468 25,768,281 $ 44,782,021
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 105 -- VIPF Overseas
Issuance of units..................... 17,161,950 $ 25,255,249 28,543,819 $ 30,215,321
Redemption of units................... (19,369,675) (28,622,964) (23,061,224) (23,527,593)
------------ ------------- ------------ -------------
Net increase (decrease)............. (2,207,725) $ (3,367,715) 5,482,595 $ 6,687,728
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 106 -- VIPF II Asset Manager
Issuance of units..................... 16,905,477 $ 21,049,783 22,403,083 $ 21,445,027
Redemption of units................... (7,934,989) (10,360,624) (9,679,616) (8,607,199)
------------ ------------- ------------ -------------
Net increase........................ 8,970,488 $ 10,689,159 12,723,467 $ 12,837,828
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Sub-Account 150 -- T. Rowe International
Stock
Issuance of units..................... 29,613,486 $ 33,245,151 12,128,441 $ 12,563,739
Redemption of units................... (4,579,976) (4,844,300) (1,246,514) (1,334,878)
------------ ------------- ------------ -------------
Net increase........................ 25,033,510 $ 28,400,851 10,881,927 $ 11,228,861
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
F-12
<PAGE>
SEPARATE ACCOUNT VA-K -- ALLMERICA ADVANTAGE VARIABLE
ANNUITY/EXECANNUITY PLUS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code, a
variable annuity contract, other than a contract issued in connection with
certain types of employee benefit plans, will not be treated as an annuity
contract for federal income tax purposes for any period for which the
investments of the segregated asset account on which the contract is based are
not adequately diversified. The Code provides that the "adequately diversified"
requirement may be met if the underlying investments satisfy either a statutory
safe harbor test or diversification requirements set forth in regulations issued
by the Secretary of Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that VA-K satisfies the current requirements of
the regulations, and it intends that VA-K will continue to meet such
requirements.
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of the Trust, VIPF, VIPF II, T.
Rowe, and DGPF shares by VA-K during the year ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
SUB-ACCOUNT INVESTMENT PORTFOLIO PURCHASES SALES
------------ ------------------------------------------------------------------- ------------ -----------
<C> <S> <C> <C>
Allmerica Investment Trust:
1 Growth........................................................... $ 62,644,134 $ 4,760,029
2 Investment Grade Income.......................................... 24,625,367 5,734,984
3 Money Market..................................................... 112,666,418 83,967,660
4 Equity Index..................................................... 35,531,692 1,315,523
5 Government Bond.................................................. 14,129,168 12,619,134
6 Select Aggressive Growth......................................... 53,179,881 6,843,274
7 Select Growth.................................................... 40,562,495 5,758,856
8 Select Growth and Income......................................... 41,351,887 3,775,993
9 Small Cap Value.................................................. 29,716,381 1,824,905
11 Select International Equity...................................... 51,461,623 2,101,380
12 Select Capital Appreciation...................................... 55,729,376 1,059,760
Delaware Group Premium Fund, Inc.:
20 International Equity............................................. 16,276,182 1,538,983
Fidelity Variable Insurance Products Fund:
102 High Income...................................................... 35,725,781 1,100,358
103 Equity-Income.................................................... 71,713,301 6,384,881
104 Growth........................................................... 69,534,867 4,709,579
105 Overseas......................................................... 9,344,671 12,049,917
Fidelity Variable Insurance Products Fund II:
106 Asset Manager.................................................... 14,991,214 2,468,855
T. Rowe Price International Series, Inc.:
150 International Stock.............................................. 28,953,345 212,312
------------ -----------
Totals........................................................... $768,137,783 $158,226,383
------------ -----------
------------ -----------
</TABLE>
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance
and Annuity Company and Policyowners of Separate Account
VA-K -- Allmerica Advantage Variable Annuity/ExecAnnuity Plus 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 of changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts (1, 2,
3, 4, 5, 6, 7, 8, 9, 11, 12, 20, 102, 103, 104, 105, 106 and 150) constituting
the Separate Account VA-K -- Allmerica Advantage Variable Annuity/ExecAnnuity
Plus of Allmerica Financial Life Insurance and Annuity Company at December 31,
1996, and the results of each of their operations and the changes in each of
their net assets for 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 investments owned at December 31, 1996 by correspondence with
the Funds, provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
March 26, 1997
F-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 and
Financial Statements for Separate Account VA-K of Allmerica
Financial Life Insurance and Annuity Company
----------------------------------------------------------------
Financial Statements Included in Part C
---------------------------------------
None
(b) Exhibits
Exhibit 1 - Vote Authorizing Establishment of Registrant dated November 1,
1990 was previously filed on April 1, 1991, and is incorporated
herein by reference.
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- Specimen Sales and Administrative Service Agreement, Schedule of
Sales Commissions were previously filed on April 1, 1991, and are
incorporated herein by reference.
<PAGE>
Exhibit 4 - Contract Form A was previously filed on October 20, 1993, and are
incorporated herein by reference. Specimen Generic Contract Form
B was previously filed on March 1, 1996 and is incorporated
herein by reference.
Exhibit 5 - Application Form A was previously filed on October 20, 1993, and
are incorporated herein by reference. Specimen Generic
Application Form B was previously filed on March 1, 1996 and is
incorporated herein by reference.
Exhibit 6 - The Depositor's Articles of Incorporation and Bylaws, as amended
were previously filed and are incorporated by reference herein.
Exhibit 7 - Not Applicable.
Exhibit 8 - AUV Calculation Services Agreement with The Shareholder Services
Group dated March 31, 1995 was previously filed on May 1, 1995
and is incorporated herein by reference.
(b) Fidelity Services Agreement was filed on April 30, 1996 and is
incorporated herein by reference. AN AMENDMENT TO THE
FIDELITY SERVICES AGREEMENT, EFFECTIVE AS OF JANUARY 1, 1997,
IS FILED HEREWITH. A PROPOSED FORM OF THE FIDELITY SERVICE
CONTRACT IS FILED HEREWITH.
(c) A PROPOSED FORM OF THE T. ROWE PRICE AGREEMENT IS FILED
HEREWITH.
Exhibit 9 - Consent and Opinion of Counsel is filed herewith.
Exhibit 10 - Consent of Independent Accountants is filed herewith.
Exhibit 11 - None.
Exhibit 12 - None.
Exhibit 14 - Not Applicable
Iem 25. Directors and Officers of the Depositor.
----------------------------------------
The principal business address of all the following Directors and
Officers is:
<PAGE>
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
PRINCIPAL OCCUPATION(S)
NAME AND POSITION DURING PAST FIVE YEARS
- ----------------- ------------------------
Bruce C. Anderson, Director Director of First
Allmerica since 1996; Vice
President, First Allmerica
Abigail M. Armstrong, Secretary and Counsel Secretary of First
Allmerica since 1996;
Counsel, First Allmerica
John P. Kavanaugh, Director, Vice President and Director and Chief
Chief Investment Officer Investment Officer of
First Allmerica since
1996; Vice President,
First Allmerica since 1991
John F. Kelly, Director Director of First
Allmerica since 1996;
Senior Vice President,
General Counsel and
Assistant Secretary, First
Allmerica
J. Barry May, Director Director of First
Allmerica since 1996;
Director and President,
The Hanover Insurance
Company since 1996; Vice
President, The Hanover
Insurance Company, 1993 to
1996
James R. McAuliffe, Director Director of First
Allmerica since 1996;
President and CEO,
Citizens Insurance Company
of America since 1994;
Vice President 1982 to
1994 and Chief Investment
Officer, First Allmerica
1986 to 1994
John F. O'Brien, Director and Chairman of the Director, Chairman of the
Board Board, President and Chief
Executive Officer, First
Allmerica since 1989
Edward J. Parry, III, Director, Vice President, Director and Chief
Chief Financial Officer and Treasurer Financial Officer of First
Allmerica since 1996; Vice
President and Treasurer,
First Allmerica since 1993
Richard M. Reilly, Director, President and Director of First
Chief Executive Officer Allmerica since 1996; Vice
President, First Allmerica
since 1990; Director,
Allmerica Investments,
Inc. since 1990; Director
and President, Allmerica
Investment Management
Company, Inc. since 1990
Larry C. Renfro, Director Director of First
Allmerica since 1996; Vice
President, First Allmerica
since 1990
<PAGE>
Eric A. Simonsen, Director and Vice President Director of First
Allmerica since 1996; Vice
President, First Allmerica
since 1990; Chief
Financial Officer, First
Allmerica 1990 to 1996
Phillip E. Soule, Director Director of First
Allmerica since 1996; Vice
President, First Allmerica
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
----------------------------------------
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
AAM High Yield Fund, L.L.C. Limited Liability Company
AFC Capital Trust I Statutory Business Trust
Allmerica Asset Management 440 Lincoln Street Investment advisory
Limited Worcester MA 01653 services
Allmerica Asset Management, 440 Lincoln Street Investment advisory
Inc. Worcester MA 01653 services
Allmerica Employees Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Equity Index Pool Grantor Trust
Allmerica Financial Alliance 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial Benefit 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
Allmerica Financial 440 Lincoln Street Holding Company
Corporation Worcester MA 01653
Allmerica Financial Insurance 440 Lincoln Street Insurance Broker
Brokers, Inc. Worcester MA 01653
Allmerica Financial Life 440 Lincoln Street Life insurance, accident
Insurance and Annuity Company Worcester MA 01653 and health insurance,
(formerly known as SMA Life annuities, variable
Assurance Company) annuities and variable
life insurance
Allmerica Financial Services 440 Lincoln Street Insurance Agency
Insurance Agency, Inc. Worcester MA 01653
<PAGE>
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Allmerica Funds 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities
Allmerica Institutional 440 Lincoln Street Accounting, marketing and
Services, Inc. Worcester MA 01653 shareholder services for
(formerly known as 440 investment companies
Financial Group of Worcester,
Inc.)
Allmerica Investment 440 Lincoln Street Investment advisory
Management Company, Inc. Worcester MA 01653 services
Allmerica Investments, Inc. 440 Lincoln Street Securities, retail
Worcester MA 01653 broker-dealer
Allmerica Investment Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services 440 Lincoln Street Internal administrative
Corporation Worcester MA 01653 services provider to
Allmerica Financial
Corporation entities
Allmerica Trust Company, N.A. 440 Lincoln Street Limited purpose national
Worcester MA 01653 trust company
AMGRO, Inc. 100 North Parkway Premium financing
Worcester MA 01605
APC Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Beltsville Drive Limited 440 Lincoln Street Real estate partnership
Partnership Worcester MA 01653
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
<PAGE>
Citizens Insurance Company of 645 West Grand River Multi-line property and
America Howell MI 48843 casualty insurance
Citizens Insurance Company of 333 Pierce Road Multi-line property and
Illinois Itasca IL 60143 casualty insurance
Citizens Insurance Company of 3950 Priority Way Multi-line property and
the Midwest South Drive, Suite casualty insurance
200
Indianapolis IN
46280
Citizens Insurance Company of 8101 N. High Street Multi-line property and
Ohio P.O. Box 342250 casualty insurance
Columbus OH 43234
Citizens Management, Inc. 645 West Grand River Services management
Howell MI 48843 company
First Allmerica Financial 440 Lincoln Street Life, pension, annuity,
Life Insurance Company Worcester MA 01653 accident and health
(formerly State Mutual Life insurance company
Assurance Company of America)
Greendale Special Placements 440 Lincoln Street Massachusetts Grantor
Fund Worcester MA 01653 Trust
The Hanover American 100 North Parkway Multi-line property and
Insurance Company Worcester MA 01605 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Attorney-in-fact for
Management Company, Inc. Road Hanover Lloyd's Insurance
Richardson TX 75081 Company
Hanover Lloyd's Insurance 801 East Campbell Multi-line property and
Company Road casualty insurance
Richardson TX 75081
Linder Skokie Real Estate 440 Lincoln Street Real estate holding
Corporation Worcester MA 01653 company
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
Logan Wells Water Company, 603 Heron Drive Water Company serving
Inc. Bridgeport NJ 08014 land development
investment
<PAGE>
Massachusetts Bay Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
SMA Financial Corp. 440 Lincoln Street Holding Company
Worcester MA 01653
Somerset Square, Inc. 440 Lincoln Street Real estate holding
Worcester MA 01653 company
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
Item 26. Persons Under Common Control with Registrant.
---------------------------------------------
See attached organization chart.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Allmerica Financial Corporation
Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company
Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
Logan Wells
Water Company,
Inc.
New Jersey
______________________________________________________________________________________________________________________
| | | | | |
59.47% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Somerset Allmerica Allmerica
Property Management Trust Square, Inc. Financial Life Institutional
& Casualty Services, Inc. Company, N.A. Insurance and Services, Inc.
Companies, Inc. Annuity Company
Federally
Delaware Delaware Chartered Massachusetts Delaware Massachusetts
|
___________________________________________________________________________
| | | |
100% 100% 100% 100%
APC The Hanover Allmerica Citizens
Funding Corp. Insurance Financial Insurance
Company Insurance Company of
Brokers, Inc. Illinois
Massachusetts New Hampshire Massachusetts Illinois
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 82.5% 100%
Allmerica Allmerica The Hanover Hanover Texas Citizens Massachusetts
Financial Employee American Insurance Corporation Bay Insurance
Benefit Insurance Insurance Management Company
Insurance Agency, Inc. Company Company, Inc.
Company
Pennsylvania Massachusetts New Hampshire Texas Delaware New Hampshire
|
________________________________________________________
| | |
100% 100% 100%
Citizens Citizens Insurance Citizens
Insurance Company of Insurance
Company of Ohio America Company of the
Midwest
Ohio Michigan Indiana
|
_______________
100%
Citizens
Management Inc.
Michigan
<CAPTION>
Allmerica Financial Corporation
Delaware
| | | | |
___________________________________________________________________________________
100% 100% 100% 100% 100%
Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica
Funding Corp. Financial Life Trust I Services
Insurance Corporation
Company
Massachusetts Massachusetts Massachusetts Delaware Massachusetts
|
_______________________________________________
|
100%
SMA
Financial Corp.
Massachusetts
|
______________________________________________________________________________________________________________________
| | | | | |
100% 100% 100% 100% 100% Allmerica
Allmerica Allmerica Allmerica Allmerica Linder Asset
Investments, Investment Asset Financial Services Skokie Management,
Inc. Management Management, Insurance Real Estate Limited
Company, Inc. Inc. Agency, Inc. Corporation
Massachusetts Massachusetts Massachusetts Massachusetts Massachusetts Bermuda
________________ _________________________________
Allmerica Equity Greendale AAM
Index Pool Special Equity Fund
Placements
Fund
Massachusetts Massachusetts Massachusetts
_____________________________________
| | Grantor Trusts established for the benefit of First
100% 100% Allmerica, Allmerica Financial Life, Hanover and
Allmerica AMGRO, Inc. Citizens
Financial Allmerica Allmerica Allmerica
Alliance Investment Trust Funds Securities
Insurance Trust
Company
Massachusetts Massachusetts Massachusetts
New Hampshire Massachusetts
|
|
100% Affiliated Management Investment Companies
Lloyd's
Credit Hanover Lloyd's
Corporation Insurance
Company
Massachusetts Texas
Affiliated Lloyd's plan company, controlled by
Underwriters for the benefit of the Hanover
Insurance Company
Beltsville
AAM High Drive
Yield Fund, Properties
L.L.C. Limited
Partnership
Massachusetts
Delaware
LLC established for the benefit of
First Allmerica, Allmerica Limited partnership involving First Allmerica, as
Financial Life, Hanover and general partner and Allmerica Financial Life as
Citizens limited partner
</TABLE>
<PAGE>
Item 27. Number of Contract Holders.
--------------------------
As of December 31, 1996, there were 55,039 Contract holders of qualified
Contracts and 16,738 Contract holders of non-qualified Contracts.
Item 28. Indemnification.
----------------
Article VIII of the Bylaws of Allmerica Financial Life Insurance and Annuity
Company (the Depositor) states: Each Director and each Officer of the
Corporation, whether or not in office, (and his executors or administrators),
shall be indemnified or reimbursed by the Corporation against all expenses
actually and necessarily incurred by him in the defense or reasonable settlement
of any action, suit, or proceeding in which he is made a party by reason of his
being or having been a Director or Officer of the Corporation, including any
sums paid in settlement or to discharge judgement, except in relation to matters
as to which he shall be finally adjudged in such action, suit or proceeding to
be liable for negligence or misconduct in the performance of his duties as such
Director or Officer; and the foregoing right of indemnification or reimbursement
shall not affect any other rights to which he may be entitled under the Articles
of Incorporation, any statute, bylaw, agreement, vote of stockholders, or
otherwise.
Insofar as indemnification for liability arising under the 1933 Act may be
permitted to Directors, Officers and Controlling Persons of Registrant under
any registration statement, underwriting agreement or otherwise, Registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a Director, Officer or Controlling
Person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Director, Officer or Controlling Person in
connection with the securities being registered, Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
Item 29. Principal Underwriters.
-----------------------
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
<PAGE>
- VEL Account, VEL II Account, Separate Accounts VA-A, VA-B, VA-C, VA-G,
VA-H, VA-P, Allmerica Select Separate Account, Separate Account
Fulcrum, Separate Account KG, Separate Account KGC, Fulcrum Variable
Life Separate Account, and Inheiritage Account of Allmerica Financial
Life Insurance and Annuity Company
- Separate Account I, VA-K, VA-P, Allmerica Select Separate Account, VEL
II Account, Separate Account KG, Separate Account KGC, Fulcrum
Separate Account, and Inheiritage Account of First Allmerica
- 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
Position or Office
Name with Underwriter
---- ----------------
Abigail M. Armstrong Secretary and Counsel
Philip J. Coffey Vice President
Emil J. Aberizk Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
Thomas P. Cunningham Vice President Chief Financial Officer
and Controller
David J. Mueller Vice President
William F. Monroe, Jr. Vice President
John F. Kelly Director
John F. O'Brien Director
Stephen Parker President, Director and
Chief Executive Officer
Edward J. Parry, III Treasurer
<PAGE>
Richard M. Reilly Director
Eric A. Simonsen Director
Mark Steinberg Senior Vice President
Item 30. Location of Accounts and Records.
---------------------------------
Each account, book or other document required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and Rules 31a-1 to 31a-3 thereunder are
maintained by the Company at 440 Lincoln Street, Worcester, Massachusetts.
Item 31. Management Services.
--------------------
Effective March 31, 1995, the Company provides daily unit value calculations and
related services for the Company's separate accounts.
Item 32. Undertakings.
-------------
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
(b) The registrant hereby undertakes to include in the prospectus a postcard
that the applicant can remove to send for a Statement of Additional Information.
(c) The registrant hereby undertakes to deliver a Statement of Additional
Information promptly upon written or oral request, according to the requirements
of Form N-4.
<PAGE>
(e) The Company hereby represents that the aggregate fees and charges under the
Policies are reasonable in relation to the services rendered, expenses expected
to be incurred, and risks assumed by the Company.
Item 33. Representations Concerning Withdrawal Restrictions on Section 403(b)
----------------------------------------------------------------------
Plans and under the Texas Optional Retirement Program.
- ------------------------------------------------------
Registrant, a separate account of Allmerica Financial Life Insurance and Annuity
Company ("Company"), states that it is (a) relying on Rule 6c-7 under the 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 withdrawal restrictions imposed by
the Program and by Section 403(b)(11) have been included in the prospectus
of each registration statement used in connection with the offer of the
Company's variable contracts.
2. Appropriate disclosures regarding the withdrawal 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 withdrawal
restrictions imposed by the Program and by Section 403(b)(11) to the
attention of potential participants.
<PAGE>
4. A signed statement acknowledging the participant's understanding of (I) the
restrictions on withdrawal imposed by the Program and by Section 403(b)(11)
and (ii) the investment alternatives available under the employer's
arrangement will be obtained from each participant who purchases a variable
annuity contract prior to or at the time of purchase.
Registrant hereby represents that it will not act to deny or limit a transfer
request except to the extent that a Service-Ruling or written opinion of
counsel, specifically addressing the fact pattern involved and taking into
account the terms of the applicable employer plan, determines that denial or
limitation is necessary for the variable annuity contracts to meet the
requirements of the Program or of Section 403(b). Any transfer request not so
denied or limited will be effected as expeditiously as possible.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all the requirements
for effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Worcester, and Commonwealth of Massachusetts on the 2nd day of April, 1997.
ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
Attest: /s/Abigail M. Armstrong
-----------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
Signature Title Date
- ---------
/s/John F. O'Brien Director and Chairman of the Board
- -----------------------
John F. O'Brien
/s/Bruce C. Anderson Director
- -----------------------
Bruce C. Anderson
/s/John P. Kavanaugh Director
- -----------------------
John P. Kavanaugh
/s/John F. Kelly Director April 2, 1997
- -----------------------
John F. Kelly
/s/J. Barry May Director
- -----------------------
J. Barry May
/s/James R. McAuliffe Director
- -----------------------
James R. McAuliffe
<PAGE>
/s/Edward J. Parry, III Director, Vice President
- ----------------------- Treasurer and Chief Financial
Edward J. Parry, III Officer
/s/Richard M. Reilly Director, President and
- ----------------------- Chief Executive Officer
Richard M. Reilly
/s/Larry C. Renfro Director
- -----------------------
Larry C. Renfro
/s/Eric A. Simonsen Director
- -----------------------
Eric A. Simonsen
/s/Phillip E. Soule
- -----------------------
Phillip E. Soule
<PAGE>
EXHIBIT TABLE
Exhibit 8(b) - Fidelity Services Agreement/Contract
Exhibit 8(c) - T. Rowe Price Agreement
Exhibit 9 - Consent and Opinion of Counsel
Exhibit 10 - Consent of Independent Accountants
<PAGE>
FORM OF
SERVICE CONTRACT
With respect to shares of:
( ) Variable Insurance Products Fund - High Income Portfolio
( ) Variable Insurance Products Fund - Equity-Income Portfolio
( ) Variable Insurance Products Fund - Growth Portfolio
( ) Variable Insurance Products Fund - Overseas Portfolio
( ) Variable Insurance Products Fund II - Investment Grade Bond Portfolio
( ) Variable Insurance Products Fund II - Asset Manager Portfolio
( ) Variable Insurance Products Fund II - Contrafund Portfolio
( ) Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
( ) Variable Insurance Products Fund III - Growth Opportunities Portfolio
( ) Variable Insurance Products Fund III - Balanced Portfolio
( ) Variable Insurance Products Fund III - Growth & Income Portfolio
To Fidelity Distributors Corporation:
We desire to enter into a Contract with you for activities in connection with
the distribution of shares and the servicing of shareholders of the Fund noted
above (the "Fund") of which you are the principal underwriter as defined in the
Investment Company Act of 1940 (the "Act") and for which you are the agent for
the continuous distribution of shares.
THE TERMS AND CONDITIONS OF THIS CONTRACT ARE AS FOLLOWS:
1. We shall provide distribution and certain shareholder services for our
clients who own Fund shares ("clients"), in which services may include, without
limitation: sale of shares of the Fund; answering client inquiries regarding the
Fund; assistance to clients in changing dividend options, account designations
and addresses; performance of subaccounting; processing purchase and redemption
transactions, including automatic investment and redemption of client account
cash balances; providing periodic statements showing a client's account balance
and the integration of such statements with other transactions; arranging for
bank wires; and providing such other information and services as you reasonably
may request.
2. We shall provide such office space and equipment, telephone facilities and
personnel (which may be all or any part of the space, equipment and facilities
currently used in our business, or all or any personnel employed by us) as is
necessary or beneficial for providing information and services to shareholders
of the Fund, and to assist you in servicing accounts of clients.
3. We agree to indemnify and hold you, the Fund, and the Fund's adviser and
transfer agent harmless from any and all direct or indirect liabilities or
losses resulting from requests, directions, actions or inactions, of or by us or
our officers, employees or agents regarding the purchase, redemption, transfer
or registration of shares for our clients. Such indemnification shall survive
the termination of this Contract.
Neither we nor any of our officers, employees or agents are authorized to
make any representation concerning Fund shares except those contained in the
then current Fund Prospectus, copies of which will be supplied by you to us; and
we shall have no authority to act as agent for the Fund or for you.
4. In consideration of the services and facilities described herein, we shall
be entitled to receive, and you shall cause to be paid to us by yourself or by
Fidelity Management & Research Company, investment adviser of the Fund, such
fees as are set forth in the accompanying "Fee Schedule for Qualified
Recipients." We understand that the payment of such fees has been authorized
pursuant to a Service Plan approved by the
<PAGE>
Board of Trustees of the Fund, and those Trustees who are not "interested
persons" of the fund (as defined in the Act) and who have no direct or indirect
financial interest in the operation of the Service Plan or in any agreements
related to the Service Plan (hereinafter referred to as "Qualified Trustees"),
and shareholders of the Fund, that such fees will be paid out of the fees paid
to the Fund's investment adviser, said adviser's past profits or any other
source available to said adviser; that the cost to the Fund for such fees shall
not exceed the amount of the advisory and service fee; and that such fees are
subject to change during the term of this Contract and shall be paid only so
long as this Contract is in effect.
5. We agree to conduct our activities in accordance with any applicable
federal or state laws, including securities laws and any obligation thereunder
to disclose to our clients the receipt of fees in connection with their
investment in the Fund.
6. You reserve the right, at your discretion and without notice, to suspend
the sale of shares or withdraw the sale of shares of the Fund.
7. This contract shall continue in force for one year from the effective date
(see below), and thereafter shall continue automatically for successive annual
periods, provided such continuance is specifically subject to termination
without penalty at any time if a majority of the Fund's Qualified Trustees vote
to terminate or not to continue the Service Plan. This Contract is also
terminable without penalty at any time the Service Plan is terminated by vote of
a majority of the Fund's outstanding voting securities upon 60 days' written
notice thereof to us. This Contract may also be terminated by us, for any
reason, upon 15 days' written notice to you. Notwithstanding anything contained
herein, in the event that the Service Plan shall terminate or we shall fail to
perform the distribution and shareholder servicing functions contemplated by
this Contract, such determination to be made in good faith by the Fund or you,
this Contract is terminable effective upon receipt of notice thereof by us.
This Contract will also terminate automatically in the event of its assignment
(as defined in the Act).
8. All communications to you shall be sent to you at your offices, 82
Devonshire Street, Boston, MA 02109. Any notice to us shall be duly given if
mailed or telegraphed to us at the address shown in this contract.
9. This Contract shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
Very truly yours,
- --------------------------------------------------------------------------------
Name of Qualified Recipient (Please Print or Type)
- --------------------------------------------------------------------------------
Street City State Zip Code
By:
-----------------------------------------------------------------------------
Authorized Signature
Date:
-------------------------
NOTE: Please return two signed copies of this Service Contract to Fidelity
Distributors Corporation. Upon acceptance, one countersigned copy will be
returned to you.
FOR INTERNAL USE ONLY:
EFFECTIVE DATE: JANUARY 1, 1997
<PAGE>
FEE SCHEDULE FOR QUALIFIED RECIPIENTS OF
Variable Insurance Products Fund - High Income Portfolio
Variable Insurance Products Fund - Equity-Income Portfolio
Variable Insurance Products Fund - Growth Portfolio
Variable Insurance Products Fund - Overseas Portfolio
Variable Insurance Products Fund II - Investment Grade Bond Portfolio
Variable Insurance Products Fund II - Asset Manager Portfolio
Variable Insurance Products Fund II - Contrafund Portfolio
Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
Variable Insurance Products Fund III - Growth Opportunities Portfolio
Variable Insurance Products Fund III - Balanced Portfolio
Variable Insurance Products Fund III - Growth & Income Portfolio
(1) Those who have signed the Service Agreement, who meet the requirements
of paragraph (4) below, and who render distribution, administrative support and
recordkeeping services as described therein, will hereafter be referred to as
"Qualified Recipients."
(2) Qualified Recipients who perform distribution services for their
clients including, without limitation, sale of Portfolio shares, answering
routine client inquiries about the Portfolio(s), completing Portfolio
applications for the client, and producing Portfolio sales brochures or other
marketing materials, will earn a quarterly fee at an annualized rate of 0.06%
(six basis points) of the average aggregate net assets of their clients invested
in the Portfolios.
(3) The fees paid to each Qualified Recipient will be calculated and paid
quarterly. Checks will be mailed to each Qualified Recipient by the 30th of the
following month.
(4) In order to be assured of receiving payment under this Agreement for a
given calendar quarter, a Qualified Recipient must have insurance company
clients with a minimum of $100 million of average net assets in the aggregate in
the mutual fund portfolios shown below. For any calendar quarter during which
assets in these portfolios are in the aggregate less than $100 million, the
amount of qualify assets may be considered to be zero for the purpose of
computing the payments due.
Variable Insurance Products Fund - Equity-Income Portfolio
Variable Insurance Products Fund - Growth Portfolio
Variable Insurance Products Fund - Overseas Portfolio
Variable Insurance Products Fund II - Asset Manager Portfolio
Variable Insurance Products Fund II - Contrafund Portfolio
Variable Insurance Products Fund II - Asset Manager: Growth Portfolio
Variable Insurance Products Fund III - Growth Opportunities Portfolio
Variable Insurance Products Fund III - Balanced Portfolio
Variable Insurance Products Fund III - Growth & Income Portfolio
<PAGE>
AMENDMENT TO SERVICE AGREEMENT
This Amendment to Service Agreement, effective as of the 1st day of
January, 1997, modifies an agreement entered into by and between FIDELITY
INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY ("FIIOC") and ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY ("Company") as of the 1st day of November,
1995 (the "Agreement").
WHEREAS, Fidelity now has a third insurance-dedicated mutual fund, Variable
Insurance Products Fund III, which the parties are desirous of including in this
Agreement; and
WHEREAS, the parties also desire to make technical amendments to the
Agreement;
NOW, THEREFORE, the parties do hereby agree to amend the Agreement as
follows:
1. The term "Funds" now includes Variable Insurance Products Fund,
Variable Insurance Products Fund II, and Variable Insurance Products Fund III.
2. Paragraph 3 of the Agreement is amended to change the compensation
rate from 2 basis points to 4 basis points, and to place a cap on the maximum
quarterly payment, by making the following changes:
(a) Each place that the figure 0.0002 appears, it is hereby replaced with
the figure 0.0004, and each place that the words "two basis points" appear they
are hereby replaced with "four basis points;" and
(b) The following language is hereby added to the end of paragraph 3:
"Notwithstanding anything else in this Agreement, the maximum Payment to which
Company shall be entitled with respect to any calendar quarter or stub period is
One Million Dollars ($1,000,000)."
IN WITNESS WHEREOF, the parties have set their hand as of the date first
above written.
FIDELITY INVESTMENTS INSTITUTIONAL OPERATIONS COMPANY, INC.
By: /s/ Thomas J. Fryer
------------------------------
Thomas J. Fryer
Vice President
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
------------------------------
Name: Richard M. Reilly
-----------------------------
Title: Vice President
----------------------------
<PAGE>
FORM OF SERVICE AGREEMENT
(RPFI)
______________, 1997
__________________Insurance Company
Ladies and Gentlemen:
This letter sets forth the agreement ("AGREEMENT") between
_____________________ Company ("YOU" or the "COMPANY") and the undersigned ("WE"
or "RPFI") concerning certain administration services to be provided by you,
with respect to the T. Rowe Price International Series, Inc. (the "FUND").
1. THE FUND. The Fund is a Maryland Corporation registered with the
Securities and Exchange Commission (the "SEC") under the Investment Company Act
of 1940 (the "ACT") as an open-end diversified management investment company.
The Fund serves as a funding vehicle for variable annuity contracts and variable
life insurance contracts and, as such, sells its shares to insurance companies
and their separate accounts. With respect to various provisions of the Act, the
SEC requires that owners of variable annuity contracts and variable life
insurance contracts be provided with materials and rights afforded to
shareholders of a publicly-available SEC-registered mutual fund.
2. THE COMPANY. The Company is a [STATE] insurance company. The Company
issues variable annuity and/or variable life insurance contracts (the
"CONTRACTS") supported by certain separate accounts (each a "SEPARATE ACCOUNT"),
as set forth on attached Schedule A, which are registered with the SEC as a unit
investment trust. The Company has entered into a participation agreement (the
"PARTICIPATION AGREEMENT") with the Fund pursuant to which the Company purchases
shares of the Fund for the Separate Account supporting the Company's Contracts.
3. RPFI. RPFI serves as the Fund's investment adviser. RPFI supervises
and assists in the overall management of the Fund's affairs under an Investment
Management Agreement with the Fund, subject to the overall authority of the
Fund's Board of Directors in accordance with Maryland law. Under the Investment
Management Agreement, RPFI is compensated by the Fund for providing investment
advisory and certain administrative services (either directly or through its
affiliates).
4. ADMINISTRATIVE SERVICES. You have agreed to assist us and/or our
affiliates, as we may request from time to time, with the provision of
administrative services to the Fund, as they may relate to the investment in the
Fund by the Separate Account. It is anticipated that such services may include
(but shall not be limited to): the mailing of Fund reports, notices, proxies and
proxy statements and other informational materials to holders of the Contracts
supported by the Separate Account; the transmission of purchase and redemption
requests to the Fund's transfer agent; the maintenance of separate records for
each holder of the
<PAGE>
_________________ Insurance Company
_____________, 1997
Page Two
Contract reflecting shares purchased and redeemed and share balances; the
preparation of various reports for submission to the Fund Directors; the
provision of advice and recommendations concerning the operation of the series
of the Fund as funding vehicles for the Contracts; the provision of shareholder
support services with respect to the Portfolios serving as funding vehicles for
the Company's Contracts; telephonic support for holders of Contracts with
respect to inquiries about the Fund; and the provision of other administrative
services as shall be mutually agreed upon from time to time.
5. PAYMENT FOR ADMINISTRATIVE SERVICES. In consideration of the services
to be provided by you, we shall pay you on a quarterly basis ("PAYMENTS"), from
our assets, including our BONA FIDE profits as investment adviser to the Fund,
an amount equal to 15 basis points (0.15%) per annum of the average aggregate
net asset value of shares of the Fund held by the Separate Account under the
Participation Agreement, PROVIDED, HOWEVER, that such payments shall only be
payable for each calendar quarter during which the total dollar value of shares
of the Fund purchased pursuant to the Participation Agreement exceeds
$50,000,000. For purposes of computing the payment to the Company contemplated
under this Paragraph 5, the average aggregate net asset value of shares of the
Fund held by the Separate Account over a quarterly period shall be computed by
totaling the Separate Account's aggregate investment (share net asset value
multiplied by total number of shares held by the Separate Account) on each
business day during the calendar quarter, and dividing by the total number of
business days during such quarter. The payment contemplated by this Paragraph 5
shall be calculated by RPFI at the end of each calendar quarter and will be paid
to the Company within 30 business days thereafter.
6. NATURE OF PAYMENTS. The parties to this Agreement recognize and agree
that RPFI's Payments to the Company under this Agreement represent compensation
for administrative services only and do not constitute payment in any manner for
investment advisory services or for costs of distribution of the Contracts or of
Fund shares; and further, that these payments are not otherwise related to
investment advisory or distribution services or expenses, or administrative
services which RPFI is required to provide to owners of the Contracts pursuant
to the terms thereof. You represent that you may legally receive the payments
contemplated by this Agreement.
7. TERM. This Agreement shall remain in full force and effect for an
initial term of one year, and shall automatically renew for successive one-year
periods unless either party notifies the other upon 60-days written notice of
its intent not to continue this agreement. This Agreement and all obligations
hereunder shall terminate automatically upon the redemption of the Company's and
the Separate Account's investment in the Fund, or upon termination of the
Participation Agreement.
8. AMENDMENT. This Agreement may be amended only upon mutual agreement
of the parties hereto in writing.
9. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which shall together constitute one
and the same instrument.
<PAGE>
________________ Insurance Company
_____________, 1997
Page Three
If this Agreement is consistent with your understanding of the matters
we discussed concerning your administration services, kindly sign below and
return a signed copy to us.
Very truly yours,
ROWE PRICE-FLEMING
INTERNATIONAL, INC.
By:
------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Acknowledged and Agreed to:
LIFE INSURANCE COMPANY
- ---------------------------
By:
--------------------------
Name:
------------------------
Title:
------------------------
<PAGE>
April 2, 1997
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
Gentlemen:
In my capacity as Counsel of Allmerica Financial Life Insurance and Annuity
Company (the "Company'), I have participated in the preparation of the Post-
Effective Amendments to the Registration Statement for Separate Account VA-K on
Form N-4 under the Securities Act of 1933 and the Investment Company Act of
1940, with respect to the Company's qualified and non-qualifed variable annuity
contracts.
I am of the following opinion:
1. Separate Account VA-K 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 VA-K are not chargeable with
liabilities arising out of any other business the Company may conduct.
3. The individual qualified and non-qualifed variable annuity contracts, when
issued in accordance with the Prospectus contained in the Registration
statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to the Post-
Effective Amendment to the Registration Statement on Form N-4 under the
Securities Act of 1933.
Very truly yours,
/s/Sylvia Kemp-Orino
Sylvia Kemp-Orino
Assistant Vice President and Counsel
<PAGE>
Exhibit 10
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 13 to the Registration
Statement on Form N-4 of our report dated February 3, 1997, relating to the
financial statements of Allmerica Financial Life Insurance and Annuity
Company, our report dated February 5, 1996 relating to the statutory basis
financial statements of Allmerica Financial Life Insurance and Annuity
Company and our report dated March 26, 1997, relating to the financial
statements of Separate Account VA-K ExecAnnuity Plus of Allmerica Financial
Life Insurance and Annuity Company, all of which appear in such Statement of
Additional Information. We also consent to the reference to us under the
heading "Experts" in such Statement of Additional Information.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 21, 1997
