<PAGE>
File Nos. 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. 16
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 28
SEPARATE ACCOUNT VA-K OF ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Name of Depositor)
440 Lincoln Street
Worcester, MA 01653
(Address of Depositor's Principal Executive Offices)
(508) 855-1000
(Depositor's Telephone Number, including Area Code)
Abigail M. Armstrong Secretary and Counsel
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
-----
X on May 1, 1999 pursuant to paragraph (b) of Rule 485
-----
60 days after filing pursuant to paragraph (a)(1) of Rule 485
-----
on (date) pursuant to paragraph (a)(1) of Rule 485
-----
this post-effective amendment designates a new effective
-----
date for a previously filed post-effective amendment
VARIABLE ANNUITY POLICIES
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("the
1940 Act"), Registrant hereby declares that an indefinite amount of its
securities is being registered under the Securities Act of 1933 ("the 1933
Act"). The Rule 24f-2 Notice for the issuer's fiscal year ended December 31,
1998 was filed on or before March 30, 1999.
<PAGE>
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
ITEMS CALLED FOR BY FORM N-4
FORM N-4 ITEM NO. CAPTION IN PROSPECTUS
- ----------------- ---------------------
1 . . . . . . . . . Cover Page
2 . . . . . . . . . Special Terms
3 . . . . . . . . . Prospectus A: Summary of Fees and Expenses; Summary of the
Policy Features
Prospectus B: Summary of Fees and Expenses; Summary of the
Contract Features
4 . . . . . . . . . Condensed Financial Information; Performance Information
5 . . . . . . . . . Prospectus A: Description of the Companies, the Separate
Account, the Trust, Fidelity VIP, Fidelity VIP II,
T. Rowe Price International Series, Inc. and DGPF
Prospectus B: Description of the Companies, the Variable
Accounts, the Trust, Fidelity VIP, Fidelity VIP II,
T. Rowe Price International Series, Inc. and DGPF.
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 Payout
Options; Annuity Benefit Payments
9 . . . . . . . . . Death Benefit
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
<PAGE>
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 Benefit Payments
23. . . . . . . . . Financial Statements
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
INDIVIDUAL VARIABLE ANNUITY POLICIES 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 Prospectus provides important information about
the ExecAnnuity Plus '93 variable annuity policy
issued by Allmerica Financial Life Insurance and
Annuity Company and the ExecAnnuity Plus '91 variable
annuity policy issued by Allmerica Financial Life
Insurance and Annuity Company and First Allmerica
Financial Life Insurance Company. Neither of these
policies is currently being sold.
Information specific to ExecAnnuity Plus '91 is set
forth in Appendix B. Owners of these policies should
review this Appendix first.
The Separate Account, known as Separate Account VA-K,
is subdivided into Sub- Accounts. Each Sub-Account
PLEASE READ THIS invests exclusively in shares of the following funds:
PROSPECTUS CAREFULLY
BEFORE INVESTING AND
KEEP IT FOR FUTURE
REFERENCE.
<TABLE>
<CAPTION>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
-------------------------------------------------- --------------------------------------------------
<C> <S> <C>
ANNUITIES INVOLVE Select International Equity Fund Overseas Portfolio
RISKS INCLUDING Select Aggressive Growth Fund Equity-Income Portfolio
POSSIBLE LOSS OF Select Capital Appreciation Fund Growth Portfolio
PRINCIPAL. Select Value Opportunity Fund High Income Portfolio
Select Growth Fund
Growth Fund FIDELITY VARIABLE INSURANCE PRODUCT FUND II
Equity Index Fund ---------------------------------------
Select Growth and Income Fund Asset Manager Portfolio
Investment Grade Income Fund
Government Bond Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Money Market Fund -----------------------------------
DELAWARE GROUP PREMIUM FUND, INC. T. Rowe Price International Stock Portfolio
---------------------------------
DGPF International Equity Series
</TABLE>
THIS ANNUITY IS A Statement of Additional Information dated May 1,
NOT: 1999 containing more information about this
- A BANK DEPOSIT OR annuity is on file with the Securities and
OBLIGATION; Exchange Commission and is incorporated by
- FEDERALLY INSURED; reference into this Prospectus. A copy may be
- ENDORSED BY ANY obtained free of charge by calling Annuity Client
BANK OR Services at 1-800-533-7881 or returning the
GOVERNMENTAL attached request card. The Table of Contents of
AGENCY. the Statement of Additional Information is listed
on page 3 of this Prospectus.
This Prospectus and the Statement of Additional
Information can also be obtained from the
Securities and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS........................................................................... 4
SUMMARY OF FEES AND EXPENSES............................................................ 6
SUMMARY OF POLICY FEATURES.............................................................. 11
PERFORMANCE INFORMATION................................................................. 15
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, THE TRUST, FIDELITY
VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF........................................... 19
INVESTMENT OBJECTIVES AND POLICIES...................................................... 20
INVESTMENT ADVISORY SERVICES............................................................ 22
WHAT IS AN ANNUITY?..................................................................... 25
CHARGES AND DEDUCTIONS.................................................................. 25
A. Surrender Charge................................................................. 25
B. Premium Taxes.................................................................... 28
C. Policy Fee....................................................................... 29
D. Optional Minimum Guaranteed Annuity Payout Rider Charge.......................... 29
E. Annual Charges Against Separate Account Assets................................... 29
THE VARIABLE ANNUITY POLICIES........................................................... 30
A. Purchase Payments................................................................ 30
B. Right to Cancel Individual Retirement Annuity.................................... 31
C. Right to Cancel All Other Policies............................................... 31
D. Transfer Privilege............................................................... 31
E. Surrender........................................................................ 33
F. Partial Redemption............................................................... 33
G. Death Benefit.................................................................... 34
H. The Spouse of the Owner as Beneficiary........................................... 35
I. Assignment....................................................................... 35
J. Electing the Form of Annuity and the Annuity Date................................ 35
K. Description of Variable Annuity Payout Options................................... 36
L. Optional Minimum Guaranteed Annuity Payout Rider................................. 37
M. NORRIS Decision................................................................... 39
N. Computation of Policy Values and Annuity Benefit Payments........................ 39
FEDERAL TAX CONSIDERATIONS.............................................................. 41
A. Qualified and Non-Qualified Policies............................................. 42
B. Taxation of the Policies in General.............................................. 42
Withdrawals Prior to Annuitization.............................................. 42
Annuity Payouts After Annuitization............................................. 42
Penalty on Distribution......................................................... 42
Assignments or Transfers........................................................ 43
Nonnatural Owners............................................................... 43
Deferred Compensation Plans of State and Local Governments 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............................................... 45
LOANS (QUALIFIED POLICIES ONLY)......................................................... 45
STATEMENTS AND REPORTS.................................................................. 45
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS....................................... 45
VOTING RIGHTS........................................................................... 46
</TABLE>
2
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<TABLE>
<S> <C>
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................... 47
SERVICES................................................................................ 47
LEGAL MATTERS........................................................................... 47
YEAR 2000 COMPLIANCE.................................................................... 47
APPENDIX A -- MORE INFORMATION ABOUT THE GENERAL ACCOUNT................................ A-1
APPENDIX B -- POLICY NO. A3018-91 (AND STATE VARIATIONS THEREOF)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
POLICY NO. A3018-94
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY...................................... B-1
APPENDIX C -- CONDENSED FINANCIAL INFORMATION (ALLMERICA FINANCIAL
LIFE INSURANCE AND ANNUITY COMPANY.................................................... C-1
APPENDIX D -- CONDENSED FINANCIAL INFORMATION (FIRST ALLMERICA
FINANCIAL LIFE INSURANCE COMPANY)..................................................... D-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY......................................................... 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY.......................... 3
SERVICES................................................................................ 3
UNDERWRITERS............................................................................ 3
ANNUITY BENEFIT PAYMENTS................................................................ 4
EXCHANGE OFFER.......................................................................... 6
PERFORMANCE INFORMATION................................................................. 8
FINANCIAL STATEMENTS.................................................................... F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
As used in this Prospectus, the following terms have the indicated meanings:
ACCUMULATED VALUE: the total value of all Accumulation Units in the Sub-Accounts
plus the value of all accumulations in the General Account then credited to the
Policy, on any date before the Annuity Date.
ACCUMULATION UNIT: a unit of measure used to calculate the value of a
Sub-Account 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. This date may not be
later than the first day of the month before the Annuitant's 90th birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity payments under the Policy.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance Company and Annuity Company
for all ExecAnnuity Plus '93 policies (Form A3021-93) and for ExecAnnuity Plus
'91 policies (Form A3018-91) except for ExecAnnuity Plus '91 policies issued in
New York on Form A3018-94 on and after April 1, 1994. With regard to these New
York policies, any reference to "Company" refers exclusively to First Allmerica
Financial Life Insurance Company.
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 and are not chargeable with liabilities arising
out of any other business which the Company may conduct.
SUB-ACCOUNT: a subdivision of the Separate Account investing 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
surrender 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 Select Value Opportunity
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>
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 Sub-Accounts 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 unit value of the Subaccounts may be
materially affected.
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 OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the ExecAnnuity
Plus Policy. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Policies, (2) annual expenses of the Sub-Accounts, and (3) annual expenses of
the Underlying Funds. In addition to the charges and expenses described below,
premium taxes may be applicable in some states.
<TABLE>
<CAPTION>
POLICY YEAR
AFTER
DATE OF
PURCHASE
(1) POLICY CHARGES: PAYMENT CHARGE
- ----------------------------------------------------------------------------- --------------- ---------
<S> <C> <C>
SURRENDER CHARGE: 0-2 8%
This charge may be assessed upon surrender, withdrawal or annuitization 3 7%
under any commutable period certain option or a noncommutable period certain 4 6%
option of less than ten years. The charge is a percentage of payments 5 5%
applied to the amount surrendered (in excess of any amount that is free of 6 4%
surrender charge) within the indicated time period. 7 3%
8 2%
9 1%
More than 9 0%
TRANSFER CHARGE:
The Company currently makes no charge for processing transfers and None
guarantees that the first 12 transfers in a Policy year will not be subject
to a transfer charge. For each subsequent transfer, the Company reserves
the right to assess a charge, guaranteed never to exceed $25, to reimburse
the Company for the costs of processing the transfer.
ANNUAL POLICY FEE:
A Policy fee equal to the lesser of $30 or 3% is deducted annually and upon $30
surrender prior to the Annuity Date when Accumulated Value is $50,000 or
less. The fee is waived for Policies issued to and maintained by the
trustee of a 401(k) plan.
OPTIONAL RIDER CHARGES:
The annual charge is deducted on a monthly basis at the end of each month.
On an annual basis as a percentage of Accumulated Value, the charge is:
Optional Minimum Guaranteed Annuity Payout Rider with a ten-year waiting 0.25%
period:
Optional Minimum Guaranteed Annuity Payout Rider with a fifteen-year 0.15%
waiting period:
(2) ANNUAL SUB-ACCOUNT EXPENSES:
- -----------------------------------------------------------------------------
(on an annual basis as percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
---------
Total Asset Charges: 1.45%
</TABLE>
6
<PAGE>
(3) ANNUAL 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 as a percentage of
average net assets for the year ended December 31, 1998. For more information
concerning fees and expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
TOTAL FUND EXPENSES
MANAGEMENT FEE OTHER EXPENSES (AFTER ANY
(AFTER ANY VOLUNTARY (AFTER ANY WAIVERS/
FUND WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- ------------------------------------------------------- --------------------- ------------------ -----------------------
<S> <C> <C> <C>
Select International Equity Fund....................... 0.90% 0.12% 1.02%(1)(2)
DGPF International Equity Series....................... 0.82% 0.13% 0.95%(3)
Fidelity VIP Overseas Portfolio........................ 0.74% 0.17% 0.91%(4)
T. Rowe Price International Stock Portfolio............ 1.05% 0.00% 1.05%
Select Aggressive Growth Fund.......................... 0.88% 0.07% 0.95%(1)(2)
Select Capital Appreciation Fund....................... 0.94% 0.10% 1.04%(1)(2)
Select Value Opportunity Fund.......................... 0.90%(1)* 0.08% 0.98%(1)(2)*
Select Growth Fund..................................... 0.81%** 0.05% 0.86%(1)(2)**
Growth Fund............................................ 0.44% 0.05% 0.49%(1)(2)
Fidelity VIP Growth Portfolio.......................... 0.59% 0.09% 0.68%(4)
Equity Index Fund...................................... 0.29% 0.07% 0.36%(1)
Select Growth and Income Fund.......................... 0.68% 0.05% 0.73%(1)(2)
Fidelity VIP Equity-Income Portfolio................... 0.49% 0.09% 0.58%(4)
Fidelity VIP II Asset Manager Portfolio................ 0.54% 0.10% 0.64%(4)
Fidelity VIP High Income Portfolio..................... 0.58% 0.12% 0.70%
Investment Grade Income Fund........................... 0.43% 0.09% 0.52%(1)
Government Bond Fund................................... 0.50% 0.14% 0.64%(1)
Money Market Fund...................................... 0.26% 0.06% 0.32%(1)
</TABLE>
(*) Amount has been adjusted to reflect a voluntary expense limitation currently
in effect for Select Value Opportunity Fund. Without these adjustments, the
Management Fee and Total Fund Expenses would have been 0.91% and 0.99%,
respectively, for Select Value Opportunity Fund.
(**) Effective June 1, 1998, the management fee rate for the Select Growth Fund
was revised. The Management Fee and Total Fund Expense ratios shown in the table
above have been adjusted to assume that the revised rates took effect January 1,
1998.
(1) Until further notice, Allmerica Financial Investment Management Services,
Inc. ("Manager") has declared a voluntary expense limitation of 1.35% of average
net assets for Select Aggressive Growth Fund and Select Capital Appreciation
Fund, 1.25% for Select Value Opportunity Fund, 1.50% for Select International
Equity Fund, 1.20% for Growth Fund and Select Growth Fund, 1.10% for Select
Growth and Income Fund, 1.00% for Investment Grade Income Fund and Government
Bond Fund, and 0.60% for Money Market Fund and Equity Index Fund. The total
operating expenses of these Funds of the Trust were less than their respective
expense limitations throughout 1998.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these Funds. These limitations may be terminated at any time.
7
<PAGE>
(2) 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 annual fund operating expenses would have been 0.92% for
Select Aggressive Growth Fund, 1.02% for Select Capital Appreciation Fund, 0.94%
for Select Value Opportunity Fund, 1.01% for Select International Equity Fund,
0.84% for Select Growth Fund, 0.70% for Select Growth and Income Fund and 0.46%
for Growth Fund.
(3) Effective May 1, 1999, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.95% that expired on April 30, 1999. The new limitation will be in effect
through October 31, 1999. For the fiscal year ended December 31, 1998, the
actual ratio of total annual expenses was 0.98%.
(4) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, certain funds, or Fidelity Management &
Research Company on behalf of certain funds, have entered into arrangements with
their custodian whereby credits realized as a result of uninvested cash balances
were used to reduce custodian expenses. Including these reductions, total
operating expenses would have been 0.89% for the Fidelity VIP Overseas
Portfolio; 0.57% for the Fidelity VIP Equity-Income Portfolio; 0.63% for the
Fidelity VIP II Asset Manager Portfolio and 0.66% for the Fidelity VIP Growth
Portfolio.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES. The following examples demonstrate the cumulative expenses
which an Owner of ExecAnnuity '93 (A3021-93) would pay at 1-year, 3-year, 5-year
and 10-year intervals under certain contingencies. Each example assumes a $1,000
investment in a Sub-Account and a 5% annual return on assets. As required by
rules of the Securities and Exchange Commission (the "SEC"), 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
0.05%, and the amount of the Policy fee is assumed to be $0.50 in the examples.
The Policy fee is deducted only when the accumulated value is $50,000 or less.
Lower costs apply to Policies issued and maintained as part of a 401(k) plan.
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. (Owners of ExecAnnuity '91 (A3018-91 and A3018-94) should review
the expense examples in Appendix B.)
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
8
<PAGE>
(1)(a) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under a commutable period certain option or a noncommutable period
certain option of less than ten years, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return on assets and no Rider:**
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 99 $ 145 $ 182 $ 282
DGPF International Equity Series............................................. $ 98 $ 143 $ 179 $ 275
Fidelity VIP Overseas Portfolio.............................................. $ 98 $ 142 $ 177 $ 271
T. Rowe Price International Stock Portfolio.................................. $ 99 $ 146 $ 184 $ 285
Select Aggressive Growth Fund................................................ $ 98 $ 143 $ 179 $ 275
Select Capital Appreciation Fund............................................. $ 99 $ 146 $ 183 $ 284
Select Value Opportunity Fund................................................ $ 99 $ 144 $ 180 $ 278
Select Growth Fund........................................................... $ 98 $ 141 $ 174 $ 266
Growth Fund.................................................................. $ 94 $ 130 $ 156 $ 228
Fidelity VIP Growth Portfolio................................................ $ 96 $ 136 $ 165 $ 248
Equity Index Fund............................................................ $ 93 $ 127 $ 149 $ 215
Select Growth and Income Fund................................................ $ 96 $ 137 $ 168 $ 253
Fidelity Equity-Income Portfolio............................................. $ 95 $ 133 $ 160 $ 238
Fidelity VIP II Asset Manager Portfolio...................................... $ 95 $ 135 $ 163 $ 244
Fidelity VIP High Income Portfolio........................................... $ 96 $ 136 $ 166 $ 250
Investment Grade Income Fund................................................. $ 94 $ 131 $ 157 $ 231
Government Bond Fund......................................................... $ 95 $ 135 $ 163 $ 244
Money Market Fund............................................................ $ 92 $ 126 $ 147 $ 210
</TABLE>
(1)(b) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under a commutable period certain option or a noncommutable period
certain option of less than ten years, you would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets and election of a Minimum
Guaranteed Annuity Payout Rider** with a ten-year waiting period:
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 101 $ 152 $ 195 $ 307
DGPF International Equity Series............................................. $ 101 $ 150 $ 191 $ 300
Fidelity VIP Overseas Portfolio.............................................. $ 100 $ 149 $ 189 $ 296
T. Rowe Price International Stock Portfolio.................................. $ 102 $ 153 $ 196 $ 309
Select Aggressive Growth Fund................................................ $ 101 $ 150 $ 191 $ 300
Select Capital Appreciation Fund............................................. $ 101 $ 153 $ 196 $ 308
Select Value Opportunity Fund................................................ $ 101 $ 151 $ 193 $ 303
Select Growth Fund........................................................... $ 100 $ 148 $ 187 $ 291
Growth Fund.................................................................. $ 96 $ 137 $ 168 $ 254
Fidelity VIP Growth Portfolio................................................ $ 98 $ 143 $ 178 $ 273
Equity Index Fund............................................................ $ 95 $ 134 $ 162 $ 241
Select Growth and Income Fund................................................ $ 99 $ 144 $ 180 $ 278
Fidelity VIP Equity-Income Portfolio......................................... $ 97 $ 140 $ 173 $ 263
Fidelity VIP II Asset Manager Portfolio...................................... $ 98 $ 142 $ 176 $ 269
Fidelity VIP High Income Portfolio........................................... $ 98 $ 143 $ 179 $ 275
Investment Grade Income Fund................................................. $ 97 $ 138 $ 170 $ 257
Government Bond Fund......................................................... $ 98 $ 142 $ 176 $ 269
Money Market Fund............................................................ $ 95 $ 133 $ 160 $ 237
</TABLE>
9
<PAGE>
(2)(a) If you annuitize* under a life option or any noncommutable 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 Policy, you would pay the following expenses
on a $1,000 investment, assuming 5% annual return on assets and no Rider:**
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 25 $ 77 $ 132 $ 282
DGPF International Equity Series............................................. $ 24 $ 73 $ 125 $ 267
Fidelity VIP Overseas Portfolio.............................................. $ 24 $ 74 $ 127 $ 271
T. Rowe Price International Stock Portfolio.................................. $ 26 $ 78 $ 134 $ 285
Select Aggressive Growth Fund................................................ $ 25 $ 75 $ 129 $ 275
Select Capital Appreciation Fund............................................. $ 25 $ 78 $ 133 $ 284
Select Value Opportunity Fund................................................ $ 25 $ 76 $ 130 $ 278
Select Growth Fund........................................................... $ 24 $ 73 $ 124 $ 266
Growth Fund.................................................................. $ 20 $ 62 $ 106 $ 228
Fidelity VIP Growth Portfolio................................................ $ 22 $ 67 $ 115 $ 248
Equity Index Fund............................................................ $ 19 $ 58 $ 99 $ 215
Select Growth and Income Fund................................................ $ 22 $ 69 $ 118 $ 253
Fidelity Equity-Income Portfolio............................................. $ 21 $ 64 $ 110 $ 238
Fidelity VIP II Asset Manager Portfolio...................................... $ 21 $ 66 $ 113 $ 244
Fidelity VIP High Income Portfolio........................................... $ 22 $ 68 $ 116 $ 250
Investment Grade Income Fund................................................. $ 20 $ 62 $ 107 $ 231
Government Bond Fund......................................................... $ 21 $ 66 $ 113 $ 244
Money Market Fund............................................................ $ 18 $ 56 $ 97 $ 210
</TABLE>
(2)(b) If you annuitize* under a life option or any noncommutable 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 Policy you would pay the following expenses on
a $1,000 investment, assuming an annual 5% return on assets and election of a
Minimum Guaranteed Annuity Payout Rider** with a ten-year waiting period:
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 28 $ 85 $ 145 $ 307
DGPF International Equity Series............................................. $ 26 $ 80 $ 137 $ 292
Fidelity VIP Overseas Portfolio.............................................. $ 27 $ 82 $ 139 $ 296
T. Rowe Price International Stock Portfolio.................................. $ 28 $ 86 $ 146 $ 309
Select Aggressive Growth Fund................................................ $ 27 $ 83 $ 141 $ 300
Select Capital Appreciation Fund............................................. $ 28 $ 86 $ 146 $ 308
Select Value Opportunity Fund................................................ $ 27 $ 84 $ 143 $ 303
Select Growth Fund........................................................... $ 26 $ 80 $ 137 $ 291
Growth Fund.................................................................. $ 22 $ 69 $ 118 $ 254
Fidelity VIP Growth Portfolio................................................ $ 24 $ 75 $ 128 $ 273
Equity Index Fund............................................................ $ 21 $ 65 $ 112 $ 241
Select Growth and Income Fund................................................ $ 25 $ 76 $ 130 $ 278
Fidelity VIP Equity-Income Portfolio......................................... $ 23 $ 72 $ 123 $ 263
Fidelity VIP II Asset Manager Portfolio...................................... $ 24 $ 74 $ 126 $ 269
Fidelity VIP High Income Portfolio........................................... $ 25 $ 75 $ 129 $ 275
Investment Grade Income Fund................................................. $ 23 $ 70 $ 120 $ 257
Government Bond Fund......................................................... $ 24 $ 74 $ 126 $ 269
Money Market Fund............................................................ $ 21 $ 64 $ 110 $ 237
</TABLE>
* The Policy fee is not deducted after annuitization. No surrender 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.
** If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Policy.
10
<PAGE>
SUMMARY OF THE POLICY FEATURES
INVESTMENT OPTIONS
Purchase payments may be allocated among the variable Sub-Accounts available
under the Policies and a fixed account ("General Account") of the Company
(together "accounts"). The Sub-Accounts are subdivisions of Separate Account
VA-K (the "Separate Account"), a separate account of the Company. 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 or management of investment practices or policies 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 Select Value Opportunity
Value Fund of Allmerica Investment Trust. Four of the portfolios of Fidelity 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, amounts may 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.
11
<PAGE>
In addition, an optional Minimum Guaranteed Annuity Payout Rider is available in
most jurisdictions for a separate monthly charge. See "L. Optional Minimum
Guaranteed Annuity Payout Rider" under "THE VARIABLE ANNUITY POLICIES." If
elected, the Rider guarantees the Annuitant a minimum amount of fixed annuity
lifetime income during the annuity payout phase, subject to certain conditions.
On each Policy anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized should you
exercise the Rider. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rates listed under the Annuity
Option Tables in your Policy. The Minimum Guaranteed Annuity Payout Benefit Base
is equal to the greatest of:
(a) the Accumulated Value; or
(b) the Accumulated Value on the effective date of the Rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Policy anniversary since the Rider
effective date, as determined after positive adjustments have been made for
subsequent payments and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal.
See "THE VARIABLE ANNUITY POLICIES" for information about annuity benefit
payment options, selecting the Annuity Date, and how annuity payments are
calculated.
CANCELLATION RIGHTS
The Policy Owner may cancel 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 cancellation rights, see "RIGHT TO CANCEL OR SURRENDER."
PAYMENT MINIMUMS AND MAXIMUMS
Under the Policies, purchase payments are not limited as to frequency, 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."
12
<PAGE>
A. SURRENDER CHARGE
No sales charge is deducted from purchase payments at the time the payments are
made. However, a surrender charge may be assessed on withdrawals of payments
that have not been invested for nine full years.
B. ANNUAL POLICY FEE
A Policy Fee equal to the lesser of $30 or 3% of Accumulated Value will be
deducted on a Policy Anniversary 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
The Company will deduct a daily charge, equivalent to 1.25% annually, of the
average daily net assets 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.
G. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER CHARGE
Subject to state availability, the Owner may elect the following optional Rider.
A separate monthly charge is made for the Rider which is deducted from the
Accumulated Value at the end of each month within which the Rider has been in
effect. The applicable charge is assessed by multiplying the Accumulated Value
on the last day of each month and on the date the Rider is terminated by 1/12th
of the following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with a ten-year waiting period..... 0.25%
Minimum Guaranteed Annuity Payout Rider with a fifteen-year waiting
period................................................................... 0.15%
</TABLE>
For a description of this Rider, see "D. Optional Minimum Guaranteed Annuity
Payout Rider Charge" under "CHARGES AND DEDUCTIONS," and "L. Optional Minimum
Guaranteed Annuity Payout Rider" under "THE VARIABLE ANNUITY POLICIES."
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 surrender charge, or to redeem a
portion of the Policy's value subject to certain limits and any applicable
surrender charge. There may be tax consequences for surrender or redemptions.
For further information, see "Surrender" and "Partial Redemption," "Surrender
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
13
<PAGE>
proportionally to reflect the amount of all partial redemptions, or (c) 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. Upon death of the Owner,
who is not also the Annuitant, 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 were originally sold by agents of the Company
who are registered representatives of Allmerica Investments, Inc., a
broker-dealer affiliate of the Company. The Policies were also sold by 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 a annuity policies. See "Sales Expense." These policies are no
longer being issued.
14
<PAGE>
PERFORMANCE INFORMATION
Allmerica Financial Life Insurance and Annuity Company first offered ExecAnnuity
Plus '91 to the public in 1991 and ExecAnnuity Plus '93 in 1993. The Company,
however, may advertise "total return" and "average annual total return"
performance information based on (1) the periods that the Sub-Accounts have been
in existence and (2) the periods that the Underlying Funds have been in
existence. Performance results in Tables 1A and 2A are calculated with all
charges assumed to be those applicable to the Policy, the Sub-Accounts and the
Underlying Funds and also assume that the Policy is surrendered at the end of
the applicable period. Performance in Tables 1B and 2B do not include the Policy
fee and assume that the Policy is not surrendered at the end of the applicable
period. Performance results in Tables 1B and 2B do not include the Policy fee
and assume that the Policy is not surrendered at the end of the applicable
period. Both the total return and yield figures are based on historical earnings
and are not intended to indicate future performance. (Performance numbers under
policies issued by First Allmerica Financial Life Insurance Company (A3018-94)
are shown in Appendix B).
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 Sub-Account charges, and expressed as a percentage.
The average annual total return represents the average annual percentage change
in the value of an investment in the Sub-Account over a given period of time. It
represents averaged figures as opposed to the actual performance of a
Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Money Market Fund
refers to the annualized income generated by an investment in the Sub-Account
over a specified 30-day or one-month period. The yield is calculated by assuming
that the income generated by the investment during that 30-day or one-month
period is generated each period over a 12-month period and is shown as a
percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.45%, the $30
annual Policy fee the Underlying Fund charges and the surrender charge which
would be assessed if the investment were completely withdrawn at the end of the
specified period. The calculation is not adjusted to reflect the deduction of
the optional Minimum Guaranteed Annuity Payout Rider charge. Quotations of
supplemental average total returns, as shown in Table 1B, are calculated in
exactly the same manner and for the same periods of time except that it does not
reflect the Policy fee and assumes that the Policy is not surrendered at the end
of the periods shown.
The performance shown in Tables 2A and 2B is calculated in exactly the same
manner as those in Tables 1A and 1B respectively; however, the period of time is
based on the Underlying Fund's lifetime, which may predate the Sub-Account's
inception date. These performance calculations are based on the assumption that
the Sub-Account corresponding to the applicable Underlying Fund was actually in
existence throughout the stated period and that the contractual charges and
expenses during that period were equal to those currently assessed under the
Policy.
15
<PAGE>
For more detailed information about these performance calculations, including
actual formulas, see the SAI.
Performance information for any Sub-Account reflects only the performance of a
hypothetical investment in the Sub-Account during the time period on which the
calculations are based. Performance information should be considered in light of
the investment objectives and policies and risk characteristics of the
Underlying 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.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad-based indices and performance from
independent sources may be used to illustrate the performance of certain policy
features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
16
<PAGE>
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
EXECANNUITY PLUS '91 AND '93
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED 5 INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 YEARS SUB-ACCOUNT
- ------------------------------------------------------------- ------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Select International Equity Fund............................. 5/3/94 6.63% N/A 9.76%
DGPF International Equity Series............................. 5/6/93 0.80% 8.14% 9.69%
Fidelity VIP Overseas Portfolio.............................. 9/5/91 3.02% 7.26% 8.19%
T. Rowe Price International Stock Portfolio.................. 5/1/95 6.11% N/A 8.13%
Select Aggressive Growth Fund................................ 9/16/92 0.89% 12.52% 15.36%
Select Capital Appreciation Fund............................. 4/30/95 4.12% N/A 17.51%
Select Value Opportunity Fund................................ 5/2/93 -4.23% 10.69% 12.59%
Select Growth Fund........................................... 9/16/92 25.33% 19.80% 16.55%
Growth Fund.................................................. 9/4/91 9.34% 16.55% 14.46%
Fidelity VIP Growth Portfolio................................ 9/5/91 29.18% 19.24% 18.72%
Equity Index Fund............................................ 9/4/91 18.32% 21.05% 17.32%
Select Growth and Income Fund................................ 9/16/92 6.60% 15.46% 13.54%
Fidelity VIP Equity-Income Portfolio......................... 9/5/91 1.79% 16.26% 16.39%
Fidelity VIP II Asset Manager Portfolio...................... 5/4/94 5.34% N/A 11.52%
Fidelity VIP High Income Portfolio........................... 9/24/91 -12.63% 6.34% 10.80%
Investment Grade Income Fund................................. 9/5/91 -1.33% 4.49% 6.61%
Government Bond Fund......................................... 9/8/91 -1.54% 3.59% 5.16%
Money Market Fund............................................ 9/9/91 -3.52% 2.80% 2.97%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED 5 INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 YEARS SUB-ACCOUNT
- ------------------------------------------------------------- ------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Select International Equity Fund............................. 5/3/94 14.82% N/A 10.68%
DGPF International Equity Series............................. 5/6/93 8.75% 8.97% 10.24%
Fidelity VIP Overseas Portfolio.............................. 9/5/91 11.14% 8.14% 8.48%
T. Rowe Price International Stock Portfolio.................. 5/1/95 14.20% N/A 9.52%
Select Aggressive Growth Fund................................ 9/16/92 8.98% 13.36% 15.77%
Select Capital Appreciation Fund............................. 4/30/95 12.25% N/A 18.67%
Select Value Opportunity Fund................................ 5/2/93 3.37% 11.49% 13.12%
Select Growth Fund........................................... 9/16/92 33.51% 20.41% 16.90%
Growth Fund.................................................. 9/4/91 17.62% 17.31% 14.80%
Fidelity VIP Growth Portfolio................................ 9/5/91 37.50% 20.01% 19.06%
Equity Index Fund............................................ 9/4/91 26.50% 21.63% 17.54%
Select Growth and Income Fund................................ 9/16/92 14.77% 16.15% 13.92%
Fidelity VIP Equity-Income Portfolio......................... 9/5/91 10.03% 17.09% 16.75%
Fidelity VIP II Asset Manager Portfolio...................... 5/4/94 13.41% N/A 12.29%
Fidelity VIP High Income Portfolio........................... 9/24/91 -5.69% 7.25% 11.05%
Investment Grade Income Fund................................. 9/5/91 6.43% 5.43% 6.89%
Government Bond Fund......................................... 9/8/91 6.14% 4.48% 5.40%
Money Market Fund............................................ 9/9/91 4.00% 3.72% 3.24%
</TABLE>
17
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS OR
FOR YEAR SINCE
UNDERLYING FUND ENDED 5 INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS IF LESS
- -------------------------------------------------------- --------------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Select International Equity Fund........................ 5/2/94 6.63% N/A 9.75%
DGPF International Equity Series........................ 10/29/92 0.80% 8.14% 9.13%
Fidelity VIP Overseas Portfolio......................... 1/28/87 3.02% 7.26% 8.41%
T. Rowe Price International Stock Portfolio............. 3/31/94 6.11% N/A 7.21%
Select Aggressive Growth Fund........................... 8/21/92 0.89% 12.52% 16.02%
Select Capital Appreciation Fund........................ 4/28/95 4.12% N/A 17.48%
Select Value Opportunity Fund 4/30/93 -4.23% 10.69% 12.57%
Select Growth Fund...................................... 8/21/92 25.33% 19.80% 17.14%
Growth Fund............................................. 4/29/85 9.34% 16.55% 15.18%
Fidelity VIP Growth Portfolio........................... 10/9/86 29.18% 19.24% 17.51%
Equity Index Fund....................................... 9/28/90 18.32% 21.05% 18.84%
Select Growth and Income Fund........................... 8/21/92 6.60% 15.46% 13.50%
Fidelity VIP Equity-Income Portfolio.................... 10/9/86 1.79% 16.26% 13.73%
Fidelity VIP II Asset Manager Portfolio................. 9/6/89 5.34% 9.47% 10.91%
Fidelity VIP High Income Portfolio...................... 9/19/85 -12.63% 6.34% 9.39%
Investment Grade Income Fund............................ 4/29/85 -1.33% 4.49% 7.52%
Government Bond Fund.................................... 8/26/91 -1.54% 3.59% 4.95%
Money Market Fund....................................... 4/29/85 -3.52% 2.80% 4.08%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEE)
<TABLE>
<CAPTION>
10 YEARS OR
FOR YEAR SINCE
UNDERLYING FUND ENDED 5 INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS IF LESS
- -------------------------------------------------------- --------------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Select International Equity Fund........................ 5/2/94 14.82% N/A 10.67%
DGPF International Equity Series........................ 10/29/92 8.75% 8.97% 9.54%
Fidelity VIP Overseas Portfolio......................... 1/28/87 11.14% 8.14% 8.52%
T. Rowe Price International Stock Portfolio............. 3/31/94 14.20% N/A 8.09%
Select Aggressive Growth Fund........................... 8/21/92 8.98% 13.36% 16.42%
Select Capital Appreciation Fund........................ 4/28/95 12.25% N/A 18.64%
Select Value Opportunity Fund........................... 4/30/93 3.37% 11.49% 13.11%
Select Growth Fund...................................... 8/21/92 33.51% 20.41% 17.47%
Growth Fund............................................. 4/29/85 17.62% 17.31% 15.35%
Fidelity VIP Growth Portfolio........................... 10/9/86 37.50% 20.01% 17.72%
Equity Index Fund....................................... 9/28/90 26.50% 21.63% 18.98%
Select Growth and Income Fund........................... 8/21/92 14.77% 16.15% 13.88%
Fidelity VIP Equity-Income Portfolio.................... 10/9/86 10.03% 17.09% 13.98%
Fidelity VIP II Asset Manager Portfolio................. 9/6/89 13.41% 10.21% 11.34%
Fidelity VIP High Income Portfolio...................... 9/19/85 -5.69% 7.25% 9.50%
Investment Grade Income Fund............................ 4/29/85 6.43% 5.43% 7.61%
Government Bond Fund.................................... 8/26/91 6.14% 4.48% 5.19%
Money Market Fund....................................... 4/29/85 4.00% 3.72% 4.11%
</TABLE>
18
<PAGE>
DESCRIPTION OF THE COMPANY, THE SEPARATE ACCOUNT, THE TRUST,
FIDELITY VIP, FIDELITY VIP II, T. ROWE PRICE AND DGPF
THE COMPANY. Allmerica Financial Life Insurance and Annuity 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, 1998, the Company had over $14
billion in assets and over $26 billion of life insurance in force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an 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 among the five oldest life insurance companies
in America. As of December 31, 1998, First Allmerica and its subsidiaries
(including the Company) had over $27 billion in combined assets and over $48
billion in life insurance in force.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE SEPARATE ACCOUNT. The Separate 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 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 Board of Directors of the Company authorized the Separate Account 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 or management of investment practices or policies of the Variable
Account or the Company by the SEC.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts.
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, to serve as an investment medium for assets of various
separate accounts established by the Company or other 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 Select
Value Opportunity 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
19
<PAGE>
investment performance of another Fund. Shares of the Trust are not offered to
the general public but solely to such variable accounts.
Allmerica Financial Investment Management Services, Inc. serves as the
investment adviser of the Trust and 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. As part of their
operating expenses, the Portfolios of Fidelity VIP 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 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 Policies: the T. Rowe Price
International Stock Portfolio. One of its affiliates, T. Rowe Price Associates,
Inc., serves as the Sub-Adviser to the Select Capital Appreciation Fund.
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 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.
20
<PAGE>
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. 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.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity 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 of the Trust
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.
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
money market 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 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 INDIVIDUAL 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 Trustees have overall
responsibility for the supervision of the affairs of the Trust. The Trustees
have entered into an agreement (" Management Agreement") with Allmerica
Financial Investment Management Services, 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>
<S> <C> <C>
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Growth Fund First $250 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Government Bond Fund, the 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 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
23
<PAGE>
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.
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 FUNDS -- For
managing investments and business affairs, each Portfolio pays a monthly
management 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 fee for each fund is calculated by adding a group fee rate to an individual
fund fee rate, multiplying the result by the fund's monthly average net assets,
and dividing by twelve.
The Fidelity VIP High Income Portfolio's annual fee rate is made up of the sum
of two components:
1. A group fee rate based on the 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 the total assets under management increase.
2. An individual fund fee rate of 0.45% for the Fidelity VIP High Income
Portfolio.
The annual 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 average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.52%, and
drops as the total assets under management increase.
2. An individual fund 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.
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.
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 the largest no-load international mutual fund asset managers with
approximately $32 billion (as of December 31, 1998) under management in its
offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. 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
based on the average daily net assets of the Series as follows: 0.85% on the
first $500 million, 0.80% on the next $500 million, 0.75% on the next $1,500
million and 0.70% on net assets in excess of $2,500 million.
24
<PAGE>
WHAT IS AN ANNUITY?
In general, an annuity is a policy designed to provide a retirement income in
the form of periodic annuity payments for the lifetime of the purchaser or an
individual chosen by the purchaser. The retirement income payments are called
"annuity payments" and the individual receiving the payments is called the
"Annuitant." Annuity 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
how 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. SURRENDER CHARGE
No charge for sales expense is deducted from purchase payments at the time the
payments are made. However, a surrender 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 surrender 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 invested in the Policy for more than nine years;
and (3) the amount available under the Free Withdrawal Provision. See "Free
Withdrawal Amounts" below. For purposes of determining the amount of any
surrender charge, surrenders will be deemed to be taken first from Free
Withdrawal Amounts and then Old Payments, and finally from New Payments. Free
Withdrawal Amounts and Old Payments may be withdrawn from the Policy at any time
without the imposition of a surrender charge. If a withdrawal is attributable
all or in part to New Payments, a surrender charge may apply.
Subject to state law, no surrender 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; 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.
25
<PAGE>
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.
Any elimination of or reduction in the amount of duration of the surrender
charge will not discriminate unfairly among purchasers. The Company will not
make any changes to the charge where prohibited by law.
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 surrender charge may be imposed. The amount of the charge will depend
upon the number of years that any New Payments to which the withdrawal is
attributed have remained credited under the Policy. Amounts withdrawn are then
deducted first from Old Payments. Thereafter, for the purpose of calculating
surrender charges for New Payments, all amounts withdrawn are assumed to be
deducted first from the oldest New Payment and then from the next oldest New
Payment and so on, until all New Payments have been exhausted pursuant to the
first-in-first-out ("FIFO") method of accounting. (See "FEDERAL TAX
CONSIDERATIONS" for a discussion of how withdrawals are treated for income tax
purposes.)
The Surrender Charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM DATE
OF
PAYMENT TO DATE CHARGE AS PERCENTAGE OF
OF NEW PAYMENTS
WITHDRAWAL 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 surrender charge exceed a maximum limit
of 8% of total gross New Payments. Such total charge equals the aggregate of all
applicable surrender charges for surrender, partial redemptions, and
annuitization.
FREE WITHDRAWAL AMOUNTS. In each calendar year, the Company will waive the
surrender 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 surrender 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).
26
<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 surrender charge, if any,
until the entire Free Withdrawal Amount has been redeemed.
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
Policy according to the Company's life expectancy distribution ("LED") option by
returning a properly signed LED request form to the Principal Office.
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under policies
issued in Hawaii and New York, the LED option will terminate automatically on
the maximum Annuity Date permitted under the Policy, at which time an Annuity
Option must be selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge based on the
Owner's then life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) The numerator of the fraction is 1 (one) and the denominator of
the fraction is the remaining life expectancy of the Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during the year. Under the Company's LED option, the
amount withdrawn from the 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. Where the Owner is a trust or
other nonnatural person, the Owner may elect the LED option based on the
Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Policy and be subject to a 10% federal tax
penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Policies in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the amount of the Company's LED amount, a surrender charge may
apply to the amount in excess of the LED amount.)
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time.
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 surrender 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 surrender 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 surrender charge on New Payments.
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<PAGE>
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 surrender charge. Any such reallocation will be at
the unit values for the Sub-Accounts as of the valuation date on which a
written, signed request is received at the Principal Office.
For further information on surrender and 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."
CHARGE AT THE TIME ANNUITY BENEFIT PAYMENTS BEGIN. If the Owner chooses a
period certain option (Option V or the comparable fixed annuity option), a
surrender 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 surrender 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 surrender 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 which may
include amounts derived from mortality and expense risk charges. There is no
additional charge to Owners or to the Separate Account. Any surrender 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 in total 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.
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C. POLICY FEE
A $30 Policy fee currently is deducted on the Policy anniversary date and upon
full surrender of the Policy if the Accumulated Value on any of these dates 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.
D. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT CHARGE
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider that may be elected by the Owner. A separate monthly charge
is made for the Rider. On the last day of each month and on the date the Rider
is terminated, a charge equal to 1/12th of the applicable annual rate (see table
below) is made against the Accumulated Value of the Policy at that time. The
charge is made through a pro-rata reduction of the Accumulated Value of the
Sub-Accounts and the Fixed Account (based on the relative value that the
Accumulation Units of the Sub-Accounts and the dollar amounts in the Fixed
Account bear to the total Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the Rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period................ 0.25%
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period............ 0.15%
</TABLE>
For a description of the Rider, see "L. Optional Minimum Guaranteed Annuity
Payout Rider" under "THE VARIABLE ANNUITY POLICIES," above.
E. ANNUAL CHARGES AGAINST SEPARATE ACCOUNT ASSETS
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a daily charge against
the assets of each Sub-Account to compensate for certain mortality and expense
risks which it has assumed. 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.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's assets. This charge may not be increased. Since
mortality and expense risks involve future contingencies which are not subject
to precise determination in advance, it is not feasible to identify specifically
the portion of the charge which is applicable to each. The Company estimates
that a reasonable allocation might be .80% for mortality risk and .45% for
expense risk.
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<PAGE>
ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge at an annual rate of 0.20% 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, it reserves the right to assess a
charge, guaranteed never to exceed $25, to reimburse it for the costs of
processing transfers. 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.
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
prospectuses and SAIs of the Underlying Funds contain additional information
conderning 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.
Policy Owners may direct any inquiries to Annuity Client Services, Allmerica
Financial Life Insurance and Annuity Company, 440 Lincoln Street, Worcester,
Massachusetts 01653, telephone 1-800-533-7881.
A. PURCHASE PAYMENTS
Purchase 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 payment is 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 not completed within five business
days of the Company's receipt of the initial payment, 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 on the basis of accumulation unit value next determined after
receipt.
Payments may be made to the Policy at any time prior to the Annuity Date.
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
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<PAGE>
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, 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. 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 may 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 or PIN number. All transfer
instructions by telephone are tape recorded.
B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY
An individual purchasing a Policy intended to qualify as an IRA may cancel the
Policy at any time within ten days after receipt of the Policy and receive a
refund. In order to cancel the Policy, the Owner must mail or deliver the Policy
to the agent through whom the Policy 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 Policy for
cancellation to be effective.
Within seven days, the Company will provide a refund equal to gross payments
received. In some states, however, the refund may equal the greater of (1) gross
payments, or (2) the difference between the payment received and any amount
allocated to the Separate Account plus the Accumulated Value of the Sub-Accounts
plus any amounts deducted under the Policy or by the Underlying Funds for taxes,
charges or fees. The "Right to Examine" provision on the cover of the Policy
will specifically indicate whether the refund will be equal to gross payments or
equal to the greater of (1) or (2) as set forth above.
The liability of the Separate Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO CANCEL ALL OTHER POLICIES
An Owner may cancel the Policy at any time within ten days after receipt of the
Policy (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the payment received, including fees, and any amount
allocated to the Separate Account, and (2) the Accumulated Value of amounts
allocated to the Separate Account as of the date the request is received. If the
Policy was purchased as an IRA or issued in a state that requires a full refund
of the initial payment(s), the IRA cancellation right described above will be
used. At the time the Policy is issued, the "Right to Examine" provision on the
cover of the Policy will specifically indicate what the refund will be and the
time period allowed to exercise the right to cancel.
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 from the
Sub-Account to 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.
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<PAGE>
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 these additional 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 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 or change the option is
received by the Company. As such, subsequent payments allocated in a manner
different from the percentage allocation mix in effect on the date the payment
is received will be allocated in accordance with the existing mix on the next
scheduled date unless the Owner's timely request to change the allocation mix is
received by the Company.
The Company reserves the right to limit the number of Sub-Accounts that may be
used for automatic transfers and rebalancing, and to discontinue either option
upon advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Policy year under that
request 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. Either option may
be elected at no additional charge when the Policy is purchased or at a later
date.
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<PAGE>
E. SURRENDER
At any time prior to the Annuity Date, an Owner may surrender the Policy and
receive its Surrender Value. The Owner must return the Policy and a signed,
written request for surrender, satisfactory to the Company to the Principal
Office. The Surrender Value will be calculated 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 surrender 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 annuitized under a commutable period
certain option (as specified in Annuity Option V) may be surrendered. The amount
payable commuted value of any unpaid installments, computed on the basis of the
assumed interest rate incorporated in such annuity benefit payments. No
surrender charge is imposed after the Annuity Date.
Any amount surrendered 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 Company reserves the right 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."
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 surrender 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 a minimum 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.
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<PAGE>
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 below 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, (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 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.
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<PAGE>
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 under an IRA) 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
The Owner's spouse, if named as sole beneficiary ("spousal beneficiary"), may by
written request continue the Policy in force rather than receive the death
benefit. 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.
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.
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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 Owner selects the Annuity Date. To the extent permitted by state law, the
Annuity Date may be the first day of any month (1) before the Annuitant's 85th
birthday, if the Annuitant's age 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 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. In no event will the maximum
annuitization age exceed 90. The Code and the terms of qualified plans impose
limitations on the age at which annuity benefit payments may commence and the
type of annuity option selected. See "FEDERAL TAX CONSIDERATIONS" for further
information.
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.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Policy.
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 periodically 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 only during the
lifetime of the payee. It would be possible under this option for the payee to
receive only one annuity benefit payment if the payee dies prior to the due date
of the second annuity benefit payment, two annuity benefit payments if the payee
dies before the due date of the third annuity benefit payment, and so on.
Payments will continue, however, during the lifetime of the payee, no matter how
long he or she lives.
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OPTION III -- UNIT REFUND VARIABLE LIFE ANNUITY. A variable annuity payable
periodically 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 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 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
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
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, if specifically requested 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 Company deducts a charge for
annuity rate guarantees, which includes a factor for mortality risks. Although
not contractually required to do so, the Company currently follows a practice of
permitting persons receiving payments under 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 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. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
An optional Minimum Guaranteed Annuity Payout Rider is available for a separate
monthly charge. The Minimum Guaranteed Annuity Payout Rider guarantees a minimum
amount of fixed annuity lifetime income during the annuity payout phase, subject
to the conditions described below. On each Policy anniversary a Minimum
Guaranteed Annuity Payout Benefit Base (less any applicable premium taxes) is
determined. The Minimum Guaranteed Annuity Payout Benefit Base is the value that
will be annuitized should you exercise the Rider. In order to exercise the
Rider, a fixed annuitization option involving a life contingency must be
selected. Annuitization under this Rider will occur at the guaranteed annuity
purchase rates listed under the Annuity Option Tables in the Policy. The Minimum
Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
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(c) the highest Accumulated Value on any Policy anniversary since the Rider
effective date, as determined after positive adjustments have been made
for subsequent payments and negative adjustments have been made for
subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
---------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- The Owner may elect the Minimum Guaranteed Annuity Payout Rider at Policy
issue or at any time thereafter, however, if the Rider is not elected
within thirty days after Policy issue or within thirty days after a Policy
anniversary date, the effective date of the Rider will be the following
Policy anniversary date.
- The Owner may not elect a Rider with a ten-year waiting period if at the
time of election the Annuitant has reached his or her 78th birthday. The
Owner may not elect a Rider with a fifteen-year waiting period if at the
time of election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider
within thirty days after any Policy anniversary following the expiration
of a ten or fifteen-year waiting period from the effective date of the
Rider.
- The Owner may only annuitize under a fixed annuity payout option involving
a life contingency as provided under "K. Description of Variable Annuity
Payout Options."
- The Owner may only annuitize at the guaranteed annuity purchase rates
listed under the Annuity Option Tables in the Policy.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER.
- The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider
prior to the seventh Policy anniversary after the effective date of the
Rider, unless such termination occurs on or within thirty days after any
Policy anniversary and in conjunction with the repurchase of a Minimum
Guaranteed Annuity Payout Rider with a waiting period of equal or greater
length at its then current price, if available.
- After the seventh Policy anniversary from the effective date of the Rider
the Owner may terminate the Rider at any time.
- The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of
a Policy anniversary.
- Other than in the event of a repurchase, once terminated the Rider may not
be purchased again.
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- The Rider will terminate upon surrender of the Policy or the date that a
death benefit is payable if the Policy is not continued under "H. The
Spouse of the Owner as Beneficiary" (see "THE VARIABLE ANNUITY POLICIES").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider for individuals based on a
variety of assumptions, including varying rates of return on the value of the
Policy during the accumulation phase, annuity payout periods, annuity payout
options and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed
rates of return are for purposes of illustration only and are not intended as a
representation of past or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of a Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With 120 Monthly Payments Guaranteed. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that would be received under the Minimum Guaranteed Annuity Payout Rider. The
minimum guaranteed benefit base amounts are the values that will be annuitized.
Minimum guaranteed annual income values are based on a fixed annuity payout.
<TABLE>
<CAPTION>
MINIMUM
POLICY GUARANTEED MINIMUM
ANNIVERSARY BENEFIT GUARANTEED
AT EXERCISE BASE ANNUAL INCOME(1)
- --------------- ----------- ----------------
<S> <C> <C>
10 $ 162,889 $ 12,153
15 $ 207,892 $ 17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With 120 Monthly Payments Guaranteed are available. See "K.
Description of Variable Annuity Payout Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
M. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a 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.
N. COMPUTATION OF POLICY VALUES AND ANNUITY BENEFIT PAYMENTS
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "M. Norris Decision" above) and
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<PAGE>
age of the Annuitant, and the value of the amount applied under the annuity
option ("annuity value"). The Policy provides annuity rates that determine the
dollar amount of the first periodic payment under each variable annuity option
for each $1,000 of applied value. From time to time, the Company may offer its
Owners both fixed and variable annuity rates more favorable than those contained
in the Policy. Any such rates will be applied uniformly to all Owners of the
same class.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- For life annuity options and noncommutable period certain options of ten
years or more, the dollar amount is determined by multiplying (1) the
Accumulated Value applied under that option (after application of any
Market Value Adjustment and less premium tax, if any) divided by $1,000,
by (2) the applicable amount of the first monthly payment per $1,000 of
value.
- For commutable period certain options and any period certain option of
less than ten years, the dollar amount is determined by multiplying (1)
the Surrender Value less premium taxes, if any, applied under that option
(after application of any Market Value Adjustment and less premium tax, if
any) divided by $1,000, by (2) the applicable amount of the first monthly
payment per $1,000 of value.
- For a death benefit annuity, the annuity value will be the amount of the
death benefit.
THE FIRST PERIODIC ANNUITY BENEFIT PAYMENT IS BASED UPON THE ACCUMULATED VALUE
AS OF A DATE NOT MORE THAN FOUR WEEKS PRECEDING THE DATE THAT THE FIRST ANNUITY
BENEFIT PAYMENT IS DUE. THE COMPANY TRANSMITS VARIABLE ANNUITY BENEFIT PAYMENTS
FOR RECEIPT BY THE PAYEE BY THE FIRST OF A MONTH. VARIABLE ANNUITY BENEFIT
PAYMENTS ARE CURRENTLY BASED ON UNIT VALUES AS OF THE 15TH DAY OF THE PRECEDING
MONTH.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account initially was set at
$1.00. The value of an Annuity Unit under a Sub-Account on any Valuation Date
thereafter is equal to the value of such unit on the immediately preceding
Valuation Date, multiplied by the net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Policy.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected Sub-Account(s). The
dollar amount of each subsequent variable annuity benefit payment is determined
by multiplying the fixed number of Annuity Units (derived from the dollar amount
of the first payment, as described above) with respect to a Sub-Account by the
value of an annuity unit of that Sub-Account on the applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
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For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "L.
Optional Minimum Guaranteed Annuity Payout Rider," above.
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 contracts under Section 817(h) of
the Code. The regulations prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract
and therefore, the income on a policy, for any taxable year of an owner, would
be treated as ordinary income received or accrued by the owner. It is
anticipated that the Series of Delaware Group Premium Fund, Inc., in this
Contract 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.
In addition, traditionally in order for a variable annuity policy to qualify for
tax deferral, the Company, and not the variable policy owner, must be considered
to be the owner for tax purposes of the assets in the segregated asset account
underlying the variable annuity contract. In certain circumstances, however,
variable annuity
41
<PAGE>
policy owners may now be considered the owners of these assets for federal
income tax purposes. Specifically, the IRS has stated in published rulings that
a variable annuity policy owner may be considered the owner of segregated
account assets if the policy owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. The
Treasury Department has also announced, in connection with the issuance of
regulations concerning investment diversification, that those regulations do not
provide guidance governing the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states that guidance would
be issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular sub-accounts without being treated as
owners of the underlying assets." As of the date of this Prospectus, no such
guidance has been issued. The Company therefore additionally reserves the right
to modify the Policy as necessary in order to attempt to prevent a contract
owner from being considered the owner of a pro rata share of the assets of the
segregated asset account underlying the variable annuity policies.
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 "Nonnatural Owners" below), be considered an annuity
policy under Section 72 of the Code. Please note, however, if the Owner chooses
an Annuity Date beyond the Annuitant's 85th birthday, it is possible that the
Policy may not be considered an annuity for tax purposes and therefore, the
Owner may be taxed on the annual increase in Accumulated Value. The Owner should
consult tax and financial advisers for more information. This section governs
the taxation of annuities. The following discussion concerns annuities subject
to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the 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
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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 any
LED-type option prior to age 59 1/2. Subsequent Private Letter Rulings, however,
have treated LED-type withdrawal programs as effectively avoiding the 10%
penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the 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.
NONNATURAL OWNERS. As a general rule, deferred annuity policies owned by
"nonnatural 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.
43
<PAGE>
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 Policy. 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 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 cancel the Policy as described in this Prospectus. See "Right to Cancel 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
44
<PAGE>
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.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Series. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her policy, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting Policy Value. (Certain transactions made
under recurring payment plans such as Dollar Cost Averaging may in the future be
confirmed quarterly rather than by immediate confirmations.) The Owner should
review the information in all statements carefully. All errors or corrections
must be reported to the Company immediately to assure proper crediting to the
Policy. The Company will assume that all transactions are accurately reported on
confirmation statements and quarterly/ annual statements unless the Owner
notifies the Principal Office in writing within 30 days after receipt of the
statement.
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.
45
<PAGE>
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. 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.
46
<PAGE>
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
Policy 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.
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
or to which the assets of the Separate Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets of that relates to the Separate
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently
47
<PAGE>
available information. However, there can be no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have material adverse effect
on the Company. The Company does not believe that it has material exposure to
contingencies related to the Year 2000 issue for the products it has sold.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project, through December 31, 1998. The total remaining cost of
the project is estimated between $20-30 million.
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.
48
<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 surrender 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
POLICY NO. A3018-91 (AND STATE VARIATIONS THEREOF)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
POLICY NO. A3018-94
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
If your Policy is issued on Form No. A3018-91 or Form No. A3018-94, your Policy
is substantially similar to the Policy described in this Prospectus (A3018-93),
except as follows:
1. (For Owners of A3018-94 only, the following is added:) The issuer of the
policy is First Allmerica rather than Allmerica Financial. First Allmerica,
organized under the laws of Massachusetts in 1844, is among the five oldest life
insurance companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries had over $27 billion in combined assets and over $48 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance company known as State Mutual Life Assurance
Company of America to a stock life insurance company and adopted its present
name. First Allmerica is a wholly owned subsidiary of Allmerica Financial
Corporation ("AFC"). First Allmerica's principal office ("Principal Office") is
located at 440 Lincoln Street, Worcester MA 01653, Telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
First Allmerica is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
2. The Owner, if a natural person, and the Annuitant must be the same under
Form A3018-94 and joint Owners are not permitted. Under A3018-91 and A3018-93
the Owner and the Annuitant may be different and joint Owners are permitted if
one of the two joint Owners is also the Annuitant.
3. The minimum interest rate credited to amounts allocated to the General
Account respecting A3018-93 and A3018-94 is 3% compounded annually. For A3018-91
the minimum interest rate guarantees are 5% compounded annually for the first
five Policy years, 4% for the next five Policy years and 3.5% thereafter.
4. The stepped-up death benefit under A3018-91 and A3018-94 applies to the
most recent fifth year Policy anniversary and gross payments are simply reduced
by subsequent withdrawals by subtracting the amount of the withdrawal from the
total gross payments. The stepped-up death benefit under A3018-93 applies to the
most recent fifth year Policy anniversary and the guaranteed death benefit is
reduced proportionately to reflect partial withdrawals (in the same proportion
that the Accumulated Value was reduced by the withdrawals).
5. Under A3018-91 and A3018-94, the Free Withdrawal Amount is equal to 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 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).
6. The transfer provisions of A3018-91 are identical to those of A3018-93.
Under A3018-94, the General Account restrictions described in the third
paragraph of "D. Transfer Privilege" are deleted and replaced with the
following:
B-1
<PAGE>
Except for General Account transfers made under the automatic transfer option
(Dollar Cost Averaging), transfers from the General Account will only be
permitted if there has been a least a ninety (90) day period since the last
transfer from the General Account and the amount transferred from the General
Account in each transfer does not exceed the lesser of $100,000 or 25% of the
Accumulated Value under the Policy.
7. Because of the differences in the amount of the Free Withdrawal (see 4.
above), the following expense examples apply to Owners of A3018-91 and A3018-94
and should be referred to rather than examples (1)(a) and (1)(b) on page 9 of
this Prospectus:
(1)(a) If, at the end of the applicable period, you surrender your Policy or
annuitize* under a commutable period certain option or a noncommutable period
certain option of less than ten years, you would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets and no rider:**
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 97 $ 140 $ 177 $ 282
DGPF International Equity Series............................................. $ 97 $ 138 $ 173 $ 275
Fidelity VIP Overseas Portfolio.............................................. $ 96 $ 137 $ 171 $ 271
T. Rowe Price International Stock Portfolio.................................. $ 98 $ 141 $ 178 $ 285
Select Aggressive Growth Fund................................................ $ 97 $ 138 $ 173 $ 275
Select Capital Appreciation Fund............................................. $ 97 $ 141 $ 178 $ 284
Select Value Opportunity Fund................................................ $ 97 $ 139 $ 175 $ 278
Select Growth Fund........................................................... $ 96 $ 135 $ 169 $ 266
Growth Fund.................................................................. $ 92 $ 124 $ 150 $ 228
Fidelity VIP Growth Portfolio................................................ $ 94 $ 130 $ 160 $ 248
Equity Index Fund............................................................ $ 91 $ 120 $ 143 $ 215
Select Growth and Income Fund................................................ $ 94 $ 131 $ 162 $ 253
Fidelity VIP Equity-Income Portfolio......................................... $ 93 $ 127 $ 155 $ 238
Fidelity VIP II Asset Manager Portfolio...................................... $ 93 $ 129 $ 158 $ 244
Fidelity VIP High Income Portfolio........................................... $ 94 $ 130 $ 161 $ 250
Investment Grade Income Fund................................................. $ 92 $ 125 $ 152 $ 231
Government Bond Fund......................................................... $ 93 $ 129 $ 158 $ 244
Money Market Fund............................................................ $ 90 $ 119 $ 141 $ 210
</TABLE>
B-2
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your Policy
or annuitize* under a commutable period certain option or noncommutable period
certain option of less than ten years, you would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets and election of a Minimum
Guaranteed Annuity Payout Rider** with a ten-year waiting period:
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 100 $ 148 $ 189 $ 307
DGPF International Equity Series............................................. $ 99 $ 146 $ 186 $ 300
Fidelity VIP Overseas Portfolio.............................................. $ 99 $ 144 $ 184 $ 296
T. Rowe Price International Stock Portfolio.................................. $ 100 $ 149 $ 191 $ 309
Select Aggressive Growth Fund................................................ $ 99 $ 146 $ 186 $ 300
Select Capital Appreciation Fund............................................. $ 100 $ 148 $ 190 $ 308
Select Value Opportunity Fund................................................ $ 99 $ 146 $ 187 $ 303
Select Growth Fund........................................................... $ 98 $ 143 $ 181 $ 291
Growth Fund.................................................................. $ 94 $ 132 $ 163 $ 254
Fidelity VIP Growth Portfolio................................................ $ 96 $ 137 $ 172 $ 273
Equity Index Fund............................................................ $ 93 $ 128 $ 156 $ 241
Select Growth and Income Fund................................................ $ 97 $ 139 $ 175 $ 278
Fidelity VIP Equity-Income Portfolio......................................... $ 95 $ 134 $ 167 $ 263
Fidelity VIP II Asset Manager Portfolio...................................... $ 96 $ 136 $ 170 $ 269
Fidelity VIP High Income Portfolio........................................... $ 97 $ 138 $ 173 $ 275
Investment Grade Income Fund................................................. $ 95 $ 133 $ 164 $ 257
Government Bond Fund......................................................... $ 96 $ 136 $ 170 $ 269
Money Market Fund............................................................ $ 93 $ 127 $ 154 $ 237
</TABLE>
8. First Allmerica Financial Life Insurance Company first offered
ExecAnnuity Plus to the public in 1994.
B-3
<PAGE>
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
EXECANNUITY PLUS '94
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ---------------------------------------- ----------- ---------- ---------- ------------
Select International Equity Fund........ 5/3/94 6.63% N/A 9.76%
<S> <C> <C> <C> <C>
DGPF International Equity Series........ 4/20/94 0.82% N/A 8.26%
Fidelity VIP Overseas Portfolio......... 4/20/94 3.03% N/A 7.18%
T. Rowe Price International Stock
Portfolio.............................. 5/1/95 6.08% N/A 8.10%
Select Aggressive Growth Fund........... 4/20/94 0.87% N/A 14.90%
Select Capital Appreciation Fund........ 4/30/95 4.10% N/A 17.49%
Select Value Opportunity Fund........... 4/20/94 -4.25% N/A 12.81%
Select Growth Fund...................... 4/20/94 25.30% N/A 23.45%
Growth Fund............................. 4/20/94 9.40% N/A 19.07%
Fidelity VIP Growth Portfolio........... 4/20/94 29.18% N/A 22.88%
Equity Index Fund....................... 4/21/94 18.32% N/A 23.59%
Select Growth and Income Fund........... 4/20/94 6.60% N/A 17.47%
Fidelity VIP Equity-Income Portfolio.... 4/20/94 1.81% N/A 17.87%
Fidelity VIP II Asset Manager
Portfolio.............................. 5/11/94 5.35% N/A 11.79%
Fidelity VIP High Income Portfolio...... 4/20/94 -12.66% N/A 7.34%
Investment Grade Income Fund............ 4/21/94 -1.29% N/A 5.66%
Government Bond Fund.................... 4/20/94 -1.53% N/A 4.34%
Money Market Fund....................... 4/10/94 -3.54% N/A 2.84%
</TABLE>
B-4
<PAGE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEES)
<TABLE>
<CAPTION>
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 5 YEARS SUB-ACCOUNT
- ----------------------------------------- ----------- ---------- ---------- ------------
Select International Equity Fund......... 5/3/94 14.82% N/A 10.68%
<S> <C> <C> <C> <C>
DGPF International Equity Series......... 4/20/94 8.76% N/A 9.14%
Fidelity VIP Overseas Portfolio.......... 4/20/94 11.14% N/A 8.11%
T. Rowe Price International Stock
Portfolio............................... 5/1/95 14.20% N/A 9.52%
Select Aggressive Growth Fund............ 4/20/94 8.98% N/A 15.76%
Select Capital Appreciation Fund......... 4/30/95 12.25% N/A 18.67%
Select Value Opportunity Fund............ 4/20/94 3.37% N/A 13.64%
Select Growth Fund....................... 4/20/94 33.51% N/A 24.08%
Growth Fund.............................. 4/20/94 17.62% N/A 19.79%
Fidelity VIP Growth Portfolio............ 4/20/94 37.50% N/A 23.65%
Equity Index Fund........................ 4/21/94 26.50% N/A 24.19%
Select Growth and Income Fund............ 4/20/94 14.77% N/A 18.19%
Fidelity VIP Equity-Income Portfolio..... 4/20/94 10.04% N/A 18.70%
Fidelity VIP II Asset Manager
Portfolio............................... 5/11/94 13.41% N/A 12.56%
Fidelity VIP High Income Portfolio....... 4/20/94 -5.69% N/A 8.32%
Investment Grade Income Fund............. 4/21/94 6.43% N/A 6.57%
Government Bond Fund..................... 4/20/94 6.14% N/A 5.27%
Money Market Fund........................ 4/10/94 4.00% N/A 3.84%
</TABLE>
B-5
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
UNDERLYING 10 YEARS OR
FUND FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN UNDERLYING INCEPTION ENDED INCEPTION
FUND DATE 12/31/98 5 YEARS IF LESS
- ------------------------------------ ------------- ---------- ---------- --------------
Select International Equity Fund.... 5/2/94 6.63% N/A 9.75%
<S> <C> <C> <C> <C>
DGPF International Equity Series.... 10/29/92 0.82% 8.14% 9.13%
Fidelity VIP Overseas Portfolio..... 1/28/87 3.03% 7.28% 8.42%
T. Rowe Price International Stock
Portfolio.......................... 3/31/94 6.08% N/A 7.18%
Select Aggressive Growth Fund....... 8/21/92 0.87% 12.49% 15.99%
Select Capital Appreciation Fund.... 4/28/95 4.10% N/A 17.45%
Select Value Opportunity Fund....... 4/30/93 -4.25% 10.67% 12.54%
Select Growth Fund.................. 8/21/92 25.30% 19.78% 17.11%
Growth Fund......................... 4/29/85 9.40% 16.61% 15.18%
Fidelity VIP Growth Portfolio....... 10/9/86 29.18% 19.23% 17.49%
Equity Index Fund................... 9/28/90 18.32% 21.06% 18.84%
Select Growth and Income Fund....... 8/21/92 6.60% 15.46% 13.49%
Fidelity VIP Equity-Income
Portfolio.......................... 10/9/86 1.81% 16.28% 13.83%
Fidelity VIP II Asset Manager
Portfolio.......................... 9/6/89 5.35% 9.46% 10.92%
Fidelity VIP High Income
Portfolio.......................... 9/19/85 -12.66% 6.31% 9.36%
Investment Grade Income Fund........ 4/29/85 -1.29% 4.54% 7.57%
Government Bond Fund................ 8/26/91 -1.53% 3.60% 5.30%
Money Market Fund................... 4/29/85 -3.54% 2.77% 4.05%
</TABLE>
B-6
<PAGE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO POLICY FEES)
<TABLE>
<CAPTION>
UNDERLYING 10 YEARS OR
FUND FOR YEAR SINCE
SUB-ACCOUNT INVESTING IN UNDERLYING INCEPTION ENDED INCEPTION
FUND DATE 12/31/98 5 YEARS IF LESS
- ------------------------------------- ------------- ---------- ---------- --------------
Select International Equity Fund..... 5/2/94 14.82% N/A 10.67%
<S> <C> <C> <C> <C>
DGPF International Equity Series..... 10/29/92 8.76% 8.97% 9.54%
Fidelity VIP Overseas Portfolio...... 1/28/87 11.14% 8.14% 8.51%
T. Rowe Price International Stock
Portfolio........................... 3/31/94 14.20% N/A 8.09%
Select Aggressive Growth Fund........ 8/21/92 8.98% 13.35% 16.40%
Select Capital Appreciation Fund..... 4/28/95 12.25% N/A 18.64%
Select Value Opportunity Fund........ 4/30/93 3.37% 11.49% 13.08%
Select Growth Fund................... 8/21/92 33.51% 20.41% 17.47%
Growth Fund.......................... 4/29/85 17.62% 17.32% 15.31%
Fidelity VIP Growth Portfolio........ 10/9/86 37.50% 20.01% 17.71%
Equity Index Fund.................... 9/28/90 26.50% 21.63% 18.97%
Select Growth and Income Fund........ 8/21/92 14.77% 16.15% 13.87%
Fidelity VIP Equity-Income
Portfolio........................... 10/9/86 10.04% 17.09% 14.07%
Fidelity VIP II Asset Manager
Portfolio........................... 9/6/89 13.41% 10.21% 11.34%
Fidelity VIP High Income Portfolio... 9/19/85 -5.69% 7.25% 9.49%
Investment Grade Income Fund......... 4/29/85 6.43% 5.43% 7.61%
Government Bond Fund................. 8/26/91 6.14% 4.48% 5.52%
Money Market Fund.................... 4/29/85 4.00% 3.71% 4.11%
</TABLE>
B-7
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE
AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY
ALLMERICA ADVANTAGE VARIABLE ANNUITY
PROFILE THIS PROFILE IS A SUMMARY OF SOME OF THE MORE
MAY 1, 1999 IMPORTANT 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 (the
contract owner) and Allmerica Financial Life Insurance and Annuity Company (for
contracts issued in the District of Columbia, Puerto Rico, the Virgin Islands
and any state except Hawaii and New York) or First Allmerica Financial Life
Insurance Company (for contracts issued in Hawaii and New York). It is designed
to help you accumulate assets for your retirement or other important financial
goals on a tax-deferred basis. The 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 deferred annuities, the contract has an ACCUMULATION PHASE and, if you
annuitize, an ANNUITY PAYOUT PHASE. During the ACCUMULATION PHASE you can make
payments into the contract on any frequency. Investment and interest gains
accumulate tax deferred. You may withdraw money from your contract during the
ACCUMULATION PHASE. However, as with other tax-deferred investments, you pay
taxes on earnings and any pre-tax payments to the contract when you withdraw
them. A federal tax penalty may apply if you withdraw money prior to age 59 1/2.
During the ANNUITY PAYOUT PHASE you will receive regular payments from your
contract, provided you annuitize. Annuitization involves beginning a series of
payments from the capital that has built up in your contract. The amount of your
payments during the annuity payout phase will, in part, be determined by your
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 at annuitization, 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. Other annuity options may be offered by the
Company.
You also need to decide if you want your annuity payments on a variable basis
(i.e., subject to fluctuation based on investment performance), on a fixed basis
(with benefit payments guaranteed at a fixed amount), or on a combination
variable and fixed basis. Once payments begin, the annuity option cannot be
changed.
P-1
<PAGE>
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 nor any limits as to payment frequency. Currently, the
initial payment must be at least $600 ($1,000 in Washington) and each subsequent
payment must be at least $50. In addition, a minimum of $1,000 is always
required to establish a Guarantee Period Account.
4. INVESTMENT OPTIONS
You may allocate money to the Sub-Accounts investing in 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
Fidelity VIP II Asset Manager
Select Aggressive Growth Fund Portfolio
Select Capital Appreciation Fund Fidelity VIP High Income Portfolio
Select Value Opportunity 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 contract fee is deducted from your contract.
This fee is waived if the value of the contract is $50,000 or more on the date
the fee is assessed or if the contract is issued to and maintained by the
Trustees of a 401(k) plan. We also deduct insurance charges at a total annual
rate of 1.45% of the average daily value of your contract value allocated to the
variable investment options. The insurance charges include a mortality and
expense risk charge of 1.25% and an administrative expense charge of 0.20%.
There are also investment management fees and other fund operating expenses that
vary by fund. In addition, if you elect the optional Minimum Guaranteed Annuity
Payout Rider, we will deduct a monthly charge against the accumulated value of
your contract at an annual rate of 0.25% for a rider with a ten-year waiting
period and at an annual rate of 0.15% for a rider with a fifteen-year waiting
period.
If a payment remains in your contract for more than nine years, you will not
incur any surrender charge on that amount. If, however, you decide to surrender
your contract, make withdrawals or receive payments under certain annuity
options, we may impose a surrender charge on any amounts invested nine years or
less on a declining scale between 8% and 1%. 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 annual $30
contract fee (which is represented as 0.05%), the 1.45% insurance charges and
the investment charges for each fund. Optional rider charges are not included.
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
P-2
<PAGE>
as the surrender charges. For year 10, the example shows the aggregate of all
the annual charges assessed for 10 years, with no surrender charge. The premium
tax is assumed to be 0% in both examples. The following chart does not reflect
the optional Minimum Guaranteed Annuity Payout Rider charge which, if elected,
would increase the Total Annual Insurance Charges.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL
EXPENSES AT
END OF
TOTAL ANNUAL TOTAL ANNUAL ----------------------
INSURANCE FUND TOTAL ANNUAL (1) (2)
FUND CHARGES CHARGES CHARGES 1 YEAR 10 YEARS
- ------------------------------------------ ------------- ------------- ------------- --------- -----------
Select International Equity Fund.......... 1.50% 1.02% 2.52% $99 $ 282
<S> <C> <C> <C> <C> <C>
DGPF International Equity Series.......... 1.50% 0.95% 2.45% $98 $ 275
Fidelity VIP Overseas Portfolio........... 1.50% 0.91% 2.41% $98 $ 271
T. Rowe Price International Stock
Portfolio............................... 1.50% 1.05% 2.55% $99 $ 285
Select Aggressive Growth Fund............. 1.50% 0.95% 2.45% $98 $ 275
Select Capital Appreciation Fund.......... 1.50% 1.04% 2.54% $99 $ 284
Select Value Opportunity Fund............. 1.50% 0.98% 2.48% $99 $ 278
Select Growth Fund........................ 1.50% 0.86% 2.36% $98 $ 266
Growth Fund............................... 1.50% 0.49% 1.99% $94 $ 228
Fidelity VIP Growth Portfolio............. 1.50% 0.68% 2.18% $96 $ 248
Equity Index Fund......................... 1.50% 0.36% 1.86% $93 $ 215
Select Growth and Income Fund............. 1.50% 0.73% 2.23% $96 $ 253
Fidelity VIP Equity-Income Portfolio...... 1.50% 0.58% 2.08% $95 $ 238
Fidelity VIP II Asset Manager Portfolio... 1.50% 0.64% 2.14% $95 $ 244
Fidelity VIP High Income Portfolio........ 1.50% 0.70% 2.20% $96 $ 250
Investment Grade Income Fund.............. 1.50% 0.52% 2.02% $94 $ 231
Government Bond Fund...................... 1.50% 0.64% 2.14% $95 $ 244
Money Market Fund......................... 1.50% 0.32% 1.82% $92 $ 210
</TABLE>
The charges reflect any applicable expense reimbursements and/or fee waivers.
For more information, see the Fee Table in the prospectus for the contract.
6. TAXES
Under current tax rules, you will not pay taxes until you withdraw money from
your contract. During the accumulation phase, earnings are withdrawn first and
are taxed as ordinary income. If you make a withdrawal prior to age 59 1/2, you
may be subject to a 10% federal tax penalty on the earnings. Payments during the
annuity payout phase are considered partly a return of your original investment
and partly earnings. You will be subject to income taxes on the earnings portion
of each payment. However, if your contract is funded with pre-tax or tax
deductible dollars (such as a pension or profit sharing plan contribution), then
the entire payment may be taxable.
7. WITHDRAWALS
You can 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) if you are an Owner and also the
Annuitant, an amount based on your life expectancy. (Similarly, no surrender
charge will apply if an amount is withdrawn based on the Annuitant's life
expectancy and the Owner is a trust or other nonnatural person.)
The surrender charge is also waived if, after the contract is issued and before
you attain age 65, you become disabled. Under New York contracts, the disability
must also exist for a continuous period of at least four months. Also, except in
New York and New Jersey where not permitted by state law, you may receive your
P-3
<PAGE>
money without a surrender charge if, after the contract is issued, you are
diagnosed with a fatal illness or are confined in a medical care facility until
the later of one year from the issue date or 90 days.
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 Sub-Accounts investing in the underlying funds you choose.
The first chart below illustrates past return on a calendar year basis for each
Sub- Account of Allmerica Financial Life Insurance and Annuity Company's
Separate Account VA-K based on the inception dates of each of its Sub-Accounts.
The second chart illustrates the same information for each Sub-Account of First
Allmerica Financial Life Insurance Company's Separate Account VA-K. Each Company
offers the same Sub-Accounts; however, Separate Account VA-K of Allmerica
Financial Life Insurance and Annuity Company and its Sub-Accounts have been in
existence for a longer period. The performance figures reflect the contract fee,
the insurance charges, and the investment charges and other expenses of the
underlying funds. They do not reflect the surrender charges which would reduce
such performance if applied. In addition, they do not reflect the optional
Minimum Guaranteed Annuity Payout Rider charge, which if elected, would reduce
performance. Please note that past performance is not a guarantee of future
results.
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE) OF ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR
----------------------------------------------------------------------------
FUND 1998 1997 1996 1995 1994 1993
- -------------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Select International Equity Fund............ 14.63% 3.11% 20.07% 17.82% N/A N/A
DGPF International Equity Series............ 8.62% 5.04% 18.18% 12.15% 1.08% N/A
Fidelity VIP Overseas Portfolio............. 11.01% 9.92% 11.46% 8.00% 0.16% 35.23%
T. Rowe Price International Stock
Portfolio................................. 14.11% 1.58% 12.90% 9.44% N/A N/A
Select Aggressive Growth Fund............... 8.71% 16.97% 16.72% 30.31% -3.81% 17.73%
Select Capital Appreciation Fund............ 12.11% 12.60% 7.11% N/A N/A N/A
Select Value Opportunity Fund............... 3.20% 23.03% 26.57% 15.83% -7.96% N/A
Select Growth Fund.......................... 33.33% 32.11% 20.14% 22.71% -3.01% -0.43%
Growth Fund................................. 17.34% 23.32% 18.34% 30.81% -1.34% 5.07%
Fidelity VIP Growth Portfolio............... 37.18% 21.68% 12.93% 33.35% -1.55% 17.58%
Equity Index Fund........................... 26.33% 30.49% 20.42% 34.15% -0.50% 7.89%
Select Growth and Income Fund............... 14.60% 20.72% 19.40% 28.38% -0.82% 8.69%
Fidelity VIP Equity-Income Portfolio........ 9.68% 26.24% 12.51% 33.08% 5.43% 16.42%
Fidelity VIP II Asset Manager Portfolio..... 13.34% 18.89% 12.83% 15.19% N/A N/A
Fidelity VIP High Income Portfolio.......... -5.85% 15.95% 12.27% 18.79% -3.07% 18.69%
Investment Grade Income Fund................ 6.32% 7.84% 1.93% 16.06% -4.45% 9.08%
Government Bond Fund........................ 6.10% 5.54% 1.89% 11.34% -2.41% 5.89%
Money Market Fund........................... 3.96% 3.92% 3.71% 4.22% 2.34% 1.42%
<CAPTION>
FUND 1992
- -------------------------------------------- -----------
<S> <C>
Select International Equity Fund............ N/A
DGPF International Equity Series............ N/A
Fidelity VIP Overseas Portfolio............. 12.10%
T. Rowe Price International Stock
Portfolio................................. N/A
Select Aggressive Growth Fund............... N/A
Select Capital Appreciation Fund............ N/A
Select Value Opportunity Fund............... N/A
Select Growth Fund.......................... N/A
Growth Fund................................. 5.68%
Fidelity VIP Growth Portfolio............... 7.66%
Equity Index Fund........................... 5.58%
Select Growth and Income Fund............... N/A
Fidelity VIP Equity-Income Portfolio........ 15.20%
Fidelity VIP II Asset Manager Portfolio..... N/A
Fidelity VIP High Income Portfolio.......... 21.19%
Investment Grade Income Fund................ 6.61%
Government Bond Fund........................ 3.35%
Money Market Fund........................... 2.18%
</TABLE>
P-4
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE) FIRST ALLMERICA FINANCIAL
LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
CALENDAR YEAR
--------------------------------------------------
FUND 1998 1997 1996 1995
- --------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund..................................... 14.63% 3.11% 20.07% 17.82%
DGPF International Equity Series..................................... 8.65% 5.04% 18.18% 12.15%
Fidelity VIP Overseas Portfolio...................................... 11.03% 9.92% 11.46% 8.00%
T. Rowe Price International Stock Portfolio.......................... 14.08% 1.58% 12.90% 9.44%
Select Aggressive Growth Fund........................................ 8.70% 16.97% 16.72% 30.31%
Select Capital Appreciation Fund..................................... 12.09% 12.60% 7.11% N/A
Select Value Opportunity Fund........................................ 3.18% 23.03% 26.57% 15.83%
Select Growth Fund................................................... 33.30% 32.11% 20.14% 22.71%
Growth Fund.......................................................... 17.40% 23.32% 18.34% 30.81%
Fidelity VIP Growth Portfolio........................................ 37.18% 21.68% 12.93% 33.35%
Equity Index Fund.................................................... 26.33% 30.49% 20.42% 34.15%
Select Growth and Income Fund........................................ 14.60% 20.73% 19.40% 28.38%
Fidelity VIP Equity-Income Portfolio................................. 9.71% 26.24% 12.51% 33.08%
Fidelity VIP II Asset Manager Portfolio.............................. 13.35% 18.89% 12.83% 15.19%
Fidelity VIP High Income Portfolio................................... -5.88% 15.95% 12.27% 18.79%
Investment Grade Income Fund......................................... 6.37% 7.84% 1.93% 16.06%
Government Bond Fund................................................. 6.11% 5.54% 1.89% 11.34%
Money Market Fund.................................................... 3.94% 3.92% 3.71% 4.22%
</TABLE>
9. DEATH BENEFIT
If the annuitant dies during the accumulation phase, we will pay the beneficiary
a death benefit. The death benefit is equal to the GREATEST of: (a) the
accumulated value increased for any positive market value adjustment; (b) gross
payments compounded daily at the annual rate of 5%, decreased proportionately to
reflect any prior withdrawals (in Hawaii and New York the 5% compounding is not
available; therefore, (b) equals gross payments decreased proportionately to
reflect withdrawals); or (c) the death benefit that would have been payable on
the most recent contract anniversary, increased for subsequent payments and
decreased proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made: On the first anniversary, the death benefit will be equal to the
greater of (a) the accumulated value (increased by any positive market value
adjustment) or (b) gross payments compounded daily at the annual rate of 5%
(except in Hawaii and New York). The higher of (a) or (b) will then be locked in
until the second anniversary, at which time the death benefit will be equal to
the greatest of (a) the contract's then current accumulated value increased by
any positive market value adjustment; (b) gross payments compounded daily at the
annual rate of 5% (except in Hawaii and New York) or (c) the locked-in value of
the death benefit at the first anniversary. The greatest of (a), (b) or (c) will
be locked in until the next contract anniversary. This calculation will then be
repeated on each anniversary while the contract remains in force and prior to
the annuity date. As noted above, the values of (b) and (c) will be decreased
proportionately if withdrawals are taken.
10. OTHER INFORMATION
FREE LOOK PERIOD: If you cancel your contract within 10 days after receiving it
(or whatever period is required by your state), you will receive a refund in
accordance with the terms of the contract's "Right to Examine" provision.
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<PAGE>
DOLLAR COST AVERAGING: You may elect to automatically transfer money on a
periodic basis from the Money Market Fund, Government Bond Fund or Fixed Account
to one or more of the other investment options. There is no charge for this
service.
AUTOMATIC ACCOUNT REBALANCING: You may elect to automatically have your
contract's accumulated value periodically reallocated ("rebalanced") among your
chosen investment options to maintain your designated percentage allocation mix.
There is no charge for this service.
NO PROBATE: In most cases, the death benefit is payable to the beneficiary you
select without having to go through probate.
OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER (not available in all
jurisdictions): This optional rider is available for a separate monthly charge
and guarantees you a minimum amount of fixed annuity lifetime income during the
annuity payout phase, subject to certain conditions. On each contract
anniversary a minimum guaranteed annuity payout benefit base is determined. This
minimum guaranteed annuity payout benefit base (less any applicable premium
taxes) is the value that will be annuitized should you exercise the rider. In
order to exercise the rider, a fixed annuitization involving a life contingency
must be selected. Annuitization under this rider will occur at the guaranteed
annuity purchase rates listed under the Annuity Option Tables in your contract.
The minimum guaranteed annuity payout benefit base is equal to the greatest of:
(a) the accumulated value increased by any positive market value adjustment, if
applicable; or
(b) the accumulated value on the effective date of the rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest accumulated value on any contract anniversary since the rider
effective date, as determined after positive adjustments have been made for
subsequent payments and any positive market value adjustment, if applicable,
and negative adjustments have been made for subsequent withdrawals.
11. INQUIRIES
If you need more information about Allmerica Advantage, you may contact us at
1-800-533-7881 or send correspondence to:
Allmerica Advantage
Allmerica Financial
P.O. Box 8632
Boston, Massachusetts 02266-8632
P-6
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
WORCESTER, MASSACHUSETTS
This Prospectus provides important information about
the Allmerica Advantage variable annuity contracts
issued by Allmerica Financial Life Insurance and
Annuity Company (in all jurisdictions except Hawaii
and New York) or by First Allmerica Financial Life
Insurance Company in Hawaii and New York. The
contract is a flexible payment tax-deferred
combination variable and fixed annuity offered on
PLEASE READ THIS both a group and individual basis.
PROSPECTUS CAREFULLY
BEFORE INVESTING AND
KEEP IT FOR FUTURE
REFERENCE.
The Variable Account, known as Separate Account VA-K,
is subdivided into Sub-Accounts. Each Sub-Account
invests exclusively in shares of the following funds:
<TABLE>
<CAPTION>
ALLMERICA INVESTMENT TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUND
-------------------------------------------------- --------------------------------------------------
<C> <S> <C>
ANNUITIES INVOLVE Select International Equity Fund Overseas Portfolio
RISKS INCLUDING Select Aggressive Growth Fund Equity-Income Portfolio
POSSIBLE LOSS OF Select Capital Appreciation Fund Growth Portfolio
PRINCIPAL. Select Value Opportunity Fund High Income Portfolio
Select Growth Fund
Growth Fund FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Equity Index Fund ---------------------------------------
Select Growth and Income Fund Asset Manager Portfolio
Investment Grade Income Fund
Government Bond Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Money Market Fund ----------------------------------
DELAWARE GROUP PREMIUM FUND, INC. T. Rowe Price International Stock Portfolio
----------------------------
International Equity Series
</TABLE>
THIS ANNUITY IS The Fixed Account is part of the Company's General
NOT: Account and pays an interest rate guaranteed for
- A BANK DEPOSIT OR one year from the time a payment is received. The
OBLIGATION; Guarantee Period Accounts offer fixed rates of
- FEDERALLY INSURED; interest for specified periods ranging from 2 to
- ENDORSED BY ANY 10 years. A Market Value Adjustment is applied to
BANK OR payments removed from a Guarantee Period Account
GOVERNMENTAL before the end of the specified period. The Market
AGENCY. Value Adjustment may be positive or negative.
Payments allocated to a Guarantee Period Account
are held in the Company's Separate Account GPA
(except in California where they are allocated to
the General Account).
A Statement of Additional Information dated May 1,
1999 containing more information about this
annuity is on file with the Securities and
Exchange Commission and is incorporated by
reference into this Prospectus. A copy may be
obtained free of charge by calling Allmerica
Investments, Inc. at 1-800-533-7881. The Table of
Contents of the Statement of Additional
Information is listed on page 3 of this
Prospectus.
This Prospectus and the Statement of Additional
Information can also be obtained from the
Securities and Exchange Commission's website
(http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED THAT THE INFORMATION IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SPECIAL TERMS........................................................................... 4
SUMMARY OF FEES AND EXPENSES............................................................ 6
SUMMARY OF CONTRACT FEATURES............................................................ 11
PERFORMANCE INFORMATION................................................................. 17
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS, THE TRUST, FIDELITY VIP, FIDELITY
VIP II, T. ROWE PRICE AND DGPF......................................................... 18
INVESTMENT OBJECTIVES AND POLICIES...................................................... 20
INVESTMENT ADVISORY SERVICES............................................................ 22
DESCRIPTION OF THE CONTRACT............................................................. 25
A. Payments......................................................................... 25
B. Right to Cancel Individual Retirement Annuity.................................... 25
C. Right to Cancel All Other Contracts.............................................. 26
D. Transfer Privilege............................................................... 26
Automatic Transfers and Automatic Account Rebalancing Options................... 26
E. Surrender........................................................................ 27
F. Withdrawals...................................................................... 28
Systematic Withdrawals.......................................................... 28
Life Expectancy Distributions................................................... 28
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 On or 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................................... 32
L. Annuity Benefit Payments......................................................... 33
Determination of the First Variable Annuity Benefit Payment..................... 33
The Annuity Unit................................................................ 33
Determination of the Number of Annuity Units.................................... 33
Dollar Amount of Subsequent Variable Annuity Benefit Payments................... 33
M. Optional Minimum Guaranteed Annuity Payout Rider.................................. 34
N. NORRIS Decision.................................................................. 36
O. Computation of Values............................................................ 36
The Accumulation Unit........................................................... 36
Net Investment Factor........................................................... 37
CHARGES AND DEDUCTIONS.................................................................. 37
A. Variable Account Deductions...................................................... 37
Mortality and Expense Risk Charge............................................... 37
Administrative Expense Charge................................................... 38
Other Charges................................................................... 38
B. Contract Fee..................................................................... 38
C. Optional Minimum Guaranteed Annuity Payout Rider Charge.......................... 38
D. Premium Taxes.................................................................... 39
E. Surrender Charge................................................................. 39
Charge for Surrender and Withdrawal............................................. 39
Reduction or Elimination of Surrender Charge and Additional Amounts Credited.... 40
Withdrawal Without Surrender Charge............................................. 41
Surrenders...................................................................... 42
Charge at the Time Annuity Benefit Payments Begin............................... 42
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
F. Transfer Charge.................................................................. 43
GUARANTEE PERIOD ACCOUNTS............................................................... 43
FEDERAL TAX CONSIDERATIONS.............................................................. 45
A. Qualified and Non-Qualified Contracts............................................ 46
B. Taxation of the Contracts in General............................................. 46
Withdrawals Prior to Annuitization.............................................. 46
Annuity Payouts After Annuitization............................................. 46
Penalty on Distribution......................................................... 46
Assignments or Transfers........................................................ 47
Nonnatural Owners............................................................... 47
Deferred Compensation Plans of State and Local Government and Tax-Exempt
Organizations................................................................... 47
C. Tax Withholding.................................................................. 48
D. Provisions Applicable to Qualified Employer Plans................................ 48
Corporate and Self-Employed Pension and Profit Sharing Plans.................... 48
Individual Retirement Annuities................................................. 48
Tax-Sheltered Annuities......................................................... 48
Texas Optional Retirement Program............................................... 49
STATEMENTS AND REPORTS.................................................................. 49
LOANS (QUALIFIED CONTRACTS ONLY)........................................................ 49
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS....................................... 49
CHANGES TO COMPLY WITH LAW AND AMENDMENTS............................................... 50
VOTING RIGHTS........................................................................... 51
DISTRIBUTION............................................................................ 51
SERVICES................................................................................ 51
LEGAL MATTERS........................................................................... 52
YEAR 2000 COMPLIANCE.................................................................... 52
FURTHER INFORMATION..................................................................... 53
APPENDIX A -- MORE INFORMATION ABOUT THE FIXED ACCOUNT.................................. A-1
APPENDIX B -- PERFORMANCE TABLES (Allmerica Financial Life Insurance and Annuity
Company)............................................................................... B-1
APPENDIX C -- PERFORMANCE TABLES (First Allmerica Financial Life Insurance Company)..... C-1
APPENDIX D -- SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT......................... D-1
APPENDIX E -- THE DEATH BENEFIT......................................................... E-1
APPENDIX F -- CONDENSED FINANCIAL INFORMATION........................................... F-1
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY......................................................... 2
TAXATION OF THE CONTRACT, THE VARIABLE ACCOUNT AND THE COMPANY.......................... 3
SERVICES................................................................................ 3
UNDERWRITERS............................................................................ 3
ANNUITY BENEFIT PAYMENTS................................................................ 4
EXCHANGE OFFER.......................................................................... 6
PERFORMANCE INFORMATION................................................................. 8
FINANCIAL STATEMENTS.................................................................... F-1
</TABLE>
3
<PAGE>
SPECIAL TERMS
ACCUMULATED VALUE: the total value of all Accumulation Units in the Sub-Accounts
plus the value of all accumulations in the Fixed Account and Guarantee Period
Accounts credited to the Contract on any date before the Annuity Date.
ACCUMULATION UNIT: a unit of measure used to calculate the value of a
Sub-Account before annuity benefit payments begin.
ANNUITANT: the person designated in the Contract upon whose life annuity benefit
payments are to be made.
ANNUITY DATE: the date on which annuity benefit payments begin. This date may
not be later than the first day of the month before the Annuitant's 90th
birthday.
ANNUITY UNIT: a unit of measure used to calculate the value of the periodic
annuity benefit payments under the Contract.
COMPANY: unless otherwise specified, any reference to the "Company" shall refer
exclusively to Allmerica Financial Life Insurance and Annuity Company for
contracts issued in all jurisdictions except Hawaii and New York and exclusively
to First Allmerica Financial Life Insurance Company for contracts issued in
Hawaii and New York.
FIXED ACCOUNT: an investment option under the Contract that guarantees principal
and a fixed minimum interest rate and which is part of the Company's General
Account.
FIXED ANNUITY PAYOUT: an annuity payout option providing for annuity benefit
payments which remain fixed in amount throughout the annuity benefit payment
period selected.
GENERAL ACCOUNT: all the assets of the Company other than those held in a
separate account.
GUARANTEE PERIOD: the number of years that a Guaranteed Interest Rate is
credited.
GUARANTEE PERIOD ACCOUNT: an account which corresponds to a Guaranteed Interest
Rate for a specified Guarantee Period.
GUARANTEED INTEREST RATE: the annual effective rate of interest, after daily
compounding, credited to a Guarantee Period Account.
MARKET VALUE ADJUSTMENT: a positive or negative adjustment assessed if any
portion of a Guarantee Period Account is withdrawn or transferred prior to the
end of its Guarantee Period.
OWNER (OR YOU): the person, persons or entity entitled to exercise the rights
and privileges under this Contract. Joint Owners are permitted if one of the two
is the Annuitant.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a corresponding 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, surrender charge, and Market Value Adjustment.
4
<PAGE>
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 Select Value Opportunity
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.
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 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 payout option providing for payments varying
in amount in accordance with the investment experience of certain Funds.
5
<PAGE>
SUMMARY OF FEES AND EXPENSES
There are certain fees and expenses that you will bear under the Allmerica
Advantage Contract. The purpose of the following tables is to assist you in
understanding these fees and expenses. The tables show (1) charges under the
Contract, (2) annual expenses of the Sub-Accounts, and (3) annual expenses of
the 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."
<TABLE>
<CAPTION>
YEARS FROM
(1) CONTRACT CHARGES: DATE OF PAYMENT CHARGE
- ------------------------------------------------------------------------------ --------------- ---------
<S> <C> <C>
SURRENDER CHARGE:* 0-2 8%
This charge may be assessed upon surrender, withdrawal or annuitization 3 7%
under any commutable period certain option or a noncommutable period certain 4 6%
option of less than ten years. The charge is a percentage of payments 5 5%
applied to the amount surrendered (in excess of any amount that is free of 6 4%
surrender charge) within the indicated time period. 7 3%
8 2%
9 1%
More than 9 0%
TRANSFER CHARGE:
The Company currently makes no charge for processing transfers and None
guarantees that the first 12 transfers in a Contract year will not be
subject to a transfer charge. For each subsequent transfer, the Company
reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse the Company for the costs of processing the transfer.
ANNUAL CONTRACT FEE:
The fee is deducted annually and upon surrender prior to the Annuity Date $30
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.
OPTIONAL RIDER CHARGES:
(The annual charge is deducted on a monthly basis at the end of each month.)
On an annual basis as a percentage of Accumulated Value the charge is:
Optional Minimum Guaranteed Annuity Payout Rider with a ten-year waiting 0.25%
period:
Optional Minimum Guaranteed Annuity Payout Rider with a fifteen-year 0.15%
waiting period:
(2) ANNUAL SUB-ACCOUNT EXPENSES:
- ------------------------------------------------------------------------------
(on an annual basis as percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.25%
Administrative Expense Charge: 0.20%
---------
Total Asset Charges: 1.45%
</TABLE>
* From time to time the Company may allow a reduction of the surrender charge,
the period during which the charges apply, or both, and/or credit additional
amounts on Contracts when (1) Contracts are sold to individuals or groups of
individuals in a manner which reduces sales expenses, or (2) where the Owner or
the Annuitant on the date of issue is within certain classes of eligible
persons. For more information, see "REDUCTION OR ELIMINATION OF SURRENDER CHARGE
AND ADDITIONAL AMOUNTS CREDITED."
6
<PAGE>
(3) ANNUAL 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 as a percentage of
average net assets for the year ended December 31, 1998. For more information
concerning fees and expenses, see the prospectuses of the Underlying Funds.
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER TOTAL FUND EXPENSES
(AFTER ANY VOLUNTARY EXPENSES (AFTER (AFTER ANY WAIVERS/
FUND WAIVERS) ANY REIMBURSEMENTS) REIMBURSEMENTS)
- --------------------------------------------------- --------------------- --------------------- ----------------------
<S> <C> <C> <C>
Select International Equity Fund................... 0.90% 0.12% 1.02%(1)(2)
DGPF International Equity Series................... 0.82% 0.13% 0.95%(3)
Fidelity VIP Overseas Portfolio.................... 0.74% 0.17% 0.91%(4)
T. Rowe Price International Stock Portfolio........ 1.05% 0.00% 1.05%
Select Aggressive Growth Fund...................... 0.88% 0.07% 0.95%(1)(2)
Select Capital Appreciation Fund................... 0.94% 0.10% 1.04%(1)(2)
Select Value Opportunity Fund...................... 0.90%(1)* 0.08% 0.98%(1)(2)*
Select Growth Fund................................. 0.81%(**) 0.05% 0.86%(1)(2)**
Growth Fund........................................ 0.44% 0.05% 0.49%(1)(2)
Fidelity VIP Growth Portfolio...................... 0.59% 0.09% 0.68%(4)
Equity Index Fund.................................. 0.29% 0.07% 0.36%(1)
Select Growth and Income Fund...................... 0.68% 0.05% 0.73%(1)(2)
Fidelity VIP Equity-Income Portfolio............... 0.49% 0.09% 0.58%(4)
Fidelity VIP II Asset Manager Portfolio............ 0.54% 0.10% 0.64%(4)
Fidelity VIP High Income Portfolio................. 0.58% 0.12% 0.70%
Investment Grade Income Fund....................... 0.43% 0.09% 0.52%(1)
Government Bond Fund............................... 0.50% 0.14% 0.64%(1)
Money Market Fund.................................. 0.26% 0.06% 0.32%(1)
</TABLE>
(*) Amount has been adjusted to reflect a voluntary expense limitation currently
in effect for Select Value Opportunity Fund. Without these adjustments, the
Management Fee and Total Fund Expenses would have been 0.91% and 0.99%,
respectively.
(**) Effective June 1, 1998, the management fee rate for the Select Growth Fund
was revised. The Management Fee and Total Fund Expense ratios shown in the table
above have been adjusted to assume that the revised rates took effect January 1,
1998.
(1) Until further notice, Allmerica Financial Investment Management Services,
Inc. ("Manager") has declared a voluntary expense limitation of 1.35% of average
net assets for Select Aggressive Growth Fund and Select Capital Appreciation
Fund, 1.25% for Select Value Opportunity Fund, 1.50% for Select International
Equity Fund, 1.20% for Growth Fund and Select Growth Fund, 1.10% for Select
Growth and Income Fund, 1.00% for Investment Grade Income Fund and Government
Bond Fund, and 0.60% for Money Market Fund and Equity Index Fund. The total
operating expenses of these Funds of the Trust were less than their respective
expense limitations throughout 1998.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
The declaration of a voluntary management fee or expense limitation in any year
does not bind the Manager to declare future expense limitations with respect to
these Funds. These limitations may be terminated at any time.
(2) 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 annual fund operating expenses would have been 0.92% for
Select Aggressive Growth Fund, 1.02% for Select Capital Appreciation Fund, 0.94%
for Select Value Opportunity Fund, 1.01% for Select International Equity Fund,
0.84% for Select Growth Fund, 0.70% for Select Growth and Income Fund and 0.46%
for Growth Fund.
7
<PAGE>
(3) Effective May 1, 1999, Delaware International Advisers Ltd., the investment
adviser for the International Equity Series, has agreed to limit total annual
expenses of the fund to 0.95%. This limitation replaces a prior limitation of
0.95% that expired on April 30, 1999. The new limitation will be in effect
through October 31, 1999. For the fiscal year ended December 31, 1998, the
actual ratio of total annual expenses was 0.98%.
(4) A portion of the brokerage commissions that certain funds paid was used to
reduce fund expenses. In addition, certain funds, or Fidelity Management &
Research Company on behalf of certain funds, have entered into arrangements with
their custodian whereby credits realized as a result of uninvested cash balances
were used to reduce custodian expenses. Including these reductions, total
operating expenses would have been 0.89% for the Fidelity VIP Overseas
Portfolio; 0.57% for the Fidelity VIP Equity-Income Portfolio; 0.63% for the
Fidelity VIP II Asset Manager Portfolio and 0.66% for the Fidelity VIP Growth
Portfolio.
The Underlying Fund information above was provided by the Underlying Funds and
was not independently verified by the Company.
EXPENSE EXAMPLES. The following examples demonstrate the cumulative expenses
which an Owner would pay at 1-year, 3-year, 5-year and 10-year intervals under
certain contingencies. Each example assumes a $1,000 investment in a Sub-Account
and a 5% annual return on assets. As required by rules of the Securities and
Exchange Commission (the "SEC"), the Contract fee is 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 0.05% and the amount
of the Contract fee is assumed to be $0.50 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. 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.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
(1)(a) If, at the end of the applicable time period, you surrender your Contract
or annuitize* under a commutable period certain option or a noncommutable period
certain option of less than ten years, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return on assets and no Rider:**
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 99 $ 145 $ 182 $ 282
DGPF International Equity Series............................................. $ 98 $ 143 $ 179 $ 275
Fidelity VIP Overseas Portfolio.............................................. $ 98 $ 142 $ 177 $ 271
T. Rowe Price International Stock Portfolio.................................. $ 99 $ 146 $ 184 $ 285
Select Aggressive Growth Fund................................................ $ 98 $ 143 $ 179 $ 275
Select Capital Appreciation Fund............................................. $ 99 $ 146 $ 183 $ 284
Select Value Opportunity Fund................................................ $ 99 $ 144 $ 180 $ 278
Select Growth Fund........................................................... $ 98 $ 141 $ 174 $ 266
Growth Fund.................................................................. $ 94 $ 130 $ 156 $ 228
Fidelity VIP Growth Portfolio................................................ $ 96 $ 136 $ 165 $ 248
Equity Index Fund............................................................ $ 93 $ 127 $ 149 $ 215
Select Growth and Income Fund................................................ $ 96 $ 137 $ 168 $ 253
Fidelity Equity-Income Portfolio............................................. $ 95 $ 133 $ 160 $ 238
Fidelity VIP II Asset Manager Portfolio...................................... $ 95 $ 135 $ 163 $ 244
Fidelity VIP High Income Portfolio........................................... $ 96 $ 136 $ 166 $ 250
Investment Grade Income Fund................................................. $ 94 $ 131 $ 157 $ 231
Government Bond Fund......................................................... $ 95 $ 135 $ 163 $ 244
Money Market Fund............................................................ $ 92 $ 126 $ 147 $ 210
</TABLE>
8
<PAGE>
(1)(b) If, at the end of the applicable time period, you surrender your Contract
or annuitize* under a commutable period certain option or a noncommutable period
certain option of less than ten years, you would pay the following expenses on a
$1,000 investment, assuming 5% annual return on assets and election of a Minimum
Guaranteed Annuity Payout Rider** with a ten-year waiting period:
<TABLE>
<CAPTION>
WITH SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 101 $ 152 $ 195 $ 307
DGPF International Equity Series............................................. $ 101 $ 150 $ 191 $ 300
Fidelity VIP Overseas Portfolio.............................................. $ 100 $ 149 $ 189 $ 296
T. Rowe Price International Stock Portfolio.................................. $ 102 $ 153 $ 196 $ 309
Select Aggressive Growth Fund................................................ $ 101 $ 150 $ 191 $ 300
Select Capital Appreciation Fund............................................. $ 101 $ 153 $ 196 $ 308
Select Value Opportunity Fund................................................ $ 101 $ 151 $ 193 $ 303
Select Growth Fund........................................................... $ 100 $ 148 $ 187 $ 291
Growth Fund.................................................................. $ 96 $ 137 $ 168 $ 254
Fidelity VIP Growth Portfolio................................................ $ 98 $ 143 $ 178 $ 273
Equity Index Fund............................................................ $ 95 $ 134 $ 162 $ 241
Select Growth and Income Fund................................................ $ 99 $ 144 $ 180 $ 278
Fidelity VIP Equity-Income Portfolio......................................... $ 97 $ 140 $ 173 $ 263
Fidelity VIP II Asset Manager Portfolio...................................... $ 98 $ 142 $ 176 $ 269
Fidelity VIP High Income Portfolio........................................... $ 98 $ 143 $ 179 $ 275
Investment Grade Income Fund................................................. $ 97 $ 138 $ 170 $ 257
Government Bond Fund......................................................... $ 98 $ 142 $ 176 $ 269
Money Market Fund............................................................ $ 95 $ 133 $ 160 $ 237
</TABLE>
(2)(a) If, at the end of the applicable time period, you annuitize* under a life
option or any noncommutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and no
Rider:**
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 25 $ 77 $ 132 $ 282
DGPF International Equity Series............................................. $ 25 $ 75 $ 129 $ 275
Fidelity VIP Overseas Portfolio.............................................. $ 24 $ 74 $ 127 $ 271
T. Rowe Price International Stock Portfolio.................................. $ 26 $ 78 $ 134 $ 285
Select Aggressive Growth Fund................................................ $ 25 $ 75 $ 129 $ 275
Select Capital Appreciation Fund............................................. $ 25 $ 78 $ 133 $ 284
Select Value Opportunity Fund................................................ $ 25 $ 76 $ 130 $ 278
Select Growth Fund........................................................... $ 24 $ 73 $ 124 $ 266
Growth Fund.................................................................. $ 20 $ 62 $ 106 $ 228
Fidelity VIP Growth Portfolio................................................ $ 22 $ 67 $ 115 $ 248
Equity Index Fund............................................................ $ 19 $ 58 $ 99 $ 215
Select Growth and Income Fund................................................ $ 22 $ 69 $ 118 $ 253
Fidelity Equity-Income Portfolio............................................. $ 21 $ 64 $ 110 $ 238
Fidelity VIP II Asset Manager Portfolio...................................... $ 21 $ 66 $ 113 $ 244
Fidelity VIP High Income Portfolio........................................... $ 22 $ 68 $ 116 $ 250
Investment Grade Income Fund................................................. $ 20 $ 62 $ 107 $ 231
Government Bond Fund......................................................... $ 21 $ 66 $ 113 $ 244
Money Market Fund............................................................ $ 18 $ 56 $ 97 $ 210
</TABLE>
9
<PAGE>
(2)(b) If at the end of the applicable time period, you annuitize* under a life
option or any noncommutable period certain option of ten years or more, or if
you do NOT surrender or annuitize your Contract, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets and
election of a Minimum Guaranteed Annuity Payout Rider** with a ten-year waiting
period:
<TABLE>
<CAPTION>
WITHOUT SURRENDER CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Select International Equity Fund............................................. $ 28 $ 85 $ 145 $ 307
DGPF International Equity Series............................................. $ 27 $ 83 $ 141 $ 300
Fidelity VIP Overseas Portfolio.............................................. $ 27 $ 82 $ 139 $ 296
T. Rowe Price International Stock Portfolio.................................. $ 28 $ 86 $ 146 $ 309
Select Aggressive Growth Fund................................................ $ 27 $ 83 $ 141 $ 300
Select Capital Appreciation Fund............................................. $ 28 $ 86 $ 146 $ 308
Select Value Opportunity Fund................................................ $ 27 $ 84 $ 143 $ 303
Select Growth Fund........................................................... $ 26 $ 80 $ 137 $ 291
Growth Fund.................................................................. $ 22 $ 69 $ 118 $ 254
Fidelity VIP Growth Portfolio................................................ $ 24 $ 75 $ 128 $ 273
Equity Index Fund............................................................ $ 21 $ 65 $ 112 $ 241
Select Growth and Income Fund................................................ $ 25 $ 76 $ 130 $ 278
Fidelity VIP Equity-Income Portfolio......................................... $ 23 $ 72 $ 123 $ 263
Fidelity VIP II Asset Manager Portfolio...................................... $ 24 $ 74 $ 126 $ 269
Fidelity VIP High Income Portfolio........................................... $ 25 $ 75 $ 129 $ 275
Investment Grade Income Fund................................................. $ 23 $ 70 $ 120 $ 257
Government Bond Fund......................................................... $ 24 $ 74 $ 126 $ 269
Money Market Fund............................................................ $ 21 $ 64 $ 110 $ 237
</TABLE>
* The Contract fee is not deducted after annuitization. A surrender charge is
assessed at the time of annuitization if you elect a noncommutable period
certain option of less than ten years or any commutable period certain option.
No charge is assessed if you elect any life contingency option or any
noncommutable period certain option of ten years or more.
** If the Minimum Guaranteed Annuity Payout Rider is exercised, you may only
annuitize under a fixed annuity payout option involving a life contingency at
the guaranteed annuity purchase rates listed under the Annuity Option Tables in
your Contract.
10
<PAGE>
SUMMARY OF CONTRACT FEATURES
WHAT IS THE ALLMERICA ADVANTAGE VARIABLE ANNUITY?
The Allmerica Advantage variable annuity contract ("Contract") is an insurance
contract designed to help you, the Owner, 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 payments that you can receive for life;
- - Issue age up to your 90th birthday.
The Contract has two phases, an accumulation phase and, if you choose to
annuitize, an annuity payout phase. During the accumulation phase you may
allocate your initial payment and any additional payments you choose to make
among 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 you withdraw money. In addition,
during the accumulation phase, your beneficiaries receive certain protections in
the event of the Annuitant's death. See discussion below "WHAT HAPPENS UPON
DEATH DURING THE ACCUMULATION PHASE?"
WHAT HAPPENS IN THE ANNUITY PAYOUT PHASE?
During the annuity payout phase, the Annuitant can receive income based on
several annuity payout options. You choose the annuity payout option and the
date for annuity benefit payments to begin. You also decide whether you want
variable annuity benefit payments based on the investment performance of certain
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 any remaining guaranteed payments
continuing to your beneficiary for ten years in the event that you die before
the end of ten years;
- - periodic payments over a specified number of years (1 to 30); under this
option you may reserve the right to convert remaining payments to a lump-sum
payout by electing a commutable option.
An optional Minimum Guaranteed Annuity Payout Rider is available during the
accumulation phase in most jurisdictions for a separate monthly charge. See "M.
Optional Minimum Guaranteed Annuity Payout Rider"
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under "DESCRIPTION OF THE CONTRACT." If elected, the Rider guarantees the
Annuitant a minimum amount of fixed lifetime income during the annuity payout
phase, subject to certain conditions. On each Contract anniversary a Minimum
Guaranteed Annuity Payout Benefit Base is determined. The Minimum Guaranteed
Annuity Payout Benefit Base (less any applicable premium taxes) is the value
that will be annuitized should you exercise the Rider. In order to exercise the
Rider, a fixed annuitization option involving a life contingency must be
selected. Annuitization under this Rider will occur at the guaranteed annuity
purchase rates listed under the Annuity Option Tables in your Contract. The
Minimum Guaranteed Annuity Payout Benefit Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment, if
applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded daily at
the annual rate of 5% plus gross payments made thereafter compounded daily
at the annual rate of 5%, starting on the date each payment is applied,
decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the Rider
effective date, as determined after positive adjustments have been made for
subsequent payments and any positive Market Value Adjustment, if applicable,
and negative adjustments have been made for subsequent withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
-----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal.
WHO ARE THE KEY PERSONS UNDER THE CONTRACT?
The Contract is between you, (the "Owner") and us, Allmerica Financial Life
Insurance and Annuity Company (for contracts issued in all jurisdictions except
Hawaii and New York) or First Allmerica Financial Life Insurance Company (for
contracts issued in Hawaii and New York). Each Contract has an Owner (or an
Owner and a Joint Owner, in which case one of the two also must be the
Annuitant), an Annuitant and one or more beneficiaries. As Owner, you make
payments, choose investment allocations and select the Annuitant and
beneficiary. The Annuitant is the individual to receive annuity benefit payments
under the Contract. The beneficiary is the person who receives any payment on
the death of the Owner or Annuitant.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The number and frequency of your payments are flexible, subject 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?
You may allocate payments among the Sub-Accounts investing in the Funds, the
Guarantee Period Accounts, and the Fixed Account.
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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
Select Value Opportunity 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 Stock
Investment Grade Income Fund 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, except in California where assets are held in the
Company's General Account. Values and benefits calculated on the basis of
Guarantee Period Account allocations, however, are obligations of the Company's
General Account. Amounts allocated to a Guarantee Period Account earn a
Guaranteed Interest Rate declared by the Company. The level of the Guaranteed
Interest Rate depends on the number of years of the Guarantee Period selected.
The Company 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; however, this adjustment will never be applied against your
principal. In addition, earnings in the GPA after application of the Market
Value Adjustment will not be less than an effective annual rate of 3%. For more
information about the Guarantee Period Accounts and the Market Value Adjustment,
see "GUARANTEE PERIOD ACCOUNTS."
FIXED ACCOUNT. The Fixed Account is part of the General Account, which consists
of all the Company's assets other than those allocated to the Variable Account
and any other separate account. Allocations to the Fixed Account are guaranteed
as to principal and a minimum rate of interest. Additional excess interest may
be declared periodically at the Company's discretion. Furthermore, the initial
rate in effect on the date an amount is allocated to the Fixed Account is
guaranteed for one year from that date. For more information about the Fixed
Account see APPENDIX A, "MORE INFORMATION ABOUT THE FIXED ACCOUNT."
THE FIXED ACCOUNT AND/OR THE GUARANTEE PERIOD ACCOUNTS MAY NOT BE AVAILABLE IN
ALL STATES.
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.
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WHAT IF I NEED MY MONEY BEFORE THE ANNUITY PAYOUT PHASE BEGINS?
You may surrender the Contract or make withdrawals any time before the annuity
payout phase begins. Each year you can take without a surrender charge the
greatest of 100% of cumulative earnings, 10% of the Contract's Accumulated Value
or, if you are both an Owner and the Annuitant, an amount based on your life
expectancy. (Similarly, no surrender charge will apply if an amount is withdrawn
based on the Annuitant's life expectancy and the Owner is a trust or other
nonnatural person.) A 10% federal tax penalty may apply to amounts deemed to be
income if you are under age 59 1/2. Additional amounts may be withdrawn at any
time but payments that have not been invested in the Contract for more than nine
years may be subject to a surrender charge. (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, you may withdraw all or a portion of your money without a surrender
charge if, after the Contract is issued and before age 65, you become disabled.
Also, except in New York and New Jersey where not permitted by state law, you
may withdraw money without a surrender charge if, after the Contract is issued,
you are admitted to a medical care facility or diagnosed with a fatal illness.
For details and restrictions, see "Reduction or Elimination of Surrender Charge
and Additional Amounts Credited."
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 compounded daily at the annual rate of 5%, starting on the date
each payment was applied (5% compounding not available in Hawaii and New
York), decreased proportionately to reflect withdrawals; or
- - The death benefit that would have been payable on the most recent Contract
anniversary, increased for subsequent payments and decreased proportionately
for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made. On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals gross payments). The higher of
(a) or (b) will then be locked in until the second anniversary, at which time
the death benefit will be equal to the greatest of (a) the Contract's then
current Accumulated Value increased by any positive Market Value Adjustment; (b)
gross payments compounded daily at the annual rate of 5% (gross payments in
Hawaii and New York) or (c) the locked-in value of the death benefit at the
first anniversary. The greatest of (a), (b) or (c) will be locked in until the
next Contract anniversary. This calculation will then be repeated on each
anniversary while the Contract remains in force and prior to the Annuity Date.
As noted above, the values of (b) and (c) will be decreased proportionately if
withdrawals are taken.
At the death of an Owner who is not also the Annuitant during the accumulation
phase, the death benefit will equal the Accumulated Value 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.")
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WHAT CHARGES WILL I INCUR UNDER MY CONTRACT?
If the Accumulated Value is less than $50,000 on a Contract anniversary or 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 surrender
charge. If applicable, this charge will be between 1% and 8% of payments
withdrawn, based on when the payments were originally made.
Depending upon the state in which you live, a deduction for state and local
premium taxes, if any, may be made as described under "C. Premium Taxes."
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 which are described in "Other Charges" and
in the Fund prospectuses accompanying this Prospectus.
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider for an additional charge. If you elect the Rider, a
separate monthly charge is deducted from the Contract's Accumulated Value at the
end of each month within which the Rider has been in effect. The charge is
assessed by multiplying the Accumulated Value on the last day of each month and
on the date the Rider is terminated by 1/12th of the following annual percentage
rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with a ten-year waiting period..... 0.25%
Minimum Guaranteed Annuity Payout Rider with a fifteen-year waiting
period................................................................... 0.15%
</TABLE>
For a description of this Rider, see "C. Optional Minimum Guaranteed Annuity
Payout Rider Charge" under "CHARGES AND DEDUCTIONS," and "M. Optional Minimum
Guaranteed Annuity Payout Rider" under "DESCRIPTION OF THE CONTRACT."
For more information, see "CHARGES AND DEDUCTIONS."
CAN I EXAMINE THE CONTRACT?
Yes. Your Contract will be delivered to you after your purchase. If you return
the Contract to the Company within ten days of receipt, the Contract will be
canceled. (There may be a longer period in certain states; see the "Right to
Examine" provision on the cover of your Contract.) If you cancel the Contract,
you will receive a refund of any amounts allocated to the Fixed and Guarantee
Period Accounts and the Accumulated Value of any 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 Cancel Individual Retirement Annuity" and
"C. Right to Cancel All Other Contracts."
CAN I MAKE FUTURE CHANGES UNDER MY CONTRACT?
You can make several changes after receiving your Contract:
- - You may assign your ownership to someone else, except under certain qualified
plans.
- - You may change the beneficiary, unless you have designated a beneficiary
irrevocably.
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<PAGE>
- - You may change your allocation of payments.
- - You may make transfers of accumulated value among your current investments
without any tax consequences.
- - You may cancel the Contract within ten days of delivery (or longer if required
by state law).
16
<PAGE>
PERFORMANCE INFORMATION
The Contract was first offered to the public by Allmerica Financial Life
Insurance and Annuity Company in 1996 and by First Allmerica Financial Life
Insurance Company in 1997. The Company, however, may advertise "total return"
and "average annual total return" performance information based on (1) the
periods that the Sub-Accounts have been in existence and (2) the periods that
the Underlying Funds have been in existence. Performance results in Tables 1A
and 2A are calculated with all charges assumed to be those applicable to the
Contract, the Sub-Accounts and the Underlying Funds and also assume that the
Contract is surrendered at the end of the applicable period. Performance results
in Tables 1B and 2B do not include the Contract fee and assume that the Contract
is not surrendered at the end of the applicable period. Both the total return
and yield figures are based on historical earnings and are not intended to
indicate future performance.
The total return of a Sub-Account refers to the total of the income generated by
an investment in the Sub-Account and of the changes in the value of the
principal (due to realized and unrealized capital gains or losses) for a
specified period, reduced by Variable Account charges, and expressed as a
percentage.
The average annual total return represents the average annual percentage change
in the value of an investment in the Sub-Account over a given period of time. It
represents averaged figures as opposed to the actual performance of a
Sub-Account, which will vary from year to year.
The yield of the Sub-Account investing in the Money Market Fund refers to the
income generated by an investment in the Sub-Account over a seven-day period
(which period will be specified in the advertisement). This income is then
"annualized" by assuming that the income generated in the specific week is
generated over a 52-week period. This annualized yield is shown as a percentage
of the investment. The "effective yield" calculation is similar but, when
annualized, the income earned by an investment in the Sub-Account is assumed to
be reinvested. Thus the effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The yield of a Sub-Account investing in a Fund other than the Money Market Fund
refers to the annualized income generated by an investment in the Sub-Account
over a specified 30-day or one-month period. The yield is calculated by assuming
that the income generated by the investment during that 30-day or one-month
period is generated each period over a 12-month period and is shown as a
percentage of the investment.
Quotations of average annual total return as shown in Table 1A are calculated in
the manner prescribed by the SEC and show the percentage rate of return of a
hypothetical initial investment of $1,000 for the most recent one, five and ten
year period or for a period covering the time the Sub-Account has been in
existence, if less than the prescribed periods. The calculation is adjusted to
reflect the deduction of the annual Sub-Account asset charge of 1.45%, the $30
annual Contract fee the Underlying Fund charges and the surrender charge which
would be assessed if the investment were completely withdrawn at the end of the
specified period. The calculation is not adjusted to reflect the deduction of
the optional Minimum Guaranteed Annuity Payout Rider charge. Quotations of
supplemental average total returns, as shown in Table 1B, are calculated in
exactly the same manner and for the same periods of time except that it does not
reflect the Contract fee and assumes that the Contract is not surrendered at the
end of the periods shown.
The performance shown in Tables 2A and 2B of Appendix B and C is calculated in
exactly the same manner as those in Tables 1A and 1B of Appendix B and C
respectively; however, the period of time is based on the Underlying Fund's
lifetime, which may predate the Sub-Account's inception date. These performance
calculations are based on the assumption that the Sub-Account corresponding to
the applicable Underlying Fund was actually in existence throughout the stated
period and that the contractual charges and expenses during that period were
equal to those currently assessed under the Contract.
Performance Tables for Contracts issued by Allmerica Financial Life Insurance
and Annuity Company can be found in Appendix B. Performance Tables for Contracts
issued by First Allmerica Financial Life Insurance
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Company can be found in Appendix C. For more detailed information about these
performance calculations, including actual formulas, see the SAI.
PERFORMANCE INFORMATION FOR ANY SUB-ACCOUNT REFLECTS ONLY THE PERFORMANCE OF A
HYPOTHETICAL INVESTMENT IN THE SUB-ACCOUNT DURING THE TIME PERIOD ON WHICH THE
CALCULATIONS ARE BASED. PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF
THE INVESTMENT OBJECTIVES AND POLICIES AND RISK CHARACTERISTICS OF THE
UNDERLYING 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.
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to: (1) the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), Dow Jones Industrial Average ("DJIA"), Shearson Lehman
Aggregate Bond Index or other unmanaged indices so that investors may compare
the Sub-Account results with those of a group of unmanaged securities widely
regarded by investors as representative of the securities markets in general;
(2) other groups of variable annuity separate accounts or other investment
products tracked by Lipper, Inc., a widely used independent research firm which
ranks mutual funds and other investment products by overall performance,
investment objectives, and assets, or tracked by other services, companies,
publications, or persons, who rank such investment products on overall
performance or other criteria; or (3) the Consumer Price Index (a measure for
inflation) to assess the real rate of return from an investment in the
Sub-Account. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses. In addition, relevant broad- based indices and performance from
independent sources may be used to illustrate the performance of certain
contract features.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/health
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues and
do not measure the ability of such companies to meet other non-policy
obligations. The ratings also do not relate to the performance of the Underlying
Funds.
DESCRIPTION OF THE COMPANIES, THE VARIABLE ACCOUNTS,
THE TRUST, FIDELITY VIP, T. ROWE PRICE AND DGPF
THE COMPANIES. Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") is a life insurance company organized under the laws of
Delaware in July 1974. Its Principal Office is located at 440 Lincoln Street,
Worcester, MA 01653, telephone 508-855-1000. Allmerica Financial is subject to
the laws of the state of Delaware governing insurance companies and to
regulation by the Commissioner of Insurance of Delaware. In addition, Allmerica
Financial is subject to the insurance laws and regulations of other states and
jurisdictions in which it is licensed to operate. As of December 31, 1998,
Allmerica Financial had over $14 billion in assets and over $26 billion of life
insurance in force.
Effective October 1, 1995, Allmerica Financial changed its name from SMA Life
Assurance Company to Allmerica Financial Life Insurance and Annuity Company.
Allmerica Financial is an indirect wholly owned subsidiary of First Allmerica
Financial Life Insurance Company which, in turn, is a wholly owned subsidiary of
Allmerica Financial Corporation ("AFC").
First Allmerica Financial Life Insurance Company ("First Allmerica"), organized
under the laws of Massachusetts in 1844, is among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries had over $27 billion in combined assets and over $48 billion of
life insurance in force. Effective October 16, 1995, First Allmerica converted
from a mutual life insurance
18
<PAGE>
company known as State Mutual Life Assurance Company of America to a stock life
insurance company and adopted its present name. First Allmerica is a wholly
owned subsidiary of AFC. First Allmerica's principal office ("Principal Office")
is located at 440 Lincoln Street, Worcester MA 01653, telephone 508-855-1000.
First Allmerica is subject to the laws of the Commonwealth of Massachusetts
governing insurance companies and to regulation by the Commissioner of Insurance
of Massachusetts. In addition, First Allmerica is subject to the insurance laws
and regulations of other states and jurisdictions in which it is licensed to
operate.
Both companies are charter members of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNTS. Each Company maintains a separate account called
Separate Account VA-K (the "Variable Account"). The Variable Account of
Allmerica Financial was authorized by vote of the Board of Directors of the
Company on November 1, 1990. The Variable Account of First Allmerica was
authorized by vote of the Board of Directors of the Company on November 1, 1990.
Each 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. This registration does not involve the supervision or management
of investment practices or policies of the Variable Accounts or the Company by
the SEC.
Separate Account VA-K is a separate investment account of the Company. 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. Obligations under
the Contracts are obligations of the Company. Under Delaware and Massachusetts
law, the assets of the Variable Account may not be charged with any liabilities
arising out of any other business of the Company.
The Company reserves the right, subject to compliance with applicable law, to
change the names of the Variable Account and the Sub-Accounts. The Company also
offers other variable annuity contracts investing in the Variable Account which
are not discussed in this Prospectus. In addition the Variable Account may
invest in other underlying funds which are not available to the Contracts
described in this Prospectus.
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, to serve as an investment medium for assets of various
separate accounts established by the Company or other 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 Select
Value Opportunity 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 Financial Investment Management Services, Inc. ("Manager") serves as
the investment adviser of the Trust and 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."
19
<PAGE>
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, Massachusetts. 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. As
part of their operating expenses, the Portfolios of Fidelity VIP 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. One of its affiliates, T. Rowe Price Associates,
Inc., serves as the Sub-Adviser to the Select Capital Appreciation Fund.
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 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.
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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 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 seeks
long-term growth 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.
SELECT VALUE OPPORTUNITY FUND -- The Select Value Opportunity Fund 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 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 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 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.
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
money market instruments.
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<PAGE>
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 the Fidelity VIP
prospectus.
INVESTMENT GRADE INCOME FUND -- The Investment Grade Income Fund 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 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 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 INDIVIDUAL 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 Trustees have overall
responsibility for the supervision of the affairs of the Trust. The Trustees
have entered into an agreement ("Management Agreement") with Allmerica Financial
Investment Management Services, Inc. ("Manager"), an indirect wholly owned
subsidiary of First Allmerica, 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.
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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>
FUND NET ASSET VALUE RATE
- -------------------------------- ------------------------------------- ---------
<S> <C> <C>
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Growth Fund First $250 million 0.60%
Next $250 million 0.40%
Over $500 million 0.35%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Select Growth and Income Fund First $100 million 0.75%
Next $150 million 0.70%
Over $250 million 0.65%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Government Bond Fund * 0.50%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
</TABLE>
* For the Government Bond Fund, the 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 Manager is solely responsible for the payment of all
fees for investment management services to the Sub-Advisers. Allmerica Asset
Management, Inc., the Sub-
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<PAGE>
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.
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 FUNDS. For
managing investments and business affairs, each Portfolio pays a monthly
management fee to Fidelity Management & Research Company ("FMR"). The
prospectuses of Fidelity VIP and Fidelity 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 fee for each fund is calculated by adding a group fee rate to an individual
fund fee rate, multiplying the result by the fund's monthly average net assets,
and dividing by twelve.
The Fidelity VIP High Income Portfolio's annual fee rate is made up of the sum
of two components:
1. A group fee rate based on the 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 the total assets under management increase.
2. An individual fund fee rate of 0.45% for the Fidelity VIP High Income
Portfolio.
The annual 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 average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.52%, and
drops as the total assets under management increase.
2. An individual fund 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.
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.
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 the largest no-load international mutual fund asset managers with
approximately $32 billion (as of December 31, 1998) under management in its
offices in Baltimore, London, Tokyo, Hong Kong, Singapore and Buenos Aires. 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 based on the average daily net assets of the Series as
follows: 0.85% on the first $500 million, 0.80% on the next $500 million, 0.75%
on the next $1,500 million and 0.70% on net assets in excess of $2,500 million.
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<PAGE>
DESCRIPTION OF THE CONTRACT
A. PAYMENTS.
The Company issues a Contract when its underwriting requirements, which include
receipt of the initial payment and allocation instructions by the Company at its
Principal Office, are met. These requirements also may include the proper
completion of an application; however, where permitted, the Company may issue a
Contract without completion of an application and/or signature for certain
classes of annuity Contracts.
Payments are to be made payable to the Company. A net payment is equal to the
payment received less the amount of any applicable premium tax. The initial net
payment is credited to the Contract as of the date that all issue requirements
are properly met. If all issue requirements are not completed within five
business days of the Company's receipt of the initial payment, the payment will
be returned immediately unless the Owner specifically consents to the holding of
it pending completion of the outstanding issue requirements. Subsequent payments
will be credited as of the Valuation Date received at the Principal Office on
the basis of accumulation unit value next determined after receipt.
Payments may be made to the Contract at any time prior to the Annuity Date,
subject to certain minimums. 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 certain states, 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 may include requirements that callers on behalf of an Owner identify
themselves by name and identify the Annuitant by name, date of birth and social
security number or PIN number. All transfer instructions by telephone are tape
recorded.
B. RIGHT TO CANCEL INDIVIDUAL RETIREMENT ANNUITY.
An individual purchasing a Contract intended to qualify as an IRA may cancel the
Contract at any time within ten days after receipt of the Contract and receive a
refund. In order to cancel the Contract, the Owner must mail or deliver the
Contract to the agent through whom the Contract was purchased, 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 cancellation to be effective.
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<PAGE>
Within seven days, the Company will provide a refund equal to the gross
payment(s) received. In some states, however, the refund may equal the greater
of (1) gross payments, or (2) gross payments allocated to the Fixed Account and
the Guarantee Period Accounts plus the Accumulated Value of any amounts
allocated to the Variable Account plus any amounts deducted under the Contract
or by the Underlying Funds for taxes, charges or fees. At the time the Contract
is issued, the "Right to Examine" provision on the cover of the Contract will
specifically indicate whether the refund will be equal to gross payments or
equal to the greater of (a) or (b) as set forth above.
The liability of the Variable Account under this provision is limited to the
Owner's Accumulated Value in the Sub-Accounts on the date of cancellation. Any
additional amounts refunded to the Owner will be paid by the Company.
C. RIGHT TO CANCEL ALL OTHER CONTRACTS.
An Owner may cancel the Contract at any time within ten days after receipt of
the Contract (or longer if required by state law) and receive a refund. In most
states, the Company will pay the Owner an amount equal to the sum of (1) the
difference between the payment received, including fees, and any amount
allocated to the Variable Account, and (2) the Accumulated Value of amounts
allocated to the Variable Account as of the date the request is received. If the
Contract was purchased as an IRA or issued in a state that requires a full
refund of the initial payment(s), the IRA cancellation right described above
will be used. At the time the Contract is issued, the "Right to Examine"
provision on the cover of the Contract will specifically indicate what the
refund will be and the time period allowed to exercise the right to cancel.
In order to comply with New York regulations concerning the purchase of a new
annuity contract to replace an existing life or annuity contract (a
"replacement"), an Owner who purchases the Contract in New York as a replacement
may cancel within 60 days after receipt. In order to cancel the Contract, the
Owner must mail or deliver it to the Company's Principal Office or to one of its
authorized representatives. The Company will refund an amount equal to the
Surrender Value plus all fees and charges and the Contract will be void from the
beginning.
D. TRANSFER PRIVILEGE.
At any time prior to the Annuity Date, 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. Transfers from a Guarantee
Period Account prior to the expiration of the Guarantee Period will be subject
to a Market Value Adjustment.
The first 12 transfers in a Contract year are guaranteed to be free of any
transfer charge. The Company does not currently charge for additional transfers
but reserves the right to assess a charge, guaranteed never to exceed $25, to
reimburse it for the expense of processing these additional 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
26
<PAGE>
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 or change the option is received
by the Company. As such, subsequent payments allocated in a manner different
from the percentage allocation mix in effect on the date the payment is received
will be allocated in accordance with the existing mix on the next scheduled date
unless the Owner's timely request to change the allocation mix is received by
the Company.
The Company reserves the right to limit the number of Funds that may used for
automatic transfers and rebalancing, and to discontinue either option upon
advance written notice. The first automatic transfer or rebalancing and all
subsequent transfers or rebalancings effected in a Contract year under a request
count as one transfer for purposes of the 12 transfers guaranteed to be free of
a transfer charge in each Contract year. Currently, Dollar Cost Averaging and
Automatic Account Rebalancing may not be in effect simultaneously. Either option
may be elected at no additional charge when the Contract is purchased or at a
later date.
E. SURRENDER.
At any time prior to the Annuity Date, the Owner may surrender the Contract and
receive its Surrender Value, less any tax withholding. The Owner must return the
Contract and a signed, written request for surrender, satisfactory to the
Company, to the Principal Office. The Surrender Value will be calculated based
on the Contract's Accumulated Value as of the Valuation Date on which the
request and the Contract are received at the Principal Office.
Before the Annuity Date, a surrender charge may be deducted when a Contract is
surrendered if payments have been credited to the Contract during the last nine
full Contract years. See "CHARGES AND DEDUCTIONS." The Contract fee will be
deducted upon surrender of the Contract.
After the Annuity Date, only Contracts annuitized under a commutable period
certain option may be surrendered. The amount payable is the commuted value of
any unpaid installments, computed on the basis of the assumed interest rate
incorporated in such annuity benefit payments. No surrender charge is imposed
after the Annuity Date.
Any amount surrendered normally is payable within seven days following the
Company's receipt of the surrender request. The Company reserves the right to
defer surrenders and withdrawals of amounts in each Sub-Account in any period
during which (1) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays, (2) the SEC has, by order, permitted such suspension, or (3) an
emergency, as determined by the SEC, exists such that disposal of portfolio
securities or valuation of assets of a separate account is not reasonably
practicable.
The Company reserves the right to defer surrenders and withdrawals of amounts
allocated to the Company's Fixed Account and Guarantee Period Accounts for a
period not to exceed six months.
The surrender rights of Owners who are participants under Section 403(b) plans
or who are participants in the Texas Optional Retirement Program ("Texas ORP")
are restricted; see "Tax-Sheltered Annuities" and "Texas Optional Retirement
Program."
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<PAGE>
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 surrender charge, as described under "CHARGES AND
DEDUCTIONS." In addition, amounts withdrawn from a Guarantee Period Account
prior to the end of the applicable Guarantee Period will be subject to a Market
Value Adjustment, as described under "GUARANTEE PERIOD ACCOUNTS."
Where allocations have been made to more than one account, a percentage of the
withdrawal may be allocated to each such account. A withdrawal from a
Sub-Account will result in cancellation of a number of units equivalent in value
to the amount withdrawn, computed as of the Valuation Date that the request is
received at the Principal Office.
Each withdrawal must be in a minimum amount of $100. Except in New York where no
specific balance is required, no withdrawal will be permitted if the Accumulated
Value remaining under the Contract would be reduced to less than $1,000.
Withdrawals will be paid in accordance with the time limitations described under
"E. Surrender."
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 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 date
indicated on the application. If elected after the issue date, the Owner may
elect, by written request, a specific dollar amount and the percentage of this
amount to be taken from each designated Sub-Account and/or the Fixed Account, or
the Owner may elect to withdraw a specific percentage of the Accumulated Value
calculated as of the withdrawal dates, and may designate the percentage of this
amount which should be taken from each account. The first withdrawal will take
place on the date the written request is received at the Principal Office or, if
later, on a date specified by the Owner.
If a withdrawal would cause the remaining Accumulated Value to be less than
$1,000, systematic withdrawals may be discontinued. Systematic withdrawals will
cease automatically on the Annuity Date. The Owner may change or terminate
systematic withdrawals only by written request to the Principal Office.
LIFE EXPECTANCY DISTRIBUTIONS. Prior to the Annuity Date, an Owner who also is
the Annuitant may elect to make a series of systematic withdrawals from the
Contract according to the Company's life expectancy distribution ("LED") option
by returning a properly signed LED request form to the Principal Office.
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<PAGE>
The Owner may elect monthly, bi-monthly, quarterly, semi-annual, or annual LED
distributions, and may terminate the LED option at any time. Under contracts
issued in Hawaii and New York, the LED option will terminate automatically on
the maximum Annuity Date permitted under the Contract, at which time an Annuity
Option must be selected.
If an Owner elects the Company's LED option, in each calendar year a fraction of
the Accumulated Value is withdrawn without a surrender charge based on the
Owner's then life expectancy (or the joint life expectancy of the Owner and a
beneficiary.) The numerator of the fraction is 1 (one) and the denominator of
the fraction is the remaining life expectancy of the Owner, as determined
annually by the Company. The resulting fraction, expressed as a percentage, is
applied to the Accumulated Value at the beginning of the year to determine the
amount to be distributed during the year. Under the Company's LED option, the
amount withdrawn from the Contract changes each year, because life expectancy
changes each year that a person lives. For example, actuarial tables indicate
that a person age 70 has a life expectancy of 16 years, but a person who attains
age 86 has a life expectancy of another 6.5 years. Where the Owner is a trust or
other nonnatural person, the Owner may elect the LED option based on the
Annuitant's life expectancy.
(Note: this option may not produce annual distributions that meet the definition
of "substantially equal periodic payments" as defined under Code Section 72(t).
As such, the withdrawals may be treated by the Internal Revenue Service (IRS) as
premature distributions from the Contract and may be subject to a 10% federal
tax penalty. Owners seeking distributions over their life under this definition
should consult their tax advisor. For more information, see "FEDERAL TAX
CONSIDERATIONS," "B. Taxation of the Contracts in General." In addition, if the
amount necessary to meet the substantially equal periodic payment definition is
greater than the Company's LED amount, a surrender charge may apply to the
amount in excess of the LED amount.)
The Company may discontinue or change the LED option at any time, but not with
respect to election of the option made prior to the date of any change in the
LED option.
G. DEATH BENEFIT.
In the event that the Annuitant, Owner or Joint Owner, if applicable, dies while
the Contract is in force, the Company will pay the beneficiary a death benefit,
except where the Contract is continued as provided below in "H. The Spouse of
the Owner as Beneficiary." The amount of the death benefit and the time
requirements for receipt of payment may vary depending upon whether the
Annuitant or an Owner dies first, and whether death occurs prior to or after the
Annuity Date.
DEATH OF THE ANNUITANT PRIOR TO THE ANNUITY DATE. At the death of the Annuitant
(including an Owner who is also the Annuitant), the death benefit is equal to
the greatest of (a) the Accumulated Value under the Contract increased by any
positive Market Value Adjustment; (b) gross payments compounded daily at the
annual rate of 5% starting on the date each payment is applied, decreased
proportionately to reflect withdrawals (except in Hawaii and New York where (b)
equals gross payments decreased proportionately to reflect withdrawals) (for
each withdrawal, the proportionate reduction is calculated as the death benefit
under this option immediately prior to the withdrawal multiplied by the
withdrawal amount and divided by the Accumulated Value immediately prior to the
withdrawal); or (c) the death benefit that would have been payable on the most
recent contract anniversary, increased for subsequent payments and decreased
proportionately for subsequent withdrawals.
This guaranteed death benefit works in the following way assuming no withdrawals
are made: On the first anniversary, the death benefit will be equal to the
greater of (a) the Accumulated Value (increased by any positive Market Value
Adjustment) or (b) gross payments compounded daily at the annual rate of 5%
(except in Hawaii and New York where (b) equals gross payments). The higher of
(a) or (b) will then be locked in until the second anniversary, at which time
the death benefit will be equal to the greatest of (a) the Contract's then
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<PAGE>
current Accumulated Value increased by any positive Market Value Adjustment; (b)
gross payments compounded daily at the annual rate of 5% (gross payments in
Hawaii and New York) or (c) the locked-in value of the death benefit at the
first anniversary. The greatest of (a), (b) or (c) will be locked in until the
next Contract anniversary. This calculation will then be repeated on each
anniversary while the Contract remains in force and prior to the Annuity Date.
As noted above, the values of (b) and (c) will be decreased proportionately if
withdrawals are taken. See APPENDIX E, "THE DEATH BENEFIT" for specific examples
of death benefit calculations.
DEATH OF AN OWNER WHO IS NOT ALSO THE ANNUITANT PRIOR TO THE ANNUITY DATE. If
an Owner who is not also the Annuitant dies before the Annuity Date, the death
benefit will be the Accumulated Value increased by any positive Market Value
Adjustment. The death benefit never will be reduced by a negative Market Value
Adjustment.
PAYMENT OF THE DEATH BENEFIT PRIOR TO THE ANNUITY DATE. The death benefit
generally will be paid to the beneficiary in one sum within seven business days
of the receipt of due proof of death at the Principal Office unless the Owner
has specified a death benefit annuity option. Instead of payment in one sum, the
beneficiary may, by written request, elect to:
(1) defer distribution of the death benefit for a period no more than five
years from the date of death; or
(2) receive 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 ON OR AFTER THE ANNUITY DATE. If the Annuitant's death
occurs on or after the Annuity Date but before completion of all guaranteed
annuity benefit payments, any unpaid amounts or installments will be paid to the
beneficiary. The Company must pay out the remaining payments at least as rapidly
as under the payment option in effect on the date of the Annuitant's death.
H. THE SPOUSE OF THE OWNER AS BENEFICIARY.
The Owner's spouse, if named as the sole beneficiary, may by written request
continue the Contract in lieu of receiving the amount payable upon death of the
Owner. Upon such election, the spouse will become the Owner and Annuitant
subject to the following: (1) any value in the Guarantee Period Accounts will be
transferred to the 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
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have knowledge of an assignment unless it is made in writing and filed at the
Principal Office. The Company will not assume responsibility for determining the
validity of any assignment. If an assignment of the Contract is in effect on the
Annuity Date, the Company reserves the right to pay to the assignee, in one sum,
that portion of the Surrender Value of the Contract to which the assignee
appears to be entitled. The Company will pay the balance, if any, in one sum to
the Owner in full settlement of all liability under the Contract. The interest
of the Owner and of any beneficiary will be subject to any assignment.
For important tax liability which may result from assignments, see "FEDERAL TAX
CONSIDERATIONS."
J. ELECTING THE FORM OF ANNUITY AND THE ANNUITY DATE.
The Owner selects the Annuity Date. To the extent permitted by state law, the
Annuity Date may be the first day of any month (1) before the Annuitant's 85th
birthday, if the Annuitant's age on the issue date of the Contract is 75 or
under, or (2) within ten years from the issue date of the Contract and before
the Annuitant's 90th birthday, if the Annuitant's age on the issue date is
between 76 and 90. The Owner may elect to change the Annuity Date by sending a
request to the Principal Office at least one month before the Annuity date. The
new Annuity Date must be the first day of any month occurring before the
Annuitant's 90th birthday, and must be within the life expectancy of the
Annuitant. The Company shall determine such life expectancy at the time a change
in Annuity Date is requested. In no event will the maximum annuitization age
exceed 90. The 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 option, a payment equal to the value of the
fixed number of Annuity Units in the Sub-Accounts is made monthly, quarterly,
semi-annually or annually. Since the value of an Annuity Unit in a Sub-Account
will reflect the investment performance of the Sub-Account, the amount of each
annuity benefit payment will vary.
The annuity 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 a commutable period
certain option has been elected. 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 an option, a variable life annuity with periodic
payments guaranteed for ten years will be purchased. Changes in either the
Annuity Date or annuity option can be made up to one month prior to the Annuity
Date.
If the Owner exercises the Minimum Guaranteed Annuity Payout Rider, annuity
benefit payments must be made under a fixed annuity payout option involving a
life contingency and will be determined based on the guaranteed annuity purchase
rates listed under the Annuity Option Tables in the Contract.
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K. DESCRIPTION OF VARIABLE ANNUITY PAYOUT OPTIONS.
The Company provides the variable annuity payout options described below.
Currently, variable annuity payout options may be funded through the
Sub-Accounts investing in the Select Growth and Income Fund, the Equity Index
Fund, the Growth Fund and the Money Market Fund.
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 payout options may be selected
in combination with any of the fixed annuity payout options. Other annuity
options may be offered by the Company. IRS regulations may not permit certain of
the available annuity options when used in connection with certain qualified
Contracts.
VARIABLE LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR TEN YEARS. This variable
annuity is payable periodically during the lifetime of the 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. This variable annuity is payable during the payee's life. It would be
possible under this option for the payee to receive only one annuity benefit
payment if the payee dies prior to the due date of the second annuity benefit
payment, two annuity benefit payments if the payee dies before the due date of
the third annuity benefit payment, and so on. Payments will continue, however,
during the lifetime of the payee, no matter how long he or she lives.
UNIT 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 at annuitization
divided by the dollar amount of the first payment, and
(2) is the number of payments paid prior to the death of the payee.
JOINT AND SURVIVOR VARIABLE LIFE ANNUITY. This variable annuity is payable
jointly to two payees during their joint lifetime, and then continues thereafter
during the lifetime of the survivor. The amount of each payment to the survivor
is based on the same number of Annuity Units which applied during the joint
lifetime of the two payees. One of the payees must be either the person
designated as the Annuitant 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 noncommutable. A commutable option provides the payee with the right to
request a lump sum payment of any remaining balance after annuity payments have
commenced. Under a noncommutable period certain option, the Annuitant may not
request a lump sum payment. See "Annuity Benefit Payments" in the SAI.
It should be noted that the period certain option does not involve a life
contingency. In computing payments under this option, the Company deducts a
charge for annuity rate guarantees, which includes a factor for mortality risks.
Although not contractually required to do so, the Company currently follows a
practice of permitting persons receiving payments under a period certain option
to elect to convert to a variable annuity
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involving a life contingency. The Company may discontinue or change this
practice at any time, but not with respect to election of the option made prior
to the date of any change in this practice.
L. ANNUITY BENEFIT PAYMENTS.
DETERMINATION OF THE FIRST VARIABLE ANNUITY BENEFIT PAYMENT. The amount of the
first monthly payment depends upon the selected variable annuity option, the sex
(however, see "N. Norris Decision" below) and age of the Annuitant, and the
value of the amount applied under the annuity option ("annuity value"). The
Contract provides annuity rates that determine the dollar amount of the first
periodic payment under each variable annuity option for each $1,000 of applied
value. From time to time, the Company may offer its Owners both fixed and
variable annuity rates more favorable than those contained in the Contract. Any
such rates will be applied uniformly to all Owners of the same class.
The dollar amount of the first periodic annuity benefit payment is calculated
based upon the type of annuity option chosen, as follows:
- For life annuity options and noncommutable period certain options of ten
years or more (six or more years under New York Contracts), the dollar
amount is determined by multiplying (1) the Accumulated Value applied
under that option (after application of any Market Value Adjustment and
less premium tax, if any) divided by $1,000, by (2) the applicable amount
of the first monthly payment per $1,000 of value.
- For commutable period certain options and any period certain option of
less than ten years (less than six years under New York Contracts), the
dollar amount is determined by multiplying (1) the Surrender Value less
premium taxes, if any, applied under that option (after application of any
Market Value Adjustment and less premium tax, if any) divided by $1,000,
by (2) the applicable amount of the first monthly payment per $1,000 of
value.
- For a death benefit annuity, the annuity value will be the amount of the
death benefit.
THE FIRST PERIODIC ANNUITY BENEFIT PAYMENT IS BASED UPON THE ACCUMULATED VALUE
AS OF A DATE NOT MORE THAN FOUR WEEKS PRECEDING THE DATE THAT THE FIRST ANNUITY
BENEFIT PAYMENT IS DUE. THE COMPANY TRANSMITS VARIABLE ANNUITY BENEFIT PAYMENTS
FOR RECEIPT BY THE PAYEE BY THE FIRST OF A MONTH. VARIABLE ANNUITY BENEFIT
PAYMENTS ARE CURRENTLY BASED ON UNIT VALUES AS OF THE 15TH DAY OF THE PRECEDING
MONTH.
THE ANNUITY UNIT. On and after the Annuity Date, the Annuity Unit is a measure
of the value of the monthly annuity benefit payments under a variable annuity
option. The value of an Annuity Unit in each Sub-Account initially was set at
$1.00. The value of an Annuity Unit under a Sub-Account on any Valuation Date
thereafter is equal to the value of such unit on the immediately preceding
Valuation Date, multiplied by the net investment factor of the Sub-Account for
the current Valuation Period and divided by the assumed interest rate for the
current Valuation Period The assumed interest rate, discussed below, is
incorporated in the variable annuity options offered in the Contract.
DETERMINATION OF THE NUMBER OF ANNUITY UNITS. The dollar amount of the first
variable annuity benefit payment is divided by the value of an Annuity Unit of
the selected Sub-Account(s) to determine the number of Annuity Units represented
by the first payment. This number of Annuity Units remains fixed under all
annuity options except the joint and two-thirds survivor annuity option.
DOLLAR AMOUNT OF SUBSEQUENT VARIABLE ANNUITY BENEFIT PAYMENTS. The dollar
amount of each periodic variable annuity benefit payment after the first will
vary with the value of the Annuity Units of the selected Sub-Account(s). The
dollar amount of each subsequent variable annuity benefit payment is determined
by multiplying the fixed number of Annuity Units (derived from the dollar amount
of the first payment, as
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described above) with respect to a Sub-Account by the value of an Annuity Unit
of that Sub-Account on the applicable Valuation Date.
The variable annuity options offered by the Company are based on a 3.5% assumed
interest rate, which affects the amounts of the variable annuity benefit
payments. Variable annuity benefit payments with respect to a Sub-Account will
increase over periods when the actual net investment result of the Sub-Account
exceeds the equivalent of the assumed interest rate. Variable annuity benefit
payments will decrease over periods when the actual net investment results are
less than the equivalent of the assumed interest rate.
For an illustration of a calculation of a variable annuity benefit payment using
a hypothetical example, see "Annuity Benefit Payments" in the SAI.
If the Owner elects the Minimum Guaranteed Annuity Payout Rider, at
annuitization the annuity benefit payments provided under the Rider (by applying
the guaranteed annuity factors to the Minimum Guaranteed Annuity Payout Benefit
Base), are compared to the payments that would otherwise be available with the
Rider. If annuity benefit payments under the Rider are higher, the Owner may
exercise the Rider, provided that the conditions of the Rider are met. If
annuity benefit payments under the Rider are lower, the Owner may choose not to
exercise the Rider and instead annuitize under current annuity factors. See "M.
Optional Minimum Guaranteed Annuity Payout Rider," below.
M. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT RIDER
An optional Minimum Guaranteed Annuity Payout Rider is available in most
jurisdictions for a separate monthly charge. The Minimum Guaranteed Annuity
Payout Rider guarantees a minimum amount of fixed annuity lifetime income during
the annuity payout phase, subject to the conditions described below. On each
Contract anniversary a Minimum Guaranteed Annuity Payout Benefit Base is
determined. The Minimum Guaranteed Annuity Payout Benefit Base (less any
applicable premium taxes) is the value that will be annuitized if the Rider is
exercised. In order to exercise the Rider, a fixed annuitization option
involving a life contingency must be selected. Annuitization under this Rider
will occur at the guaranteed annuity purchase rates listed under the Annuity
Option Tables in the Contract. The Minimum Guaranteed Annuity Payout Benefit
Base is equal to the greatest of:
(a) the Accumulated Value increased by any positive Market Value Adjustment,
if applicable; or
(b) the Accumulated Value on the effective date of the Rider compounded
daily at the annual rate of 5% plus gross payments made thereafter
compounded daily at the annual rate of 5%, starting on the date each
payment is applied, decreased proportionately to reflect withdrawals; or
(c) the highest Accumulated Value on any Contract anniversary since the
Rider effective date, as determined after positive adjustments have been
made for subsequent payments and any positive Market Value Adjustment, if
applicable, and negative adjustments have been made for subsequent
withdrawals.
For each withdrawal described in (b) and (c) above, the proportionate reduction
is calculated by multiplying the (b) or (c) value, whichever is applicable,
determined immediately prior to the withdrawal by the following fraction:
amount of the withdrawal
----------------------------------------------------------
Accumulated Value determined immediately prior to the withdrawal
CONDITIONS OF ELECTION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER:
- The Owner may elect the Minimum Guaranteed Annuity Payout Rider at
Contract issue or at any time thereafter, however, if the Rider is not
elected within thirty days after Contract issue or within thirty
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days after a Contract anniversary date, the effective date of the Rider
will be the following Contract anniversary date.
- The Owner may not elect a Rider with a ten-year waiting period if at the
time of election the Annuitant has reached his or her 78th birthday. The
Owner may not elect a Rider with a fifteen-year waiting period if at the
time of election the Annuitant has reached his or her 73rd birthday.
EXERCISING THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER:
- The Owner may only exercise the Minimum Guaranteed Annuity Payout Rider
within thirty days after any Contract anniversary following the expiration
of a ten or fifteen-year waiting period from the effective date of the
Rider.
- The Owner may only annuitize under a fixed annuity payout option involving
a life contingency as provided under "K. Description of Variable Annuity
Payout Options."
- The Owner may only annuitize at the guaranteed annuity purchase rates
listed under the Annuity Option Tables in the Contract.
TERMINATION OF THE MINIMUM GUARANTEED ANNUITY PAYOUT RIDER:
- The Owner may not terminate the Minimum Guaranteed Annuity Payout Rider
prior to the seventh Contract anniversary after the effective date of the
Rider, unless such termination occurs on or within thirty days after any
Contract anniversary and in conjunction with the repurchase of a Minimum
Guaranteed Annuity Payout Rider with a waiting period of equal or greater
length at its then current price, if available.
- After the seventh Contract anniversary from the effective date of the
Rider the Owner may terminate the Rider at any time.
- The Owner may repurchase a Rider with a waiting period equal to or greater
than the Rider then in force at the new Rider's then current price, if
available, however, repurchase may only occur on or within thirty days of
a Contract anniversary.
- Other than in the event of a repurchase, once terminated the Rider may not
be purchased again.
- The Rider will terminate upon surrender of the Contract or the date that a
death benefit is payable if the Contract is not continued under "H. The
Spouse of the Owner as Beneficiary" (see "DESCRIPTION OF THE CONTRACT").
From time to time the Company may illustrate minimum guaranteed income amounts
under the Minimum Guaranteed Annuity Payout Rider for individuals based on a
variety of assumptions, including varying rates of return on the value of the
Contract during the accumulation phase, annuity payout periods, annuity payout
options and Minimum Guaranteed Annuity Payout Rider waiting periods. Any assumed
rates of return are for purposes of illustration only and are not intended as a
representation of past or future investment rates of return.
For example, the illustration below assumes an initial payment of $100,000 for
an Annuitant age 60 (at issue) and exercise of a Minimum Guaranteed Annuity
Payout Rider with a ten-year waiting period. The illustration assumes that no
subsequent payments or withdrawals are made and that the annuity payout option
is a Life Annuity With Payments Guaranteed For 10 Years. The values below have
been computed based on a 5% net rate of return and are the guaranteed minimums
that would be received under the Minimum Guaranteed
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Annuity Payout Rider. The minimum guaranteed benefit base amounts are the values
that will be annuitized. Minimum guaranteed annual income values are based on a
fixed annuity payout.
<TABLE>
<CAPTION>
MINIMUM
CONTRACT GUARANTEED MINIMUM
ANNIVERSARY BENEFIT GUARANTEED
AT EXERCISE BASE ANNUAL INCOME(1)
- --------------- ----------- ----------------
<S> <C> <C>
10 $ 162,889 $ 12,153
15 $ 207,892 $ 17,695
</TABLE>
(1) Other fixed annuity options involving a life contingency other than Life
Annuity With Payments Guaranteed for 10 Years are available. See "K.
Description of Variable Annuity Payout Options."
The Minimum Guaranteed Annuity Payout Rider does not create Accumulated Value or
guarantee performance of any investment option. Because this Rider is based on
conservative actuarial factors, the level of lifetime income that it guarantees
may often be less than the level that would be provided by application of
Accumulated Value at current annuity factors. Therefore, the Rider should be
regarded as a safety net. As described above, withdrawals will reduce the
benefit base.
N. NORRIS DECISION
In the case of ARIZONA GOVERNING COMMITTEE V. NORRIS, the United States Supreme
Court ruled that, in connection with retirement benefit options offered under
certain employer-sponsored employee benefit plans, annuity options based on
sex-distinct actuarial tables are not permissible under Title VII of the Civil
Rights Act of 1964. The ruling requires that benefits derived from contributions
paid into a plan after August 1, 1983 be calculated without regard to the sex of
the employee. Annuity benefits attributable to payments received by the Company
under a Contract issued in connection with an employer-sponsored benefit plan
affected by the NORRIS decision will be based on the greater of (1) the
Company's unisex non-guaranteed current annuity option rates, or (2) the
guaranteed unisex rates described in such Contract, regardless of whether the
Annuitant is male or female.
O. COMPUTATION OF VALUES.
THE ACCUMULATION UNIT. Each net payment is allocated to the accounts selected
by the Owner. Allocations to the Sub-Accounts are credited to the Contract in
the form of Accumulation Units. Accumulation Units are credited separately for
each Sub-Account. The number of Accumulation Units of each Sub-Account credited
to the Contract is equal to the portion of the net payment allocated to the
Sub-Account, divided by the dollar value of the applicable Accumulation Unit as
of the Valuation Date the payment is received 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. See APPENDIX A, "MORE INFORMATION ABOUT THE
FIXED ACCOUNT" and "GUARANTEE PERIOD ACCOUNTS."
The Accumulated Value under the Contract is determined by (1) multiplying the
number of Accumulation Units in each Sub-Account by the value of an Accumulation
Unit of that Sub-Account on the Valuation Date, (2) adding the products, and (3)
adding the amount of the accumulations in the Fixed Account and Guarantee Period
Accounts, if any.
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NET INVESTMENT FACTOR. The Net Investment Factor is an index that measures the
investment performance of a Sub-Account from one Valuation Period to the next.
This factor is equal to 1.000000 plus the result from dividing (1) by (2) and
subtracting (3) and (4) where:
(1) is the investment income of a Sub-Account for the Valuation Period,
including realized or unrealized capital gains and losses during the
Valuation Period, adjusted for provisions made for taxes, if any;
(2) is the value of that Sub-Account's assets at the beginning of the
Valuation Period;
(3) is a charge for mortality and expense risks equal to 1.25% on an annual
basis of the daily value of the Sub-Account's assets; and
(4) is an administrative charge equal to 0.20% 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.
A. VARIABLE ACCOUNT DEDUCTIONS.
MORTALITY AND EXPENSE RISK CHARGE. The Company assesses a charge against the
assets of each Sub-Account to compensate for certain mortality and expense risks
it has assumed. The charge is imposed during both the accumulation phase and the
annuity payout phase. The mortality risk arises from the Company's guarantee
that it will make annuity benefit payments in accordance with annuity rate
provisions established at the time the Contract is issued for the life of the
Annuitant (or in accordance with the annuity payout option selected), no matter
how long the Annuitant (or other payee) lives and no matter how long all
Annuitants as a class live. Therefore, the mortality charge is deducted during
the annuity payout phase on all Contracts, including those that do not involve a
life contingency, even though the Company does not bear direct mortality risk
with respect to variable annuity settlement options that do not involve life
contingencies. The expense risk arises from the Company's guarantee that the
charges it makes will not exceed the limits described in the Contract and in
this Prospectus.
If the charge for mortality and expense risks is not sufficient to cover actual
mortality experience and expenses, the Company will absorb the losses. If
expenses are less than the amounts provided to the Company by the charge, the
difference will be a profit to the Company. To the extent this charge results in
a profit to the Company, such profit will be available for use by the Company
for, among other things, the payment of distribution, sales and other expenses.
The mortality and expense risk charge is assessed daily at an annual rate of
1.25% of each Sub-Account's assets. This charge may not be increased. Since
mortality and expense risks involve future contingencies which are not subject
to precise determination in advance, it is not feasible to identify specifically
the portion of the charge which is applicable to each. The Company estimates
that a reasonable allocation might be 0.80% for mortality risk and 0.45% for
expense risk.
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ADMINISTRATIVE EXPENSE CHARGE. The Company assesses each Sub-Account with a
daily charge equal to 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 payout phase. The daily administrative expense charge is assessed to
help defray administrative expenses actually incurred in the administration of
the Sub-Account, without profits. There is no direct relationship, however,
between the amount of administrative expenses imposed on a given Contract and
the amount of expenses actually attributable to that Contract.
Deductions for the Contract fee (described below under "B. Contract Fee") and
for the administrative expense charge are designed to reimburse the Company for
the cost of administration and related expenses and are not expected to be a
source of profit. The administrative functions and expense assumed by the
Company in connection with the Variable Account and the Contract include, but
are not limited to, clerical, accounting, actuarial and legal services, rent,
postage, telephone, office equipment and supplies, expenses of preparing and
printing registration statements, expense of preparing and typesetting
prospectuses and the cost of printing prospectuses not allocable to sales
expense, filing and other fees.
OTHER CHARGES. Because the Sub-Accounts 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
prospectuses and SAI's of the Trust, Fidelity VIP, Fidelity VIP II, T. Rowe
Price and DGPF contain 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 if the Accumulated Value on any of these
dates 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.
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. OPTIONAL MINIMUM GUARANTEED ANNUITY PAYOUT CHARGE.
Subject to state availability, the Company offers an optional Minimum Guaranteed
Annuity Payout Rider that may be elected by the Owner. A separate monthly charge
is made for the Rider. On the last day of each month and on the date the Rider
is terminated, a charge equal to 1/12th of the applicable annual rate (see table
below) is made against the Accumulated Value of the Contract at that time. The
charge is made through a pro-rata reduction of the Accumulated Value of the
Sub-Accounts, the Fixed Account and the Guarantee Period Accounts (based on the
relative value that the Accumulation Units of the Sub-Accounts, the dollar
amounts in the Fixed Account and the dollar amounts in the Guarantee Period
Accounts bear to the total Accumulated Value).
The applicable charge is assessed on the Accumulated Value on the last day of
each month and on the date the Rider is terminated, multiplied by 1/12th of the
following annual percentage rates:
<TABLE>
<S> <C>
Minimum Guaranteed Annuity Payout Rider with ten-year waiting period....... 0.25%
Minimum Guaranteed Annuity Payout Rider with fifteen-year waiting period... 0.15%
</TABLE>
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<PAGE>
For a description of the Rider, see "M. Optional Minimum Guaranteed Annuity
Payout Rider" under "DESCRIPTION OF THE CONTRACT," above.
D. PREMIUM TAXES.
Some states and municipalities impose a premium tax on variable annuity
contracts. State premium taxes currently range up to 3.5%.
The Company makes a charge for state and municipal premium taxes, when
applicable, and deducts the amount paid as a premium tax charge. The current
practice of the Company is to deduct the premium tax charge in one of two ways:
1. if the premium tax was paid by the Company when payments were received,
the premium tax charge is deducted on a pro-rata basis when withdrawals
are made, upon surrender of the Contract, or when annuity benefit
payments begin (the Company reserves the right instead to deduct the
premium tax charge for these Contracts at the time the payments are
received); or
2. the premium tax charge is deducted in total when annuity benefit
payments begin.
In no event will a deduction be taken before the Company has incurred a tax
liability under applicable state law.
If no amount for premium tax was deducted at the time the payment was received,
but subsequently tax is determined to be due prior to the Annuity Date, the
Company reserves the right to deduct the premium tax from the Contract value at
the time such determination is made.
E. SURRENDER CHARGE.
No charge for sales expense is deducted from payments at the time the payments
are made. A surrender 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 surrender 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 invested in the Contract for more than nine years;
and (3) the amount available under the Withdrawal Without Surrender Charge
provision. See "Withdrawal Without Surrender Charge" below. For purposes of
determining the amount of any surrender charge, surrenders will be deemed to be
taken first from amounts available as a Withdrawal Without Surrender Charge, if
any, then from Old Payments, and then from New Payments. Amounts available as a
Withdrawal Without Surrender Charge, followed by Old Payments, may be withdrawn
from the Contract at any time without the imposition of a surrender charge. If a
withdrawal is attributable all or in part to New Payments, a surrender charge
may apply.
CHARGES FOR SURRENDER AND WITHDRAWAL. If the Contract is surrendered, or if New
Payments are withdrawn while the Contract is in force and before the Annuity
Date, a surrender charge may be imposed. The amount of the charge will depend
upon the number of years that any New Payments to which the withdrawal is
attributed have remained credited under the Contract. For the purpose of
calculating surrender charges for New Payments, all amounts withdrawn are
assumed to be deducted first from the oldest New Payment and then from the next
oldest New Payment and so on, until all New Payments have been exhausted
pursuant to the first-in-first-out ("FIFO") method of accounting. (See "FEDERAL
TAX CONSIDERATIONS" for a discussion of how withdrawals are treated for income
tax purposes.)
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<PAGE>
The surrender charge is as follows:
<TABLE>
<CAPTION>
YEARS FROM CHARGE AS PERCENTAGE OF
DATE OF PAYMENT NEW PAYMENTS 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 withdrawn equals the amount requested by the Owner plus the surrender
charge, if any. The charge is applied as a percentage of the New Payments
withdrawn, but in no event will the total surrender charge exceed a maximum
limit of 8.0% of total gross New Payments. Such total charge equals the
aggregate of all applicable surrender charges for surrender, withdrawals and
annuitization.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE AND ADDITIONAL AMOUNTS
CREDITED. Where permitted by state law, the Company will waive the surrender
charge in the event that the Owner (or the Annuitant, if the Owner is not an
individual) becomes physically disabled after the issue date of the Contract and
before attaining age 65. Under New York Contracts, the disability also must
exist for a continuous period of at least four months. The Company may require
proof of such disability and continuing disability, including written
confirmation of receipt and approval of any claim for Social Security Disability
Benefits and reserves the right to obtain an examination by a licensed physician
of its choice and at its expense. In addition, except in New York and New Jersey
where not permitted by state law, the Company will waive the surrender charge in
the event that an Owner (or the Annuitant, if the Owner is not an individual)
is: (1) admitted to a medical care facility and remains confined there until the
later of one year after the issue date or 90 consecutive days or (2) first
diagnosed by a licensed physician as having a fatal illness after the issue date
of the Contract.
For purposes of the above provision, "medical care facility" means any
state-licensed facility or, in a state that does not require licensing, a
facility that is operating pursuant to state law, providing medically necessary
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 surrender charges have been waived under any of the 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 surrender charges, the period during which the charges apply,
or both, and/or credit additional amounts on Contracts, when Contracts are sold
to individuals or groups of individuals in a manner that reduces sales expenses.
The Company will consider factors such as the following: (1) the size and type
of group or class, and the persistency expected from that group or class; (2)
the total amount of payments to be received, and the manner in which payments
are remitted; (3) the purpose for which the Contracts are being purchased, and
whether that purpose makes it likely that costs and expenses will be reduced;
(4) other transactions where sales expenses are likely to be reduced; or (5) the
level of commissions paid to 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 surrender charge, and/or credit additional
amounts
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<PAGE>
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 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, if permitted under state law, surrender 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 surrender charge
will not discriminate unfairly among purchasers of the Contract. The Company
will not make any changes to this charge where prohibited by law.
Pursuant to Section 11 of the 1940 Act and Rule 11a-2 thereunder, the surrender
charge is modified to effect certain exchanges of existing 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 surrender charge, if any, on an amount ("Withdrawal Without Surrender
Charge") equal to the greatest of (1), (2) or (3):
<TABLE>
<S> <C>
Where (1) 100% of Cumulative Earnings (calculated as the Accumulated Value as of
is: the Valuation Date the Company receives the withdrawal request, or the
following day, reduced by total gross payments not previously withdrawn);
Where (2) 10% of the Accumulated Value as of the Valuation Date the Company
is: receives the withdrawal request, or the following day, reduced by the
total amount of any prior withdrawals made in the same calendar year to
which no surrender charge was applied; and
Where (3) The amount calculated under the Company's life expectancy distribution
is: option (see "Life Expectancy Distributions" above) whether or not the
withdrawal was part of such distribution (applies only if Annuitant is
also an Owner).
</TABLE>
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<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 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 surrender charge, if any, until the entire Withdrawal Without
Surrender Charge has been withdrawn. Amounts withdrawn from a Guarantee Period
Account prior to the end of the applicable Guarantee Period 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 surrender charge on New Payments, the Contract fee and any applicable
tax withholding, and adjusted for any applicable Market Value Adjustment.
Subject to the same rules applicable to withdrawals, the Company will not assess
a surrender charge on an amount equal to the 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 surrender charge. Any such reallocation will be at the
unit values for the Sub-Accounts as of the Valuation Date on which a written,
signed request is received at the Principal Office.
For further information on surrender and 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 the Owner chooses a
commutable period certain option or a noncommutable period certain option for
less than ten years (less than six years under New York contracts), a surrender
charge will be deducted from the Accumulated Value of the Contract if the
Annuity Date occurs at any time when a surrender charge would still apply had
the Contract been surrendered on the Annuity Date.
No surrender charge is imposed at the time of annuitization in any Contract year
under an option involving a life contingency or for any noncommutable period
certain option for ten years or more (six or more years under New York
contracts). 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
surrender charge applicable under the fixed contract if a period certain option
is chosen, will be applied towards the variable annuity option desired by the
Owner. The number of Annuity Units under the option will be calculated using the
Annuity Unit values as of the 15th of the month preceding the Annuity Date.
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<PAGE>
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 to reimburse it for
the expense of processing transfers. 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, except
in California where it is accounted for in the Company's General Account. Each
Guarantee Period Account provides for the accumulation of interest at a
Guaranteed Interest Rate. The Guaranteed Interest Rate on amounts allocated or
transferred to a Guarantee Period Account is determined from time to time by the
Company in accordance with market conditions. 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%.
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 Sub-Account investing in 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. Under Contracts issued in New
43
<PAGE>
York, the Company will transfer monies out of the Guarantee Period Account
without application of a Market Value Adjustment if the Owner's request is
received within ten days of the renewal date.
MARKET VALUE ADJUSTMENT. No Market Value Adjustment will be applied to
transfers, withdrawals, or a surrender from a Guarantee Period Account on the
expiration of its Guarantee Period. In addition, no negative Market Value
Adjustment will be applied to a death benefit although a positive Market Value
Adjustment, if any, will be applied to increase the value of the death benefit
when based on the Contract's Accumulated Value. See "G. Death Benefit." 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 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 D, "SURRENDER CHARGES AND
THE MARKET VALUE ADJUSTMENT."
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
44
<PAGE>
adjustment will be made to the amount payable. If a surrender charge applies to
the withdrawal, it will be calculated as set forth under "D. Surrender Charge"
after application of the Market Value Adjustment.
FEDERAL TAX CONSIDERATIONS
The effect of federal income taxes on the value of the Contract, on withdrawals
or surrenders, on annuity benefit payments, and on the economic benefit to the
Owner, Annuitant, or beneficiary depends upon a variety of factors. The
following discussion is based upon the Company's understanding of current
federal income tax laws as they are interpreted as of the date of this
Prospectus. No representation is made regarding the likelihood of continuation
of current federal income tax laws or of current interpretations by the IRS. 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 prescribed by the Treasury Department provide that the
investments of a segregated asset account underlying a variable annuity contract
are adequately diversified if no more than 55% of the value of its assets is
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. Under this section of the Code, if the investments are not
adequately diversified, the Contract will not be treated as an annuity contract,
and therefore the income on a contract, for any taxable year of an owner, would
be treated as ordinary income received or accrued by the owner. It is
anticipated that the Funds of Allmerica Investment Trust, the Portfolios of
Fidelity VIP and the Portfolio of T. Rowe Price in this Contract will comply
with the current diversification requirements. In the event that future IRS
regulations and/or rulings would require Contract modifications in order to
remain in compliance with the diversification standards, the Company will make
reasonable efforts to comply, and it reserves the right to make such changes as
it deems appropriate for that purpose.
In addition, traditionally in order for a variable annuity contract to qualify
for tax deferral, the Company, and not the variable contract owner, must be
considered to be the owner for tax purposes of the assets in the segregated
asset account underlying the variable annuity contract. In certain
circumstances, however, variable annuity contract owners may now be considered
the owners of these assets for federal income tax purposes. Specifically, the
IRS has stated in published rulings that a variable annuity contract owner may
be considered the owner of segregated account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations do not provide guidance governing the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the contract owner), rather than the
insurance
45
<PAGE>
company, to be treated as the owner of the assets in the account. This
announcement also states that guidance would be issued by way of regulations or
rulings on the "extent to which policyholders may direct their investments to
particular sub-accounts without being treated as owners of the underlying
assets." As of the date of this Prospectus, no such guidance has been issued.
The Company therefore additionally reserves the right to modify the Contract as
necessary in order to attempt to prevent a contract owner from being considered
the owner of a pro rata share of the assets of the segregated asset account
underlying the variable annuity contracts.
A. QUALIFIED AND NON-QUALIFIED CONTRACTS.
From a federal tax viewpoint there are two types of variable annuity contracts:
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Sections 401, 403, or 408 of the Code, while a non-qualified
contract is one that is not purchased in connection with one of the indicated
retirement plans. The tax treatment for certain withdrawals or surrenders will
vary, 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 "Nonnatural Owner" below), be considered an annuity
contract under Section 72 of the Code. Please note, however, if the Owner
chooses an Annuity Date beyond the Annuitant's 85th birthday, it is possible
that the Contract may not be considered an annuity for tax purposes and
therefore the Owner may be taxed on the annual increase in Accumulated Value.
The Owner should consult tax and financial advisors for more information. This
section governs the taxation of annuities. The following discussion concerns
annuities subject to Section 72.
WITHDRAWALS PRIOR TO ANNUITIZATION. With certain exceptions, any increase in
the Contract's Accumulated Value is not taxable to the Owner until it is
withdrawn from the Contract. If the Contract is surrendered or amounts are
withdrawn prior to the Annuity Date, any withdrawal of investment gain in value
over the cost basis of the Contract will be taxed as ordinary income. Under the
current provisions of the Code, amounts received under an annuity contract prior
to annuitization (including payments made upon the death of the annuitant or
owner), generally are first attributable to any investment gains credited to the
contract over the taxpayer's "investment in the contract." Such amounts will be
treated as gross income subject to federal income taxation. "Investment in the
contract" is the total of all payments to the contract which were not excluded
from the Owner's gross income less any amounts previously withdrawn which were
not included in income. Section 72(e)(11)(A)(ii) requires that all non-qualified
deferred annuity contracts issued by the same insurance company to the same
owner during a single calendar year be treated as one contract in determining
taxable distributions.
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
46
<PAGE>
Code). Furthermore, under Section 72 of the Code, this penalty tax will not be
imposed, irrespective of age, if the amount received is one of a series of
"substantially equal" periodic payments made at least annually for the life or
life expectancy of the payee. This requirement is met when the Owner elects to
have distributions made over the Owner's life expectancy, or over the joint life
expectancy of the Owner and beneficiary. The requirement that the amount be paid
out as one of a series of "substantially equal" periodic payments is met when
the number of units withdrawn to make each distribution is substantially the
same. Any modification, other than by reason of death or disability, of
distributions which are part of a series of substantially equal periodic
payments that occurs before the Owner's age 59 1/2 or five years, will subject
the Owner to the 10% penalty tax on the prior distributions. In addition to the
exceptions above, the penalty tax will not apply to withdrawals from a qualified
Contract made to an employee who has terminated employment after reaching age
55.
In a Private Letter Ruling, the IRS took the position that where distributions
from a variable annuity contract were determined by amortizing the accumulated
value of the contract over the taxpayer's remaining life expectancy (such as
under the Contract's LED option), and the option could be changed or terminated
at any time, the distributions failed to qualify as part of a "series of
substantially equal payments" within the meaning of Section 72 of the Code. The
distributions, therefore, were subject to the 10% federal penalty tax. This
Private Letter Ruling may be applicable to an Owner who receives distributions
under any LED-type option prior to age 59 1/2. Subsequent Private Letter
Rulings, however, have treated LED-type withdrawal programs as effectively
avoiding the 10% penalty tax. The position of the IRS on this issue is unclear.
ASSIGNMENTS OR TRANSFERS. If the Owner transfers (assigns) the Contract to
another individual as a gift prior to the Annuity Date, the Code provides that
the Owner will incur taxable income at the time of the transfer. An exception is
provided for certain transfers between spouses. The amount of taxable income
upon such taxable transfer is equal to any investment gain in value over the
Owner's cost basis at the time of the transfer. The
transfer also is subject to federal gift tax provisions. Where the Owner and
Annuitant are different persons, the change of ownership of the Contract to the
Annuitant on the Annuity Date, as required under the Contract, is a gift and
will be taxable to the Owner as such; however, the Owner will not incur taxable
income. Instead, the Annuitant will incur taxable income upon receipt of annuity
benefit payments as discussed above.
NONNATURAL OWNERS. As a general rule, deferred annuity contracts owned by
"nonnatural persons" (e.g., a corporation) are not treated as annuity contracts
for federal tax purposes, and the investment income attributable to
contributions made after February 28, 1986 is taxed as ordinary income that is
received or accrued by the owner during the taxable year. This rule does not
apply to annuity contracts purchased with a single payment when the annuity date
is no later than a year from the issue date or to deferred annuities owned by
qualified employer plans, estates, employers with respect to a terminated
pension plan, and entities other than employers, such as a trust, holding an
annuity as an agent for a natural person. This exception, however, will not
apply in cases of any employer who is the owner of an annuity contract under a
non-qualified deferred compensation plan.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Under Section 457 of the Code, deferred compensation plans
established by governmental and certain other tax-exempt employers for their
employees may invest in annuity contracts. Contributions and investment earnings
are not taxable to employees until distributed; however, with respect to
payments made after February 28, 1986, a Contract owned by a state or local
government or a tax-exempt organization will not be treated as an annuity under
Section 72 as well. In addition, plan assets are treated as property of the
employer, and are subject to the claims of the employer's general creditors.
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C. TAX WITHHOLDING.
The Code requires withholding with respect to payments or distributions from
non-qualified contracts and IRAs, unless a taxpayer elects not to have
withholding. A 20% withholding requirement applies to distributions from most
other qualified contracts. In addition, the Code requires reporting to the IRS
of the amount of income received with respect to payment or distributions from
annuities.
The tax treatment of certain withdrawals or surrenders of the non-qualified
Contracts offered by this Prospectus will vary according to whether the amount
withdrawn or surrendered is allocable to an investment in the Contract made
before or after certain dates.
D. PROVISIONS APPLICABLE TO QUALIFIED EMPLOYER PLANS.
The tax rules applicable to qualified 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"). Note: This term covers all IRAs permitted
under Section 408(b) of the Code, including Roth IRAs. IRAs are subject to
limits on the amounts that may be contributed, the persons who may be eligible,
and on the time when distributions may commence. In addition, certain
distributions from other types of retirement plans may be "rolled over," on a
tax-deferred basis, to an IRA. Purchasers of an IRA Contract will be provided
with supplementary information as may be required by the IRS or other
appropriate agency, and will have the right to cancel the Contract as described
in this Prospectus. See "B. Right to Cancel Individual Retirement Annuity."
Eligible employers that meet specified criteria may establish simplified
employee pension plans (SEP-IRAs) or SIMPLE IRA plans for their employees using
IRAs. Employer contributions that may be made to such plans are larger than the
amounts that may be contributed to regular IRAs and may be deductible to the
employer.
TAX-SHELTERED ANNUITIES ("TSAS"). Under the provisions of Section 403(b) of the
Code, payments made to 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
48
<PAGE>
of such employees to the extent that total annual payments do not exceed the
maximum contribution permitted under the Code. Purchasers of TSA contracts
should seek competent advice as to eligibility, limitations on permissible
payments and other tax consequences associated with the contracts.
Withdrawals or other distributions attributable to salary reduction
contributions (including earnings thereon) made to a TSA contract after December
31, 1988, may not begin before the employee attains age 59 1/2, separates from
service, dies or becomes disabled. In the case of hardship, an Owner may
withdraw amounts contributed by salary reduction, but not the earnings on such
amounts. Even though a distribution may be permitted under these rules (e.g.,
for hardship or after separation from service), it may be subject to a 10%
penalty tax as a premature distribution, in addition to income tax.
TEXAS OPTIONAL RETIREMENT PROGRAM. Distributions under a TSA contract issued to
participants in the Texas Optional Retirement Program may not be received except
in the case of the participant's death, retirement or termination of employment
in the Texas public institutions of higher education. These additional
restrictions are imposed under the Texas Government Code and a prior opinion of
the Texas Attorney General.
STATEMENTS AND REPORTS
An Owner is sent a report semi-annually which provides certain financial
information about the Underlying Funds. At least annually, but possibly as
frequent as quarterly, the Company will furnish a statement to the Owner
containing information about his or her Contract, including Accumulation Unit
Values and other information as required by applicable law, rules and
regulations. The Company will also send a confirmation statement to Owners each
time a transaction is made affecting the Contract Value. (Certain transactions
made under recurring payment plans such as Dollar Cost Averaging may in the
future be confirmed quarterly rather than by immediate confirmations.) The Owner
should review the information in all statements carefully. All errors or
corrections must be reported to the Company immediately to assure proper
crediting to the Contract. The Company will assume that all transactions are
accurately reported on confirmation statements and quarterly/annual statements
unless the Owner notifies the Principal Office in writing within 30 days after
receipt of the statement.
LOANS (QUALIFIED CONTRACTS ONLY)
Loans are available to Owners of TSA Contracts (i.e., contracts issued under
Section 403(b) of the Code) and to Contracts issued to plans qualified under
Sections 401(a) and 401(k) of the Code. Loans are subject to provisions of the
Code and to applicable qualified retirement plan rules. Tax advisors and plan
fiduciaries should be consulted prior to exercising loan privileges.
Loaned amounts will be withdrawn first from Sub-Account and Fixed Account values
on a pro-rata basis until exhausted. Thereafter, any additional amounts will be
withdrawn from the Guarantee Period Accounts (pro rata by duration and LIFO
within each duration), subject to any applicable Market Value Adjustments. The
maximum loan amount will be determined under the Company's maximum loan formula.
The minimum loan amount is $1,000. Loans will be secured by a security interest
in the Contract and the amount borrowed will be transferred to a loan asset
account within the Company's General Account, where it will accrue interest at a
specified rate below the then-current loan rate. Generally, loans must be repaid
within five years or less, and repayments must be made quarterly and in
substantially equal amounts. Repayments will be allocated pro rata in accordance
with the most recent payment allocation, except that any allocations to a
Guarantee Period Account will be allocated 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
49
<PAGE>
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 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. Any such changes will apply uniformly to all
Contracts that are affected. You will be given written notice of such changes.
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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.
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 surrender charges and profits from the Company's
General Account, which may include amounts derived from mortality and expense
risk charges. Commissions paid on the Contract, including additional incentives
or payments, do not result in any additional charge to Owners or to the Variable
Account. Any surrender charges assessed on 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 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 Funds held by the Variable Account. With
respect to the T. Rowe Price International Stock Portfolio, the Company receives
service fees at an annual rate
51
<PAGE>
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 Funds.
LEGAL MATTERS
There are no legal proceedings pending to which the Variable Account is a party,
or to which the assets of the Variable Account are subject. The Company and the
Principal Underwriter are not involved in any litigation that is of material
importance in relation to their total assets or that relates to the Variable
Account.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
is presently completing the process of modifying or replacing existing software
and believes that this action will resolve the Year 2000 issue. However, if such
modifications and conversions are not made, or are not completed timely, or
should there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain
policyholder information, accurately maintain accounting records, and perform
customer service. Any of these specific events, depending on duration, could
have a material adverse impact on the results of operations and the financial
position of the Company.
The Company has initiated formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. Although the Company does not believe that there is a
material contingency associated with the Year 2000 project, there can be no
assurance that exposure for material contingencies will not arise.
The cost of the Year 2000 project will be expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have incurred and expensed approximately $54
million related to the assessment, plan development and substantial completion
of the Year 2000 project, through December 31, 1998. The total remaining cost of
the project is estimated between $20-30 million.
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<PAGE>
FURTHER INFORMATION
A Registration Statement under the 1933 Act relating to this offering has been
filed with the SEC. Certain portions of the Registration Statement and
amendments have been omitted in this Prospectus pursuant to the rules and
regulations of the SEC. The omitted information may be obtained from the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
53
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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 surrender charge is imposed if such event occurs before the
payments attributable to the surrender or withdrawal have been credited to the
Contract for at least 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
PERFORMANCE TABLES
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED 5 INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 YEARS SUB-ACCOUNT
- ------------------------------------------------------------- ------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Select International Equity Fund............................. 5/3/94 6.63% N/A 9.76%
DGPF International Equity Series............................. 5/6/93 0.80% 8.14% 9.69%
Fidelity VIP Overseas Portfolio.............................. 9/5/91 3.02% 7.26% 8.19%
T. Rowe Price International Stock Portfolio.................. 5/1/95 6.11% N/A 8.13%
Select Aggressive Growth Fund................................ 9/16/92 0.89% 12.52% 15.36%
Select Capital Appreciation Fund............................. 4/30/95 4.12% N/A 17.51%
Select Value Opportunity Fund................................ 5/2/93 -4.23% 10.69% 12.59%
Select Growth Fund........................................... 9/16/92 25.33% 19.80% 16.55%
Growth Fund.................................................. 9/4/91 9.34% 16.55% 14.46%
Fidelity VIP Growth Portfolio................................ 9/5/91 29.18% 19.24% 18.72%
Equity Index Fund............................................ 9/4/91 18.32% 21.05% 17.32%
Select Growth and Income Fund................................ 9/16/92 6.60% 15.46% 13.54%
Fidelity VIP Equity-Income Portfolio......................... 9/5/91 1.79% 16.26% 16.39%
Fidelity VIP II Asset Manager Portfolio...................... 5/4/94 5.34% N/A 11.52%
Fidelity VIP High Income Portfolio........................... 9/24/91 -12.63% 6.34% 10.80%
Investment Grade Income Fund................................. 9/5/91 -1.33% 4.49% 6.61%
Government Bond Fund......................................... 9/8/91 -1.54% 3.59% 5.16%
Money Market Fund............................................ 9/9/91 -3.52% 2.80% 2.97%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED 5 INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 YEARS SUB-ACCOUNT
- -------------------------------------------------------------- ------------- --------- --------- ------------
<S> <C> <C> <C> <C>
Select International Equity Fund.............................. 5/3/94 14.82% N/A 10.68%
DGPF International Equity Series.............................. 5/6/93 8.75% 8.97% 10.24%
Fidelity VIP Overseas Portfolio............................... 9/5/91 11.14% 8.14% 8.48%
T. Rowe Price International Stock Portfolio................... 5/1/95 14.20% N/A 9.52%
Select Aggressive Growth Fund................................. 9/16/92 8.98% 13.36% 15.77%
Select Capital Appreciation Fund.............................. 4/30/95 12.25% N/A 18.67%
Select Value Opportunity Fund................................. 5/2/93 3.37% 11.49% 13.12%
Select Growth Fund............................................ 9/16/92 33.51% 20.41% 16.90%
Growth Fund................................................... 9/4/91 17.62% 17.31% 14.80%
Fidelity VIP Growth Portfolio................................. 9/5/91 37.50% 20.01% 19.06%
Equity Index Fund............................................. 9/4/91 26.50% 21.63% 17.54%
Select Growth and Income Fund................................. 9/16/92 14.77% 16.15% 13.92%
Fidelity VIP Equity-Income Portfolio.......................... 9/5/91 10.03% 17.09% 16.75%
Fidelity VIP II Asset Manager Portfolio....................... 5/4/94 13.41% N/A 12.29%
Fidelity VIP High Income Portfolio............................ 9/24/91 -5.69% 7.25% 11.05%
Investment Grade Income Fund.................................. 9/5/91 6.43% 5.43% 6.89%
Government Bond Fund.......................................... 9/8/91 6.14% 4.48% 5.40%
Money Market Fund............................................. 9/9/91 4.00% 3.72% 3.24%
</TABLE>
B-1
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS OR
FOR YEAR SINCE
UNDERLYING FUND ENDED 5 INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS IF LESS
- -------------------------------------------------------- --------------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Select International Equity Fund........................ 5/2/94 6.63% N/A 9.75%
DGPF International Equity Series........................ 10/29/92 0.80% 8.14% 9.13%
Fidelity VIP Overseas Portfolio......................... 1/28/87 3.02% 7.26% 8.41%
T. Rowe Price International Stock Portfolio............. 3/31/94 6.11% N/A 7.21%
Select Aggressive Growth Fund........................... 8/21/92 0.89% 12.52% 16.02%
Select Capital Appreciation Fund........................ 4/28/95 4.12% N/A 17.48%
Select Value Opportunity Fund........................... 4/30/93 -4.23% 10.69% 12.57%
Select Growth Fund...................................... 8/21/92 25.33% 19.80% 17.14%
Growth Fund............................................. 4/29/85 9.34% 16.55% 15.18%
Fidelity VIP Growth Portfolio........................... 10/9/86 29.18% 19.24% 17.51%
Equity Index Fund....................................... 9/28/90 18.32% 21.05% 18.84%
Select Growth and Income Fund........................... 8/21/92 6.60% 15.46% 13.50%
Fidelity VIP Equity-Income Portfolio.................... 10/9/86 1.79% 16.26% 13.73%
Fidelity VIP II Asset Manager Portfolio................. 9/6/89 5.34% 9.47% 10.91%
Fidelity VIP High Income Portfolio...................... 9/19/85 -12.63% 6.34% 9.39%
Investment Grade Income Fund............................ 4/29/85 -1.33% 4.49% 7.52%
Government Bond Fund.................................... 8/26/91 -1.54% 3.59% 4.95%
Money Market Fund....................................... 4/29/85 -3.52% 2.80% 4.08%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
10 YEARS OR
FOR YEAR SINCE
UNDERLYING FUND ENDED 5 INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS IF LESS
- -------------------------------------------------------- --------------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Select International Equity Fund........................ 5/2/94 14.82% N/A 10.67%
DGPF International Equity Series........................ 10/29/92 8.75% 8.97% 9.54%
Fidelity VIP Overseas Portfolio......................... 1/28/87 11.14% 8.14% 8.52%
T.Rowe Price International Stock Portfolio.............. 3/31/94 14.20% N/A 8.09%
Select Aggressive Growth Fund........................... 8/21/92 8.98% 13.36% 16.42%
Select Capital Appreciation Fund........................ 4/28/95 12.25% N/A 18.64%
Select Value Opportunity Fund........................... 4/30/93 3.37% 11.49% 13.11%
Select Growth Fund...................................... 8/21/92 33.51% 20.41% 17.47%
Growth Fund............................................. 4/29/85 17.62% 17.31% 15.35%
Fidelity VIP Growth Portfolio........................... 10/9/86 37.50% 20.01% 17.72%
Equity Index Fund....................................... 9/28/90 26.50% 21.63% 18.98%
Select Growth and Income Fund........................... 8/21/92 14.77% 16.15% 13.88%
Fidelity VIP Equity-Income Portfolio.................... 10/9/86 10.03% 17.09% 13.98%
Fidelity VIP II Asset Manager Portfolio................. 9/6/89 13.41% 10.21% 11.34%
Fidelity VIP High Income Portfolio...................... 9/19/85 -5.69% 7.25% 9.50%
Investment Grade Income Fund............................ 4/29/85 6.43% 5.43% 7.61%
Government Bond Fund.................................... 8/26/91 6.14% 4.48% 5.19%
Money Market Fund....................................... 4/29/85 4.00% 3.72% 4.11%
</TABLE>
B-2
<PAGE>
APPENDIX C
PERFORMANCE TABLES
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
TABLE 1A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED 5 INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 YEARS SUB-ACCOUNT
- ------------------------------------------------------------- ------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Select International Equity Fund............................. 5/3/94 6.63% N/A 9.76%
DGPF International Equity Series............................. 4/20/94 0.82% N/A 8.26%
Fidelity VIP Overseas Portfolio.............................. 4/20/94 3.03% N/A 7.18%
T. Rowe Price International Stock Portfolio.................. 5/1/95 6.08% N/A 8.10%
Select Aggressive Growth Fund................................ 4/20/94 0.87% N/A 14.90%
Select Capital Appreciation Fund............................. 4/30/95 4.10% N/A 17.49%
Select Value Opportunity Fund................................ 4/20/94 -4.25% N/A 12.81%
Select Growth Fund........................................... 4/20/94 25.30% N/A 23.45%
Growth Fund.................................................. 4/20/94 9.40% N/A 19.07%
Fidelity VIP Growth Portfolio................................ 4/20/94 29.18% N/A 22.88%
Equity Index Fund............................................ 4/21/94 18.32% N/A 23.59%
Select Growth and Income Fund................................ 4/20/94 6.60% N/A 17.47%
Fidelity VIP Equity-Income Portfolio......................... 4/20/94 1.81% N/A 17.87%
Fidelity VIP II Asset Manager Portfolio...................... 5/11/94 5.35% N/A 11.79%
Fidelity VIP High Income Portfolio........................... 4/20/94 -12.66% N/A 7.34%
Investment Grade Income Fund................................. 4/21/94 -1.29% N/A 5.66%
Government Bond Fund......................................... 4/20/94 -1.53% N/A 4.34%
Money Market Fund............................................ 4/10/94 -3.54% N/A 2.84%
</TABLE>
TABLE 1B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF SUB-ACCOUNT
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
SUB-ACCOUNT FOR YEAR SINCE
INCEPTION ENDED 5 INCEPTION OF
SUB-ACCOUNT INVESTING IN UNDERLYING FUND DATE 12/31/98 YEARS SUB-ACCOUNT
- -------------------------------------------------------------- ------------- --------- --------- ------------
<S> <C> <C> <C> <C>
Select International Equity Fund.............................. 5/3/94 14.82% N/A 10.68%
DGPF International Equity Series.............................. 4/20/94 8.76% N/A 9.14%
Fidelity VIP Overseas Portfolio............................... 4/20/94 11.14% N/A 8.11%
T. Rowe Price International Stock Portfolio................... 5/1/95 14.20% N/A 9.52%
Select Aggressive Growth Fund................................. 4/20/94 8.98% N/A 15.76%
Select Capital Appreciation Fund.............................. 4/30/95 12.25% N/A 18.67%
Select Value Opportunity Fund................................. 4/20/94 3.37% N/A 13.64%
Select Growth Fund............................................ 4/20/94 33.51% N/A 24.08%
Growth Fund................................................... 4/20/94 17.62% N/A 19.79%
Fidelity VIP Growth Portfolio................................. 4/20/94 37.50% N/A 23.65%
Equity Index Fund............................................. 4/21/94 26.50% N/A 24.19%
Select Growth and Income Fund................................. 4/20/94 14.77% N/A 18.19%
Fidelity VIP Equity-Income Portfolio.......................... 4/20/94 10.04% N/A 18.70%
Fidelity VIP II Asset Manager Portfolio....................... 5/11/94 13.41% N/A 12.56%
Fidelity VIP High Income Portfolio............................ 4/20/94 -5.69% N/A 8.32%
Investment Grade Income Fund.................................. 4/21/94 6.43% N/A 6.57%
Government Bond Fund.......................................... 4/20/94 6.14% N/A 5.27%
Money Market Fund............................................. 4/10/94 4.00% N/A 3.84%
</TABLE>
C-1
<PAGE>
TABLE 2A
AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING COMPLETE WITHDRAWAL OF THE INVESTMENT)
<TABLE>
<CAPTION>
10 YEARS OR
FOR YEAR SINCE
UNDERLYING FUND ENDED 5 INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS IF LESS
- -------------------------------------------------------- --------------- ----------- --------- --------------
<S> <C> <C> <C> <C>
Select International Equity Fund........................ 5/2/94 6.63% N/A 9.75%
DGPF International Equity Series........................ 10/29/92 0.82% 8.14% 9.13%
Fidelity VIP Overseas Portfolio......................... 1/28/87 3.03% 7.28% 8.42%
T. Rowe Price International Stock Portfolio............. 3/31/94 6.08% N/A 7.18%
Select Aggressive Growth Fund........................... 8/21/92 0.87% 12.49% 15.99%
Select Capital Appreciation Fund........................ 4/28/95 4.10% N/A 17.45%
Select Value Opportunity Fund........................... 4/30/93 -4.25% 10.67% 12.54%
Select Growth Fund...................................... 8/21/92 25.30% 19.78% 17.11%
Growth Fund............................................. 4/29/85 9.40% 16.61% 15.18%
Fidelity VIP Growth Portfolio........................... 10/9/86 29.18% 19.23% 17.49%
Equity Index Fund....................................... 9/28/90 18.32% 21.06% 18.84%
Select Growth and Income Fund........................... 8/21/92 6.60% 15.46% 13.49%
Fidelity VIP Equity-Income Portfolio.................... 10/9/86 1.81% 16.28% 13.83%
Fidelity VIP II Asset Manager Portfolio................. 9/6/89 5.35% 9.46% 10.92%
Fidelity VIP High Income Portfolio...................... 9/19/85 -12.66% 6.31% 9.36%
Investment Grade Income Fund............................ 4/29/85 -1.29% 4.54% 7.57%
Government Bond Fund.................................... 8/26/91 -1.53% 3.60% 5.30%
Money Market Fund....................................... 4/29/85 -3.54% 2.77% 4.05%
</TABLE>
TABLE 2B
SUPPLEMENTAL AVERAGE ANNUAL TOTAL RETURNS OF SUB-ACCOUNT
FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF UNDERLYING FUND
(ASSUMING NO WITHDRAWAL OF THE INVESTMENT AND NO CONTRACT FEES)
<TABLE>
<CAPTION>
10 YEARS OR
FOR YEAR SINCE
UNDERLYING FUND ENDED 5 INCEPTION
SUB-ACCOUNT INVESTING IN UNDERLYING FUND INCEPTION DATE 12/31/98 YEARS IF LESS
- ---------------------------------------------------------- --------------- --------- --------- --------------
<S> <C> <C> <C> <C>
Select International Equity Fund.......................... 5/2/94 14.82% N/A 10.67%
DGPF International Equity Series.......................... 10/29/92 8.76% 8.97% 9.54%
Fidelity VIP Overseas Portfolio........................... 1/28/87 11.14% 8.14% 8.51%
T.Rowe Price International Stock Portfolio................ 3/31/94 14.20% N/A 8.09%
Select Aggressive Growth Fund............................. 8/21/92 8.98% 13.35% 16.40%
Select Capital Appreciation Fund.......................... 4/28/95 12.25% N/A 18.64%
Select Value Opportunity Fund............................. 4/30/93 3.37% 11.49% 13.08%
Select Growth Fund........................................ 8/21/92 33.51% 20.41% 17.47%
Growth Fund............................................... 4/29/85 17.62% 17.32% 15.31%
Fidelity VIP Growth Portfolio............................. 10/9/86 37.50% 20.01% 17.71%
Equity Index Fund......................................... 9/28/90 26.50% 21.63% 18.97%
Select Growth and Income Fund............................. 8/21/92 14.77% 16.15% 13.87%
Fidelity VIP Equity-Income Portfolio...................... 10/9/86 10.04% 17.09% 14.07%
Fidelity VIP II Asset Manager Portfolio................... 9/6/89 13.41% 10.21% 11.34%
Fidelity VIP High Income Portfolio........................ 9/19/85 -5.69% 7.25% 9.49%
Investment Grade Income Fund.............................. 4/29/85 6.43% 5.43% 7.61%
Government Bond Fund...................................... 8/26/91 6.14% 4.48% 5.52%
Money Market Fund......................................... 4/29/85 4.00% 3.71% 4.11%
</TABLE>
C-2
<PAGE>
APPENDIX D
SURRENDER CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: SURRENDER CHARGES
FULL SURRENDER -- Assume a payment of $50,000 is made on the issue date and no
additional payments are made. Assume there are no withdrawals and that the
Withdrawal Without Surrender Charge Amount is equal to 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)] to the power of n/365 -1
The following examples assume:
1. The payment was allocated to a ten-year Guarantee Period Account with a
Guaranteed Interest Rate of 8%.
2. The date of surrender is seven years (2,555 days) from the expiration date.
3. The value of the Guarantee Period Account is equal to $62,985.60 at the end
of three years.
4. No transfers 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.
D-1
<PAGE>
NEGATIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 10.00% or 0.10
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365 -1
= [(1+.08)/(1+.10)] to the power of 2555/365 -1
= (.98182) to the power of 7 -1
= -.12054
The market value = the market value factor multiplied by the withdrawal
adjustment
= -.12054 X $62,985.60
= -$7,592.11
</TABLE>
POSITIVE MARKET VALUE ADJUSTMENT (UNCAPPED)
Assume that on the date of surrender, the current rate (j) is 7.00% or 0.07
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.07)] to the power of 2555/365-1
= (1.0093) to the power of 7-1
= .06694
The market value = the market value factor multiplied by the withdrawal
adjustment
= .06694 X $62,985.60
= $4,216.26
</TABLE>
NEGATIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 11.00% or 0.11
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.11)] to the power of 2555/365-1
= (.97297) to the power of 7-1
= -.17454
The market value = Minimum of the market value factor multiplied by the
adjustment 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
</TABLE>
D-2
<PAGE>
POSITIVE MARKET VALUE ADJUSTMENT (CAPPED)
Assume that on the date of surrender, the current rate (j) is 6.00% or 0.06
<TABLE>
<S> <C> <C>
The market value factor = [(1+i)/(1+j)] to the power of n/365-1
= [(1+.08)/(1+.06)] to the power of 2555/365-1
= (1.01887) to the power of 7 - 1
= .13981
The market value = Minimum of the market value factor multiplied by the
adjustment withdrawal or the excess interest earned over 3%
= Minimum of .13981 X $62,985.60 or $8,349.25)
= Minimum of $8,806.02 or $8,349.25)
= $8,349.25
</TABLE>
D-3
<PAGE>
APPENDIX E
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 HYPOTHETICAL
CONTRACT ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
- --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $53,000.00
2 53,530.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 58,883.00 0.00 58,883.00 57,881.25 55,125.00 58,883.00
4 52,994.70 500.00 53,494.70 60,775.31 58,883.00 60,775.31
5 58,294.17 0.00 58,294.17 63,814.08 60,775.31 63,814.08
6 64,123.59 500.00 64,623.59 67,004.78 63,814.08 67,004.78
7 70,535.95 0.00 70,535.95 70,355.02 67,004.78 70,535.95
8 77,589.54 500.00 78,089.54 73,872.77 70,535.95 78,089.54
9 85,348.49 0.00 85,348.49 77,566.41 78,089.54 85,348.49
10 93,883.34 0.00 93,883.34 81,444.73 85,348.49 93,883.34
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield reduced proportionately to reflect
withdrawals. Death Benefit (c) is the death benefit that would have been payable
on the most recent Contract anniversary, increased for subsequent payments, and
decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
DEATH BENEFIT ASSUMING WITHDRAWALS
Assume a payment of $50,000 is made on the issue date and no additional payments
are made. Assume there are withdrawals as detailed in the table below 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 HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH DEATH DEATH DEATH
YEAR VALUE WITHDRAWALS ADJUSTMENT BENEFIT (A) BENEFIT (B) BENEFIT (C) BENEFIT
--- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $ 0.00 $ 53,000.00 $ 52,500.00 $ 50,000.00 $53,000.00
2 53,530.00 0.00 500.00 54,030.00 55,125.00 53,000.00 55,125.00
3 3,883.00 50,000.00 0.00 3,883.00 4,171.13 3,972.50 4,171.13
4 3,494.70 0.00 500.00 3,994.70 4,379.68 4,171.13 4,379.68
5 3,844.17 0.00 0.00 3,844.17 4,598.67 4,379.68 4,598.67
6 4,228.59 0.00 500.00 4,728.59 4,828.60 4,598.67 4,828.60
7 4,651.45 0.00 0.00 4,651.45 5,070.03 4,828.60 5,070.03
8 5,116.59 0.00 500.00 5,616.59 5,323.53 5,070.03 5,616.59
9 5,628.25 0.00 0.00 5,628.25 5,589.71 5,616.59 5,628.25
10 691.07 5,000.00 0.00 691.07 712.70 683.44 712.70
</TABLE>
Death Benefit (a) is the Accumulated Value increased by any positive Market
Value Adjustment. Death Benefit (b) is the gross payments accumulated daily at
the Death Benefit Effective Annual Yield reduced proportionately to reflect
withdrawals. Death Benefit (c) is the death benefit that would have been payable
on
E-1
<PAGE>
the most recent Contract anniversary, increased for subsequent payments, and
decreased proportionately for subsequent withdrawals.
The Hypothetical Death Benefit is equal to the greatest of Death Benefits (a),
(b), or (c).
PART 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 HYPOTHETICAL
ACCUMULATED MARKET VALUE DEATH
YEAR VALUE ADJUSTMENT BENEFIT
--- ------------ ------------ ------------
<S> <C> <C> <C>
1 $ 53,000.00 $ 0.00 $53,000.00
2 53,530.00 500.00 54,030.00
3 58,883.00 0.00 58,883.00
4 52,994.70 500.00 53,494.70
5 58,294.17 0.00 58,294.17
6 64,123.59 500.00 64,623.59
7 70,535.95 0.00 70,535.95
8 77,589.54 500.00 78,089.54
9 85,348.49 0.00 85,348.49
10 93,883.34 0.00 93,883.34
</TABLE>
The Hypothetical Death Benefit is the Accumulated Value increased by any
positive Market Value Adjustment.
E-2
<PAGE>
APPENDIX F
CONDENSED FINANCIAL INFORMATION
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
SUB-ACCOUNTS 1998 1997 1996 1995 1994 1993 1992
- -------------------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECT INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period................. 1.398 1.355 1.127 0.956 1.000 N/A N/A
End of Period....................... 1.605 1.398 1.355 1.127 0.956 N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 130,011 115,585 77,485 37,680 12,530 N/A N/A
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period................. 1.596 1.519 1.284 1.143 1.129 1.000 N/A
End of Period....................... 1.736 1.596 1.519 1.284 1.143 1.129 N/A
Units Outstanding at End of Period (in
thousands).......................... 68,279 62,134 44,416 34,692 26,924 6,681 N/A
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period................. 1.632 1.484 1.330 1.230 1.226 0.906 1.030
End of Period....................... 1.814 1.632 1.484 1.330 1.230 1.226 0.906
Units Outstanding at End of Period (in
thousands).......................... 59,052 56,689 63,050 65,256 59,774 25,395 6,728
T. ROWE PRICE INTERNATIONAL STOCK
PORTFOLIO
Unit Value:
Beginning of Period................. 1.222 1.203 1.064 1.000 N/A N/A N/A
End of Period....................... 1.396 1.222 1.203 1.064 N/A N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 68,367 59,832 35,915 10,882 N/A N/A N/A
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period................. 2.305 1.970 1.686 1.292 1.342 1.139 1.000
End of Period....................... 2.513 2.305 1.970 1.686 1.292 1.342 1.139
Units Outstanding at End of Period (in
thousands).......................... 125,758 106,790 89,974 70,349 54,288 26,158 2,019
SELECT CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period................. 1.670 1.482 1.383 1.000 N/A N/A N/A
End of Period....................... 1.875 1.670 1.482 1.383 N/A N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 80,048 70,932 52,927 16,096 N/A N/A N/A
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
SUB-ACCOUNTS 1998 1997 1996 1995 1994 1993 1992
- -------------------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECT VALUE OPPORTUNITY FUND
Unit Value:
Beginning of Period................. 1.945 1.580 1.249 1.075 1.167 1.000 N/A
End of Period....................... 2.011 1.945 1.580 1.249 1.075 1.167 N/A
Units Outstanding at End of Period (in
thousands).......................... 99,750 85,126 60,145 43,433 33,049 9,902 N/A
SELECT GROWTH FUND
Unit Value:
Beginning of Period................. 2.001 1.514 1.259 1.024 1.055 1.058 1.000
End of Period....................... 2.671 2.001 1.514 1.259 1.024 1.055 1.058
Units Outstanding at End of Period (in
thousands).......................... 121,005 96,643 62,633 47,078 38,415 26,064 3,039
GROWTH FUND
Unit Value:
Beginning of Period................. 2.336 1.894 1.599 1.221 1.236 1.175 1.111
End of Period....................... 2.748 2.336 1.894 1.599 1.221 1.236 1.175
Units Outstanding at End of Period (in
thousands).......................... 164,914 156,173 135,573 116,008 102,399 72,609 34,373
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period................. 2.608 2.143 1.895 1.419 1.440 1.224 1.135
End of Period....................... 3.586 2.608 2.143 1.895 1.419 1.440 1.224
Units Outstanding at End of Period (in
thousands).......................... 149,009 148,211 142,450 116,485 90,717 49,136 18,253
EQUITY INDEX FUND
Unit Value:
Beginning of Period................. 2.581 1.977 1.640 1.221 1.266 1.135 1.074
End of Period....................... 3.265 2.581 1.977 1.640 1.221 1.226 1.135
Units Outstanding at End of Period (in
thousands).......................... 107,625 85,344 57,428 39,534 29,176 22,466 9,535
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period................. 1.978 1.638 1.370 1.066 1.074 0.987 1.000
End of Period....................... 2.270 1.978 1.638 1.370 1.066 1.074 0.987
Units Outstanding at End of Period (in
thousands).......................... 119,107 103,543 82,434 63,841 51,098 31,846 4,711
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period................. 2.824 2.236 1.185 1.490 1.412 1.211 1.051
End of Period....................... 3.107 2.824 2.236 1.185 1.490 1.412 1.211
Units Outstanding at End of Period (in
thousands).......................... 187,989 180,001 167,000 139,145 104,356 61,264 17,855
FIDELITY VIP II ASSET MANAGER
PORTFOLIO
Unit Value:
Beginning of Period................. 1.514 1.273 1.127 0.977 1.000 N/A N/A
End of Period....................... 1.717 1.514 1.273 1.127 0.977 N/A N/A
Units Outstanding at End of Period (in
thousands).......................... 69,704 55,551 42,415 33,444 20,720 N/A N/A
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
SUB-ACCOUNTS 1998 1997 1996 1995 1994 1993 1992
- -------------------------------------- ---------- ---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period................. 2.272 1.958 1.743 1.465 1.510 1.270 1.047
End of Period....................... 2.142 2.272 1.958 1.743 1.465 1.510 1.270
Units Outstanding at End of Period (in
thousands).......................... 97,829 76,343 53,956 38,042 27,041 13,583 3,625
INVESTMENT GRADE INCOME FUND
Unit Value:
Beginning of Period................. 1.530 1.418 1.390 1.073 1.250 1.145 1.073
End of Period....................... 1.629 1.530 1.418 1.390 1.196 1.250 1.145
Units Outstanding at End of Period (in
thousands).......................... 102,088 86,816 79,054 69,168 57,454 48,488 15,428
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period................. 1.384 1.311 1.285 1.152 1.179 1.112 1.075
End of Period....................... 1.469 1.384 1.311 1.285 1.152 1.179 1.112
Units Outstanding at End of Period (in
thousands).......................... 48,930 35,261 30,921 31,710 32,519 60,265 29,844
MONEY MARKET FUND
Unit Value:
Beginning of Period................. 1.214 1.167 1.124 1.077 1.051 1.035 1.013
End of Period....................... 1.262 1.214 1.167 1.124 1.077 1.051 1.035
Units Outstanding at End of Period (in
thousands).......................... 128,730 91,676 92,354 69,311 37,668 30,815 30,778
</TABLE>
F-3
<PAGE>
CONDENSED FINANCIAL INFORMATION
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-K
<TABLE>
<CAPTION>
SUB-ACCOUNTS 1998 1997 1996 1995 1994
- -------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECT INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period............................................... 1.398 1.355 1.128 0.956 1.000
End of Period..................................................... 1.605 1.398 1.355 1.128 0.956
Number of Units Outstanding at End of Period (in thousands)......... 9,713 8,076 5,068 2,093 446
DGPF INTERNATIONAL EQUITY SERIES
Unit Value:
Beginning of Period............................................... 1.387 1.319 1.115 0.993 1.000
End of Period..................................................... 1.508 1.387 1.319 1.115 0.993
Number of Units Outstanding at End of Period (in thousands)......... 4,148 3,266 2,023 1,304 667
FIDELITY VIP OVERSEAS PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.298 1.180 1.058 0.978 1.000
End of Period..................................................... 1.443 1.298 1.180 1.058 0.978
Number of Units Outstanding at End of Period (in thousands)......... 4,358 3,601 3,114 2,804 1,697
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.222 1.203 1.064 1.000 N/A
End of Period..................................................... 1.396 1.222 1.203 1.064 N/A
Number of Units Outstanding at End of Period (in thousands)......... 5,670 4,536 2,506 542 N/A
SELECT AGGRESSIVE GROWTH FUND
Unit Value:
Beginning of Period............................................... 1.825 1.560 1.335 1.023 1.000
End of Period..................................................... 1.989 1.825 1.560 1.335 1.023
Number of Units Outstanding at End of Period (in thousands)......... 10,282 7,947 5,681 2,907 1,211
SELECT CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period............................................... 1.670 1.482 1.115 1.000 N/A
End of Period..................................................... 1.875 1.670 1.482 1.115 N/A
Number of Units Outstanding at End of Period (in thousands)......... 5,947 5,197 3,849 1,069 N/A
SELECT VALUE OPPORTUNITY FUND
Unit Value:
Beginning of Period............................................... 1.764 1.433 1.131 0.975 1.000
End of Period..................................................... 1.823 1.764 1.433 1.131 0.975
Number of Units Outstanding at End of Period (in thousands)......... 7,243 5,466 3,037 1,614 795
SELECT GROWTH FUND
Unit Value:
Beginning of Period............................................... 2.064 1.562 1.229 1.057 1.000
End of Period..................................................... 2.756 2.064 1.562 1.229 1.057
Number of Units Outstanding at End of Period (in thousands)......... 8,389 5,589 2,645 1,278 406
GROWTH FUND
Unit Value:
Beginning of Period............................................... 1.986 1.610 1.359 1.037 1.000
End of Period..................................................... 2.336 1.986 1.610 1.359 1.037
Number of Units Outstanding at End of Period (in thousands)......... 9,224 7,404 4,652 2,436 947
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNTS 1998 1997 1996 1995 1994
- -------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FIDELITY VIP GROWTH PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.972 1.620 1.433 1.073 1.073
End of Period..................................................... 2.712 1.972 1.620 1.433 1.073
Number of Units Outstanding at End of Period (in thousands)......... 13,035 11,575 9,342 4,952 1,944
EQUITY INDEX FUND
Unit Value:
Beginning of Period............................................... 2.187 1.675 1.390 1.035 1.000
End of Period..................................................... 2.766 2.187 1.675 1.390 1.035
Number of Units Outstanding at End of Period (in thousands)......... 8,479 5,712 2,417 947 189
SELECT GROWTH AND INCOME FUND
Unit Value:
Beginning of Period............................................... 1.911 1.582 1.324 1.030 1.000
End of Period..................................................... 2.193 1.911 1.582 1.324 1.030
Number of Units Outstanding at End of Period (in thousands)......... 7,519 6,124 3,759 2,173 832
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Unit Value:
Beginning of Period............................................... 2.034 1.610 1.430 1.073 1.000
End of Period..................................................... 2.238 2.034 1.610 1.430 1.073
Number of Units Outstanding at End of Period (in thousands)......... 16,111 12,959 9,957 5,738 2,214
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.527 1.284 1.137 0.985 1.000
End of Period..................................................... 1.732 1.527 1.284 1.137 0.985
Number of Units Outstanding at End of Period (in thousands)......... 3,514 3,125 2,735 2,025 1,240
FIDELITY VIP HIGH INCOME PORTFOLIO
Unit Value:
Beginning of Period............................................... 1.543 1.330 1.184 0.995 1.000
End of Period..................................................... 1.455 1.543 1.330 1.184 0.995
Number of Units Outstanding at End of Period (in thousands)......... 14,203 9,794 5,635 2,530 985
INVESTMENT GRADE INCOME FUND
Unit Value:
Beginning of Period............................................... 1.267 1.174 1.151 0.990 1.000
End of Period..................................................... 1.348 1.267 1.174 1.151 0.990
Number of Units Outstanding at End of Period (in thousands)......... 5,160 3,889 2,854 1,677 1,677
GOVERNMENT BOND FUND
Unit Value:
Beginning of Period............................................... 1.199 1.136 1.113 0.998 1.000
End of Period..................................................... 1.273 1.199 1.136 1.113 0.998
Number of Units Outstanding at End of Period (in thousands)......... 2,605 1,694 1,629 1,098 363
MONEY MARKET FUND
Unit Value:
Beginning of Period............................................... 1.149 1.105 1.064 1.020 1.000
End of Period..................................................... 1.195 1.149 1.105 1.064 1.020
Number of Units Outstanding at End of Period (in thousands)......... 8,683 8,628 7,379 4,194 1,837
</TABLE>
F-5
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION
OF
INDIVIDUAL AND GROUP 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 FOR THE ABOVE SUB-ACCOUNTS OF
SEPARATE ACCOUNT VA-K (EXECANNUITY PLUS/ALLMERICA ADVANTAGE) DATED MAY 1,
1999 ("THE PROSPECTUS"). THE PROSPECTUS MAY BE OBTAINED FROM ANNUITY CLIENT
SERVICES, ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY, 440 LINCOLN
STREET, WORCESTER, MASSACHUSETTS 01653, TELEPHONE 1-800-533-7881.
DATED MAY 1, 1999
AFLIAC Advantage/ExecAnnuity Plus
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY . . . . . . . . . . . . . . . . . . . 2
THE VARIABLE ACCOUNT
AND THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . 3
SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
UNDERWRITERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ANNUITY BENEFIT PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . 4
EXCHANGE OFFER. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . F-1
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, 1998, the
Company had over $14 billion in assets and over $26 billion of life insurance in
force.
Effective October 1, 1995, the Company changed its name from SMA Life Assurance
Company to Allmerica Financial Life Insurance and Annuity Company. The Company
is an indirectly wholly owned subsidiary of First Allmerica Financial Life
Insurance Company ("First Allmerica") which, in turn, is a wholly owned
subsidiary of Allmerica Financial Corporation ("AFC"). First Allmerica,
originally organized under the laws of Massachusetts in 1844 as a mutual life
insurance company, and known as State Mutual Life Assurance Company of America,
converted to a stock life insurance company and adopted its present name on
October 16, 1995. First Allmerica is among the five oldest life insurance
companies in America. As of December 31, 1998, First Allmerica and its
subsidiaries (including the Company) had over $27 billion in combined assets and
over $48 billion in life insurance in force.
Currently, 18 Sub-Accounts of the Variable Account are available under the
Allmerica Advantage contract (the "Contract") and ExecAnnuity Plus contracts
(Forms A3018-91 and A3021-93), two predecessor contracts no longer being sold.
Each Sub-Account invests 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
2
<PAGE>
Premium Fund, Inc. ("DGPF"). The Trust is managed by Allmerica Financial
Investment Management Services, Inc. Fidelity VIP and Fidelity VIP II are
managed by Fidelity Management & Research Company ("FMR"). 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, Fidelity VIP, Fidelity 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 Select
Value Opportunity Fund. Certain of these Funds may not be available in all
states. Four portfolios of Fidelity VIP 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 Fidelity 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
contracts, 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
contracts or the Variable Account.
The Variable Account is considered to be a part of and taxed with the operations
of the Company. The Company is taxed as a life insurance company under
subchapter L of the Internal Revenue Code (the "Code"), and files a consolidated
tax return with its parent and affiliated companies.
The Company reserves the right to make a charge for any effect which the income,
assets or existence of the Contract or the Variable Account may have upon its
tax. Such charge for taxes, if any, will be assessed on a fair and equitable
basis in order to preserve equity among classes of Contract Owners ("Owners").
The Variable Account presently is not subject to tax.
SERVICES
CUSTODIAN OF SECURITIES. The Company serves as custodian of the assets of the
Variable Account. Underlying 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 the Company as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998, and
the financial statements of Separate Account VA-K Allmerica Advantage Variable
Annuity and ExecAnnuity Plus Variable Annuity of the Company as of December 31,
1998 and for the periods indicated, included in this Statement of Additional
Information constituting part of this Registration Statement, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Contract.
3
<PAGE>
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, profits from the Company's general account, including the
investment earnings on amounts allocated to accumulate on a fixed basis in
excess of the interest credited on fixed accumulations by the Company, and the
profit, if any, from the mortality and expense risk charge.
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 contracts were $36,853,600.78 in
1998, $34,693,060.08 in 1997 and $32,954,782.25 in 1996.
Commissions are paid by the Company, and do not result in any charge to Owners
or to the Variable Account in addition to the charges described under "CHARGES
AND DEDUCTIONS" in the Prospectus.
ANNUITY BENEFIT PAYMENTS
The method by which the Accumulated Value under the Contract is determined is
described in detail under "Computation of Values" in the Prospectus.
ILLUSTRATION OF ACCUMULATION UNIT CALCULATION USING HYPOTHETICAL EXAMPLE. The
Accumulation Unit calculation for a daily Valuation Period may be illustrated by
the following hypothetical example: Assume that the assets of a Sub-Account at
the beginning of a one-day Valuation Period were $5,000,000; that the value of
an Accumulation Unit on the previous date was $1.135000; and that during the
Valuation Period, the investment income and net realized and unrealized capital
gains exceed net realized and unrealized capital losses by $1,675. The
Accumulation Unit Value at the end of the current Valuation Period would be
calculated as follows:
<TABLE>
<S> <C>
(1) Accumulation Unit Value -- Previous Valuation Period . . . . . . . . . . . . . .$1.135000
(2) Value of Assets -- Beginning of Valuation Period . . . . . . . . . . . . . . . .$5,000,000
(3) Excess of Investment Income and Net Gains Over Capital Losses . . . . . . . . . $1,675
(4) 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
</TABLE>
4
<PAGE>
Conversely, if unrealized capital losses and charges for expenses and taxes
exceeded investment income and net realized capital gains by $1,675, the
Accumulation Unit Value at the end of the Valuation Period would have been
$1.134574. The method for determining the amount of annuity benefit payments
is described in detail under "Determination of the First and Subsequent Annuity
Benefit Payments" in the Prospectus.
ILLUSTRATION OF VARIABLE ANNUITY BENEFIT PAYMENT CALCULATION USING HYPOTHETICAL
EXAMPLE. The determination of the Annuity Unit value and the variable annuity
benefit payment may be illustrated by the following hypothetical example: Assume
an Annuitant has 40,000 Accumulation Units in a Variable Account, and that the
value of an Accumulation Unit on the Valuation Date used to determine the amount
of the first variable annuity benefit payment is $1.120000. Therefore, the
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 surrender
charge, the first monthly payment would be 44.800 multiplied by $6.57, or
$294.34.
Next, assume that the Annuity Unit value for the assumed rate of 3.5% per annum
for the Valuation Date as of which the first payment was calculated was
$1.100000. Annuity Unit values will not be the same as Accumulation Unit Values
because the former reflect the 3.5% assumed interest rate used in the annuity
rate calculations. When the Annuity Unit value of $1.100000 is divided into the
first monthly payment the number of Annuity Units represented by that payment is
determined to be 267.5818. The value of this same number of Annuity Units will
be paid in each subsequent month under most options. Assume further that the
net investment factor for the Valuation Period applicable to the next annuity
benefit payment is 1.000190. Multiplying this factor by .999906 (the one-day
adjustment factor for the assumed interest rate of 3.5% per annum) produces a
factor of 1.000096. This then is multiplied by the Annuity Unit value on the
immediately preceding Valuation Date (assumed here to be $1.105000). The result
is an Annuity Unit value of $1.105106 for the current monthly payment. The
current monthly payment then is determined by multiplying the number of Annuity
Units by the current Annuity Unit value, or 267.5818 times $1.105106, which
produces a current monthly payment of $295.71.
METHOD FOR DETERMINING COMMUTED VALUE ON VARIABLE ANNUITY PERIOD CERTAIN OPTIONS
AND ILLUSTRATION USING HYPOTHETICAL EXAMPLE. The Contract offers both
commutable and non-commutable period certain annuity options. A commutable
option gives the Annuitant the right to exchange any remaining payments for a
lump sum payment based on the commuted value. The Commuted Value is the present
value of remaining payments calculated at 3.5% interest. The determination of
the Commuted Value may be illustrated by the following hypothetical example.
Assume a commutable period certain option is elected. The number of Annuity
Units upon which each payment is based would be calculated using the Surrender
Value less any premium tax rather 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.
5
<PAGE>
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.
SURRENDER CHARGE COMPUTATION. No surrender charge otherwise applicable to the
Exchanged Contract will be assessed as a result of the exchange. Instead, the
surrender charge under the new Contract will be computed as if the payments that
had been made to the Exchanged Contract were made to the new Contract as of the
date of issue of the Exchanged Contract. Any additional payments to the new
Contract after the exchange will be subject to the surrender charge computation
outlined in the new Contract and the Prospectus; i.e., the charge will be
computed based on the number of years that the additional payment (or portion of
that payment) that is being withdrawn has been credited to the new Contract.
SUMMARY OF DIFFERENCES BETWEEN EXCHANGED CONTRACT AND THE NEW CONTRACT. The new
Contract and the Exchanged Contract differ substantially as summarized below.
There may be additional differences important to a person considering an
exchange, and the Prospectuses for the new Contract and the Exchanged Contract
should be reviewed carefully before the exchange request is submitted to the
Company.
SURRENDER CHARGE. The surrender charge under the new Contract, as described in
the Prospectus, imposes higher charge percentages against the excess amount
redeemed than the Exchanged Contract and, in the case of a Single Payment
Exchanged Contract, applies the charge for a greater number of years. In
addition, if an Elective Payment Exchanged Contract was issued more than nine
years before the date of an exchange under this offer, additional payments to
the Exchanged Contract would not be subject to a surrender charge. New payments
to the new Contract may be subject to a charge if withdrawn prior to the
surrender charge period described in the Prospectus.
CONTRACT FEE. Under the new Contract, the Company deducts a $30 fee on each
Contract anniversary and at surrender if the Accumulated Value is less than
$50,000. This fee is waived if the new Contract is part of a 401(k) plan. No
Contract fees are charged on the Single Payment Exchanged Contract. A $9
semi-annual fee is charged on the Elective Payment Exchanged Contract if the
Accumulated Value is $10,000 or less.
VARIABLE ACCOUNT ADMINISTRATIVE EXPENSE CHARGE. Under the new Contract, the
Company assesses each Sub-Account a daily administrative expense charge at an
annual rate of 0.20% of the average daily net assets of the Sub-Account. No
administrative expense charge based on a percentage of Sub-Account assets is
imposed under the Exchanged Contract.
TRANSFER CHARGE. No charge for transfers is imposed under the Exchanged
Contract. Currently, no transfer charge is imposed under the new Contract;
however, the Company reserves the right to assess a charge not to exceed $25 for
each transfer after the twelfth in any Contract year.
6
<PAGE>
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,
prior purchase payments made under the Exchanged Contract (if higher than the
Exchanged Contract's Accumulated Value) no longer are a basis for determining
the death benefit under the new Contract. Consequently, whether the initial
minimum death benefit under the new Contract is greater than, equal to, or less
than, the death benefit of the Exchanged Contract depends on whether the
Accumulated Value transferred to the new Contract is greater than, equal to, or
less than, the gross payments under the Exchanged Contract. In addition, under
the Exchanged Contract, the amount of any prior withdrawals is subtracted from
the value of the death benefit. Under the new Contract, where there is a
reduction in the death benefit amount due to a prior withdrawal, the value of
the death benefit is reduced in the same proportion that the new Contract's
Accumulated Value was reduced on the date of the withdrawal.
ANNUITY TABLES. The Exchanged Contract contains higher guaranteed annuity
rates.
INVESTMENTS. Accumulated Values and payments under the new Contract may be
allocated to significantly more investment options than are available under the
Exchanged Contract.
B. FIXED ANNUITY EXCHANGE OFFER
This exchange offer also applies to all fixed annuity contracts issued by the
Company's subsidiary, AFLIAC. A fixed annuity contract to which this exchange
offer applies may be exchanged at net asset value for the Contract described in
this Prospectus, subject to the same provisions for effecting the exchange and
for applying the new Contract's surrender charge as described above for variable
annuity contracts. This Prospectus should be read carefully before making such
exchange. Unlike a fixed annuity, the new Contract's value is not guaranteed,
and will vary depending on the investment performance of the Underlying Funds to
which it is allocated. The new Contract has a different charge structure than a
fixed annuity contract, which includes not only a surrender charge that may vary
from that of the class of contracts to which the exchanged fixed contract
belongs, but also Contract fees, mortality and expense risk charges (for the
Company's assumption of certain mortality and expense risks), administrative
expense charges, transfer charges (for transfers permitted among Sub-Accounts
and the Fixed Account), and expenses incurred by the Underlying 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 cancel the new Contract within the time
permitted, as described in the sections of this Prospectus captioned "Right to
Cancel Individual Retirement Annuity" and "Right to Cancel All Other Contracts,"
will have their exchanged contract automatically reinstated as of the date of
cancellation. The refunded amount will be applied as the new current
Accumulated Value under the reinstated contract, which may be more or less than
it would have been had no exchange and reinstatement occurred. The refunded
amount will be allocated initially among the Fixed Account and Sub-Accounts of
the reinstated contract in the same proportion that the value in the Fixed
Account and the value in each Sub-Account bore to the transferred Accumulated
Value on the date of the exchange of the contract for the new Contract. For
purposes of calculating any surrender charge under the reinstated contract, the
reinstated contract will be deemed to have been issued and to have received past
purchase payments as if there had been no exchange.
7
<PAGE>
PERFORMANCE INFORMATION
Performance information for a Sub-Account may be compared, in reports and
promotional literature, to certain indices described in the Prospectus under
"PERFORMANCE INFORMATION." In addition, the Company may provide advertising,
sales literature, periodic publications or other material information on various
topics of interest to Owners and prospective Owners. These topics may include
the relationship between sectors of the economy and the economy as a whole and
its effect on various securities markets, investment strategies and techniques
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparisons
between the Contract and the characteristics of and market for such financial
instruments. Total return data and supplemental total return information may be
advertised based on the period of time that an Underlying Fund and an underlying
Sub-Account have been in existence, even if longer than the period of time that
the Contract has been offered. The results for any period prior to a Contract
being offered will be calculated as if the Contract had been offered during that
period 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 specified period, reduced
by the Sub-Account's asset charge and any applicable surrender charge which
would be assessed upon complete withdrawal of the investment.
Total Return figures are calculated by standardized methods prescribed by rules
of the Securities and Exchange Commission (the "SEC"). The quotations are
computed by finding the average annual compounded rates of return over the
specified periods that would equate the initial amount invested to the ending
redeemable values, according to the following formula:
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 surrender charge, if any, applicable at the end of
the period is included in the calculation, according to the following schedule:
8
<PAGE>
CHARGE AS PERCENTAGE
YEARS FROM DATE OF
OF PAYMENT TO DATE OF NEW PURCHASE PAYMENTS
WITHDRAWAL WITHDRAWN*
---------- ----------
0-2 8%
3 7%
4 6%
5 5%
6 4%
7 3%
8 2%
9 1%
Thereafter 0%
* Subject to the maximum limit described in the Prospectus.
No surrender charge is deducted upon expiration of the periods specified above.
In each calendar year, a certain amount (withdrawal without surrender charge
amount, as described in the Prospectus) is not subject to the surrender charge.
The calculations of Total Return 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 therefore
there is no adjustment for the surrender charge that would be applicable if the
Contract was surrendered at the end of the period. The calculation of
supplemental total return does not include the deduction of the $30 annual
Contract fee.
9
<PAGE>
YIELD AND EFFECTIVE YIELD - THE MONEY MARKET SUB-ACCOUNT
Set forth below is yield and effective yield information for the Money Market
Sub-Account for the seven-day period ended December 31, 1998:
Yield 3.63%
Effective 3.70%
The yield and effective yield figures are calculated by standardized methods
prescribed by rules of the SEC. Under those methods, the yield quotation is
computed by determining the net change (exclusive of capital changes) in the
value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Sub-Account at the beginning of the period, dividing
the difference by the value of the account at the beginning of the same
period to obtain the base period return, and then multiplying the return for
a seven-day base period by (365/7), with the resulting yield carried to the
nearest hundredth of one percent.
The Money Market Sub-Account computes effective yield by compounding the
unannualized base period return by using the formula:
(365/7)
Effective Yield = [ (base period return + 1) ] - 1
The calculations of yield and effective yield reflect the $30 annual Contract
fee.
FINANCIAL STATEMENTS
Financial Statements are included for Allmerica Financial Life Insurance and
Annuity Company and for its Separate Account VA-K.
10
<PAGE>
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
REVENUES
Premiums................................... $ 0.5 $ 22.8 $ 32.7
Universal life and investment product
policy fees.............................. 267.4 212.2 176.2
Net investment income...................... 151.3 164.2 171.7
Net realized investment gains (losses)..... 20.0 2.9 (3.6)
Other income............................... 0.6 1.4 0.9
------- ------- -------
Total revenues......................... 439.8 403.5 377.9
------- ------- -------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss
adjustment expenses...................... 153.9 187.8 192.6
Policy acquisition expenses................ 64.6 2.8 49.9
Sales practice litigation.................. 21.0 -- --
Loss from cession of disability income
business................................. -- 53.9 --
Other operating expenses................... 104.1 101.3 86.6
------- ------- -------
Total benefits, losses and expenses.... 343.6 345.8 329.1
------- ------- -------
Income before federal income taxes............. 96.2 57.7 48.8
------- ------- -------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current.................................... 22.1 13.9 26.9
Deferred................................... 11.8 7.1 (9.8)
------- ------- -------
Total federal income tax expense....... 33.9 21.0 17.1
------- ------- -------
Net income..................................... $ 62.3 $ 36.7 $ 31.7
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
-------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)............................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)............................................ 31.8 54.0
Mortgage loans...................................... 230.0 228.2
Real estate......................................... 14.5 12.0
Policy loans........................................ 151.5 140.1
Other long-term investments......................... 9.1 20.3
---------- ----------
Total investments............................... 1,767.3 1,857.1
---------- ----------
Cash and cash equivalents............................. 217.9 31.1
Accrued investment income............................. 33.5 34.2
Deferred policy acquisition costs..................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses,
future policy benefits and unearned premiums........ 308.0 251.1
Other assets.......................................... 46.9 10.7
Separate account assets............................... 11,020.4 7,567.3
---------- ----------
Total assets.................................... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.............................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.......................................... 17.9 18.5
Unearned premiums................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities....................................... 38.1 32.5
---------- ----------
Total policy liabilities and accruals........... 2,343.5 2,150.1
---------- ----------
Expenses and taxes payable............................ 146.2 77.6
Reinsurance premiums payable.......................... 45.7 4.9
Deferred federal income taxes......................... 78.8 75.9
Separate account liabilities.......................... 11,020.4 7,567.3
---------- ----------
Total liabilities............................... 13,634.6 9,875.8
---------- ----------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares
authorized, 2,524 and 2,521 shares issued and
outstanding......................................... 2.5 2.5
Additional paid-in capital............................ 407.9 386.9
Accumulated other comprehensive income................ 24.1 38.5
Retained earnings..................................... 275.4 213.1
---------- ----------
Total shareholder's equity...................... 709.9 641.0
---------- ----------
Total liabilities and shareholder's equity...... $ 14,344.5 $ 10,516.8
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
----------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
COMMON STOCK................................... $ 2.5 $ 2.5 $ 2.5
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period............. 386.9 346.3 324.3
Issuance of common stock................... 21.0 40.6 22.0
-------- -------- --------
Balance at end of period................... 407.9 386.9 346.3
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period............. 38.5 20.5 23.8
Appreciation (depreciation) during the
period:
Net (depreciation) appreciation on
available-for-sale securities........ (23.4) 27.0 (5.1)
Benefit (provision) for deferred
federal income taxes................. 9.0 (9.0) 1.8
-------- -------- --------
(14.4) 18.0 (3.3)
-------- -------- --------
Balance at end of period................... 24.1 38.5 20.5
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period............. 213.1 176.4 144.7
Net income................................. 62.3 36.7 31.7
-------- -------- --------
Balance at end of period................... 275.4 213.1 176.4
-------- -------- --------
Total shareholder's equity............. $ 709.9 $ 641.0 $ 545.7
-------- -------- --------
-------- -------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Net income.................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on
available-for-sale securities......... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal
income taxes.......................... 9.0 (9.0) 1.8
------- ------- -------
Other comprehensive income.......... (14.4) 18.0 (3.3)
------- ------- -------
Comprehensive income.................... 47.9 $ 54.7 $ 28.4
------- ------- -------
------- ------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
-------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to
net cash used in operating activities:
Net realized gains.................. (20.0) (2.9) 3.6
Net amortization and depreciation... (7.1) -- 3.5
Sales practice litigation expense... 21.0
Loss from cession of disability
income business................... -- 53.9 --
Deferred federal income taxes....... 11.8 7.1 (9.8)
Payment related to cession of
disability income business........ -- (207.0) --
Change in deferred acquisition
costs............................. (177.8) (181.3) (66.8)
Change in reinsurance premiums
payable........................... 40.8 3.9 (0.2)
Change in accrued investment
income............................ 0.7 3.5 1.2
Change in policy liabilities and
accruals, net..................... 193.1 (72.4) (39.9)
Change in reinsurance receivable.... (56.9) 22.1 (1.5)
Change in expenses and taxes
payable........................... 55.4 0.2 32.3
Separate account activity, net...... (0.5) 1.6 8.0
Other, net.......................... (28.0) (8.7) 2.3
-------- -------- --------
Net cash provided by (used in)
operating activities.......... 94.8 (343.3) (35.6)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities
of available-for-sale fixed
maturities............................ 187.0 909.7 809.4
Proceeds from disposals of equity
securities............................ 53.3 2.4 1.5
Proceeds from disposals of other
investments........................... 22.7 23.7 17.4
Proceeds from mortgages matured or
collected............................. 60.1 62.9 34.0
Purchase of available-for-sale fixed
maturities............................ (136.0) (579.7) (795.8)
Purchase of equity securities........... (30.6) (3.2) (13.2)
Purchase of other investments........... (22.7) (9.0) (13.9)
Purchase of mortgages................... (58.9) (70.4) (22.3)
Other investing activities, net......... (3.9) -- (2.0)
-------- -------- --------
Net cash provided by investing
activities........................ 71.0 336.4 15.1
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and
capital paid in....................... 21.0 19.2 22.0
-------- -------- --------
Net cash provided by financing
activities........................ 21.0 19.2 22.0
-------- -------- --------
Net change in cash and cash equivalents..... 186.8 12.3 1.5
Cash and cash equivalents, beginning of
period..................................... 31.1 18.8 17.3
-------- -------- --------
Cash and cash equivalents, end of period.... $ 217.9 $ 31.1 $ 18.8
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 0.6 $ -- $ 3.4
Income taxes paid....................... $ 36.2 $ 5.4 $ 16.5
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual life and annuity policies, and are based upon estimates as to future
investment yield, mortality and withdrawals that include provisions for adverse
deviation. Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. Benefits, losses and related expenses are matched
with premiums, resulting in their recognition over the lives of the contracts.
This matching is accomplished through the provision for future benefits,
estimated and unpaid losses and amortization of deferred policy acquisition
costs. Revenues for investment-related products consist of net investment income
and contract charges assessed against the fund values. Related benefit expenses
primarily consist of net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies. The Federal income tax for all subsidiaries in the consolidated
return of AFC is calculated on a separate return basis. Any current tax
liability is paid to AFC. Tax benefits resulting from taxable operating losses
or credits of AFC's subsidiaries are not reimbursed to the subsidiary until such
losses or credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), which established standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from non-owner
sources. This statement is effective for fiscal years beginning after December
15, 1997. The Company adopted Statement No. 130 for the first quarter of 1998,
which resulted primarily in reporting unrealized gains and losses on investments
in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ---------------------------------------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
government and agency securities....... $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions....... 2.7 0.2 -- 2.9
Foreign governments..................... 48.8 1.6 1.5 48.9
Corporate fixed maturities.............. 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities.............. 131.3 5.8 1.4 135.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,284.6 $66.4 $20.6 $1,330.4
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 27.4 $ 8.9 $ 4.5 $ 31.8
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
1997
----------------------------------------------
<CAPTION>
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....... $ 6.3 $ 0.5 $-- $ 6.8
States and political subdivisions....... 2.8 0.2 -- 3.0
Foreign governments..................... 50.1 2.0 -- 52.1
Corporate fixed maturities.............. 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.............. 133.8 5.2 1.3 137.7
--------- ----- ----- --------
Total fixed maturities.................. $ 1,340.5 $66.6 $ 4.6 $1,402.5
--------- ----- ----- --------
--------- ----- ----- --------
Equity securities....................... $ 34.4 $19.9 $ 0.3 $ 54.0
--------- ----- ----- --------
--------- ----- ----- --------
</TABLE>
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1998, the amortized
cost and market value of these assets on deposit in New York were $268.5 million
and $284.1 million, respectively. At December 31, 1997, the amortized cost and
market value of assets on deposit were $276.8 million and $291.7 million,
respectively. In addition, fixed maturities, excluding those securities on
deposit in New York, with an amortized cost of $4.2 million were on deposit with
various state and governmental authorities at December 31, 1998 and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
<TABLE>
<CAPTION>
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------------------------------------------------------ --------- --------
<S> <C> <C>
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
--------- --------
Total....................................................... $ 1,284.6 $1,330.4
--------- --------
--------- --------
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------------------------------------------------------ --------------- ----- ------
<S> <C> <C> <C>
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
1997
Fixed maturities............................................ $702.9 $11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $ --
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
</TABLE>
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
<TABLE>
<CAPTION>
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------------------------------------------------------ ---------- ------------- -------
<S> <C> <C> <C>
1998
Net appreciation, beginning of year......................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
Net depreciation on available-for-sale securities........... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 7.1 -- 7.1
Benefit from deferred federal income taxes.................. 3.2 5.8 9.0
---------- ------ -------
(5.9) (8.5) (14.4)
---------- ------ -------
Net appreciation, end of year............................... $ 16.2 $ 7.9 $ 24.1
---------- ------ -------
---------- ------ -------
1997
Net appreciation, beginning of year......................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
Net appreciation on available-for-sale securities........... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ (9.8) -- (9.8)
Provision for deferred federal income taxes................. (5.1) (3.9) (9.0)
---------- ------ -------
9.4 8.6 18.0
---------- ------ -------
Net appreciation, end of year............................... $ 22.1 $ 16.4 $ 38.5
---------- ------ -------
---------- ------ -------
1996
Net appreciation, beginning of year......................... $ 20.4 $ 3.4 $ 23.8
---------- ------ -------
Net (depreciation) appreciation on available-for-sale
securities................................................. (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities................ 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes....... 4.1 (2.3) 1.8
---------- ------ -------
(7.7) 4.4 (3.3)
---------- ------ -------
Net appreciation, end of year............................... $ 12.7 $ 7.8 $ 20.5
---------- ------ -------
---------- ------ -------
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
Mortgage loans.............................................. $ 230.0 $ 228.2
Real estate held for sale................................... 14.5 12.0
------- -------
Total mortgage loans and real estate........................ $ 244.5 $ 240.2
------- -------
------- -------
</TABLE>
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, real estate assets with a carrying amount of
$15.7 million were written down to the estimated fair value less cost to sell of
$12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 1997. During 1996, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
<S> <C> <C>
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ ------ ------
Geographic region:
<S> <C> <C>
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
------ ------
------ ------
</TABLE>
At December 31, 1998, scheduled mortgage loan maturities were as follows: 1999
- -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 -- $11.5
million; 2003 -- $0.6 million; and $143.0 million thereafter. Actual maturities
could differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties and loans may be
refinanced. During 1998, the Company did not refinance any mortgage loans based
on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances, which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------------------------------------------------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998
Mortgage loans.............................................. $ 9.4 $(4.5) $1.6 $ 3.3
----- ----- --- -----
----- ----- --- -----
1997
Mortgage loans.............................................. $ 9.5 $ 1.1 $1.2 $ 9.4
Real estate................................................. 1.7 3.7 5.4 --
----- ----- --- -----
Total................................................... $11.2 $ 4.8 $6.6 $ 9.4
----- ----- --- -----
----- ----- --- -----
1996
Mortgage loans.............................................. $12.5 $ 4.5 $7.5 $ 9.5
Real estate................................................. 2.1 -- 0.4 1.7
----- ----- --- -----
Total................................................... $14.6 $ 4.5 $7.9 $11.2
----- ----- --- -----
----- ----- --- -----
</TABLE>
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
------ ------ ------
------ ------ ------
</TABLE>
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 1997, and reduced net income by $0.1 million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.6 million, $21.1 million and $25.4 million at December 31,
1998, 1997 and 1996, respectively. Interest income on restructured mortgage
loans that would have been recorded in accordance with the original terms of
such loans amounted to $1.4 million, $1.9 million and $3.6 million in 1998,
1997, and 1996, respectively. Actual interest income on these loans included in
net investment income aggregated $1.8 million, $2.1 million and $2.2 million in
1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
------ ------ ------
------ ------ ------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $ (5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------- ------- -------
Other comprehensive income.................................. $ (14.4) $ 18.0 $ (3.3)
------- ------- -------
------- ------- -------
</TABLE>
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), requires disclosure of fair value information about
certain financial instruments (insurance contracts, real estate, goodwill and
taxes are excluded) for which it is practicable to estimate such values, whether
or not these instruments are included in the balance sheet. The fair values
presented for certain financial instruments are estimates which, in many cases,
may differ significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments, which have comparable terms and credit
quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans is
limited to the lesser of the present value of the cash flows or book value.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................................. $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities.......................................... 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities......................................... 31.8 31.8 54.0 54.0
Mortgage loans............................................ 230.0 241.9 228.2 239.8
Policy loans.............................................. 151.5 151.5 140.1 140.1
--------- --------- --------- ---------
$ 1,961.6 $ 1,973.5 $ 1,855.9 $ 1,867.5
--------- --------- --------- ---------
--------- --------- --------- ---------
FINANCIAL LIABILITIES
Individual fixed annuity contracts........................ $ 1,069.4 $ 1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life Contingencies......... 16.6 16.6 15.3 15.3
--------- --------- --------- ---------
$ 1,086.0 $ 1,051.2 $ 891.3 $ 865.9
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $21.0 $17.1
----- ----- -----
----- ----- -----
</TABLE>
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Deferred tax (assets) liabilities
Policy reserves........................................... $ (205.1) $ (175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
-------- --------
Deferred tax liability, net................................. $ 78.8 $ 75.9
-------- --------
-------- --------
</TABLE>
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding December 31
or (ii) the individual company's statutory net gain from operations for the
preceding calendar year (if such insurer is a
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
------ ------ ------
------ ------ ------
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
<S> <C> <C> <C>
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
------ ------ ------
------ ------ ------
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (10.2) 10.3
Adjustment for cession of disability income insurance..... -- (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- 50.3 --
------ ------ ------
Balance at end of year...................................... $950.5 $765.3 $632.7
------ ------ ------
------ ------ ------
</TABLE>
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company believes
that no material adverse development of losses will occur. However, the amount
of the liabilities could be revised in the near term if the estimates are
revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Allmerica Financial Life Insurance and Annuity
Company and the Contractowners of the Separate Account VA-K Allmerica Advantage
Variable Annuity and ExecAnnuity Plus Variable Annuity of Allmerica Financial
Life Insurance and Annuity Company
In our opinion, the accompanying statements of assets and liabilities, and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of each of the Sub-Accounts
constituting the Separate Account VA-K Allmerica Advantage Variable Annuity and
ExecAnnuity Plus Variable Annuity of Allmerica Financial Life Insurance and
Annuity Company at December 31, 1998, the results of each of their operations
and the changes in each of their net assets for each of the two years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Allmerica Financial Life
Insurance and Annuity Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the Funds, provide a reasonable basis for the opinion
expressed above.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT
INVESTMENT MONEY EQUITY GOVERNMENT AGGRESSIVE
GROWTH GRADE INCOME MARKET INDEX BOND GROWTH
------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $453,329,914 $166,255,290 $162,581,881 $351,478,319 $71,863,194 $315,970,960
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- -- -- -- --
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).............. -- 19,606 -- -- -- --
------------ ------------ ------------ ------------ ----------- ------------
Total assets.............................. 453,329,914 166,274,896 162,581,881 351,478,319 71,863,194 315,970,960
LIABILITIES:
Payable to Allmerica Financial Life
Insurance
and Annuity Company (Sponsor).............. 133,175 -- 88,289 83,355 106 1,660
------------ ------------ ------------ ------------ ----------- ------------
Net assets................................ $453,196,739 $166,274,896 $162,493,592 $351,394,964 $71,863,088 $315,969,300
------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ----------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $314,229,248 $109,523,792 $109,330,421 $236,665,487 $46,647,495 $222,038,496
Non-qualified variable annuity
contracts............................... 138,967,491 56,751,104 53,163,171 114,729,477 25,215,593 93,930,804
------------ ------------ ------------ ------------ ----------- ------------
$453,196,739 $166,274,896 $162,493,592 $351,394,964 $71,863,088 $315,969,300
------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ----------- ------------
Qualified units outstanding, December 31,
1998....................................... 114,345,181 67,244,780 86,613,172 72,485,823 31,761,575 88,373,003
Net asset value per qualified unit, December
31, 1998................................... $ 2.748076 $ 1.628733 $ 1.262284 $ 3.264990 $ 1.468677 $ 2.512515
Non-qualified units outstanding, December
31, 1998................................... 50,569,014 34,843,711 42,116,646 35,139,331 17,168,917 37,385,172
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 2.748076 $ 1.628733 $ 1.262284 $ 3.264990 $ 1.468677 $ 2.512515
<CAPTION>
SELECT
SELECT GROWTH SELECT VALUE
GROWTH AND INCOME OPPORTUNITY*
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $323,203,657 $270,427,710 $200,579,014
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- --
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).............. -- -- --
------------ ------------ ------------
Total assets.............................. 323,203,657 270,427,710 200,579,014
LIABILITIES:
Payable to Allmerica Financial Life
Insurance
and Annuity Company (Sponsor).............. 2,311 31,536 1,862
------------ ------------ ------------
Net assets................................ $323,201,346 $270,396,174 $200,577,152
------------ ------------ ------------
------------ ------------ ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $227,291,255 $180,022,112 $142,898,046
Non-qualified variable annuity
contracts............................... 95,910,091 90,374,062 57,679,106
------------ ------------ ------------
$323,201,346 $270,396,174 $200,577,152
------------ ------------ ------------
------------ ------------ ------------
Qualified units outstanding, December 31,
1998....................................... 85,096,800 79,298,223 71,065,129
Net asset value per qualified unit, December
31, 1998................................... $ 2.670973 $ 2.270191 $ 2.010804
Non-qualified units outstanding, December
31, 1998................................... 35,908,296 39,809,012 28,684,598
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 2.670973 $ 2.270191 $ 2.010804
</TABLE>
* Name changed. See Note 1.
The accompanying notes are an integral part of these financial statements.
SA-1
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
SELECT SELECT DGPF
INTERNATIONAL CAPITAL INTERNATIONAL FIDELITY VIP FIDELITY VIP
EQUITY APPRECIATION EQUITY HIGH INCOME EQUITY-INCOME
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $208,681,110 $150,062,155 $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. -- -- -- 209,594,305 584,136,591
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- -- --
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- 118,501,386 -- --
Receivable from Allmerica Financial Life
Insurance
and Annuity Company (Sponsor).............. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Total assets.............................. 208,681,110 150,062,155 118,501,386 209,594,305 584,136,591
LIABILITIES:
Payable to Allmerica Financial Life
Insurance
and Annuity Company (Sponsor).............. 1,913 1,006 1,071 256 4,816
------------- ------------- ------------- ------------- -------------
Net assets................................ $208,679,197 $150,061,149 $118,500,315 $209,594,049 $584,131,775
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net asset distribution by category:
Qualified variable annuity contracts...... $146,629,320 $104,737,980 $ 82,843,189 $138,969,164 $391,512,849
Non-qualified variable annuity
contracts............................... 62,049,877 45,323,169 35,657,126 70,624,885 192,618,926
------------- ------------- ------------- ------------- -------------
$208,679,197 $150,061,149 $118,500,315 $209,594,049 $584,131,775
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Qualified units outstanding, December 31,
1998....................................... 91,352,709 55,871,132 47,733,352 64,864,268 125,999,304
Net asset value per qualified unit, December
31, 1998................................... $ 1.605090 $ 1.874635 $ 1.735541 $ 2.142461 $ 3.107262
Non-qualified units outstanding, December
31, 1998................................... 38,658,192 24,177,063 20,545,251 32,964,373 61,989,921
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 1.605090 $ 1.874635 $ 1.735541 $ 2.142461 $ 3.107262
<CAPTION>
T. ROWE
FIDELITY VIP PRICE
FIDELITY VIP FIDELITY VIP II INTERNATIONAL
GROWTH OVERSEAS ASSET MANAGER STOCK
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in shares of Allmerica
Investment Trust........................... $ -- $ -- $ -- $ --
Investments in shares of Fidelity Variable
Insurance Products Funds (VIP)............. 534,372,318 107,144,689 119,652,554 --
Investment in shares of T. Rowe Price
International Series, Inc.................. -- -- -- 95,438,404
Investment in shares of Delaware Group
Premium Fund, Inc.......................... -- -- -- --
Receivable from Allmerica Financial Life
Insurance
and Annuity Company (Sponsor).............. -- -- -- --
------------- ------------- ------------- ------------
Total assets.............................. 534,372,318 107,144,689 119,652,554 95,438,404
LIABILITIES:
Payable to Allmerica Financial Life
Insurance
and Annuity Company (Sponsor).............. 5,144 2,512 703 1,080
------------- ------------- ------------- ------------
Net assets................................ $ 534,367,174 $ 107,142,177 $119,651,851 $95,437,324
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Net asset distribution by category:
Qualified variable annuity contracts...... $ 373,220,162 $ 77,463,381 $ 79,681,761 $67,381,222
Non-qualified variable annuity
contracts............................... 161,147,012 29,678,796 39,970,090 28,056,102
------------- ------------- ------------- ------------
$ 534,367,174 $ 107,142,177 $119,651,851 $95,437,324
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Qualified units outstanding, December 31,
1998....................................... 104,072,745 42,694,627 46,419,390 48,268,596
Net asset value per qualified unit, December
31, 1998................................... $ 3.586147 $ 1.814359 $ 1.716562 $ 1.395964
Non-qualified units outstanding, December
31, 1998................................... 44,935,976 16,357,730 23,284,967 20,098,011
Net asset value per non-qualified unit,
December 31, 1998.......................... $ 3.586147 $ 1.814359 $ 1.716562 $ 1.395964
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-2
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
GROWTH INVESTMENT GRADE INCOME MONEY MARKET
-------------------------- -------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 4,406,557 $ 4,677,303 $ 9,136,667 $ 7,765,722 $ 6,950,244 $ 5,864,394
Mortality and expense risk fees............ (5,038,572) (3,908,676) (1,884,657) (1,459,800) (1,609,169) (1,353,573)
Administrative expense fees................ (820,233) (636,296) (306,804) (237,642) (261,957) (220,349)
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss)............. (1,452,248) 132,331 6,945,206 6,068,280 5,079,118 4,290,472
------------ ------------ ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 4,179,288 58,607,134 -- -- -- --
Net realized gain (loss) from sales of
investments.............................. 1,604,114 731,664 309,825 (44,567) -- --
------------ ------------ ------------ ------------ ------------ ------------
Net realized gain (loss)................... 5,783,402 59,338,798 309,825 (44,567) -- --
Net unrealized gain (loss)................. 61,966,017 3,870,618 2,193,617 3,131,133 -- --
------------ ------------ ------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 67,749,419 63,209,416 2,503,442 3,086,566 -- --
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 66,297,171 63,341,747 9,448,648 9,154,846 5,079,118 4,290,472
------------ ------------ ------------ ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 23,152,380 23,594,450 10,363,995 8,429,192 388,698,585 333,708,420
Withdrawals................................ (22,500,816) (14,324,472) (9,709,421) (7,610,810) (15,069,288) (10,554,703)
Contract benefits.......................... (2,796,974) (1,922,040) (929,739) (604,277) (1,010,367) (909,248)
Contract charges........................... (147,854) (133,594) (42,918) (43,383) (24,514) (23,086)
Transfers between sub-accounts (including
fixed account), net...................... 20,863,894 28,600,309 22,142,688 9,492,754 (364,921,954) (344,087,104)
Other transfers from (to) the General
Account.................................. 3,452,255 8,871,794 2,166,365 1,855,856 38,477,265 21,015,281
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 22,022,885 44,686,447 23,990,970 11,519,332 46,149,727 (850,440)
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets...... 88,320,056 108,028,194 33,439,618 20,674,178 51,228,845 3,440,032
NET ASSETS:
Beginning of year.......................... 364,876,683 256,848,489 132,835,278 112,161,100 111,264,747 107,824,715
------------ ------------ ------------ ------------ ------------ ------------
End of year................................ $453,196,739 $364,876,683 $166,274,896 $132,835,278 $162,493,592 $111,264,747
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
<CAPTION>
EQUITY INDEX
--------------------------
YEAR ENDED DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 3,345,195 $ 2,257,717
Mortality and expense risk fees............ (3,473,180) (2,067,797)
Administrative expense fees................ (565,402) (336,618)
------------ ------------
Net investment income (loss)............. (693,387) (146,698)
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 8,462,654 5,924,374
Net realized gain (loss) from sales of
investments.............................. 3,042,914 891,735
------------ ------------
Net realized gain (loss)................... 11,505,568 6,816,109
Net unrealized gain (loss)................. 55,881,208 35,286,956
------------ ------------
Net realized and unrealized gain
(loss)................................. 67,386,776 42,103,065
------------ ------------
Net increase (decrease) in net assets from
operations............................... 66,693,389 41,956,367
------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 25,436,203 20,271,093
Withdrawals................................ (13,594,962) (6,948,755)
Contract benefits.......................... (2,098,286) (1,317,585)
Contract charges........................... (84,863) (54,416)
Transfers between sub-accounts (including
fixed account), net...................... 47,344,643 42,716,321
Other transfers from (to) the General
Account.................................. 7,492,994 9,939,409
------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 64,495,729 64,606,067
------------ ------------
Net increase (decrease) in net assets...... 131,189,118 106,562,434
NET ASSETS:
Beginning of year.......................... 220,205,846 113,643,412
------------ ------------
End of year................................ $351,394,964 $220,205,846
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-3
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT
GOVERNMENT BOND AGGRESSIVE GROWTH SELECT GROWTH
------------------------ -------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997 1998 1997
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 3,358,913 $ 2,535,091 $ -- $ -- $ 207,168 $ 546,016
Mortality and expense risk fees............ (744,074) (524,714) (3,432,518) (2,622,781) (3,058,313) (1,741,645)
Administrative expense fees................ (121,128) (85,419) (558,782) (426,964) (497,865) (283,523)
----------- ----------- ------------ ------------ ------------ ------------
Net investment income (loss)............. 2,493,711 1,924,958 (3,991,300) (3,049,745) (3,349,010) (1,479,152)
----------- ----------- ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- -- -- 19,360,712 2,488,257 9,673,224
Net realized gain (loss) from sales of
investments.............................. 79,202 (121,227) 1,315,125 2,017,143 1,422,656 313,313
----------- ----------- ------------ ------------ ------------ ------------
Net realized gain (loss)................... 79,202 (121,227) 1,315,125 21,377,855 3,910,913 9,986,537
Net unrealized gain (loss)................. 920,202 550,499 28,554,242 15,604,997 73,132,113 29,255,432
----------- ----------- ------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 999,404 429,272 29,869,367 36,982,852 77,043,026 39,241,969
----------- ----------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 3,493,115 2,354,230 25,878,067 33,933,107 73,694,016 37,762,817
----------- ----------- ------------ ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 9,387,842 5,942,847 21,281,666 20,169,980 22,206,826 16,019,651
Withdrawals................................ (4,327,463) (3,481,815) (15,897,301) (10,807,027) (10,783,834) (5,353,128)
Contract benefits.......................... (646,947) (178,244) (842,853) (526,406) (896,543) (391,982)
Contract charges........................... (14,294) (15,235) (115,070) (101,719) (77,520) (48,587)
Transfers between sub-accounts (including
fixed account), net...................... 13,782,410 2,892,959 35,552,684 19,497,013 43,402,629 39,243,670
Other transfers from (to) the General
Account.................................. 1,396,680 755,654 3,919,867 6,766,308 6,310,988 7,296,335
----------- ----------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 19,578,228 5,916,166 43,898,993 34,998,149 60,162,546 56,765,959
----------- ----------- ------------ ------------ ------------ ------------
Net increase (decrease) in net assets...... 23,071,343 8,270,396 69,777,060 68,931,256 133,856,562 94,528,776
NET ASSETS:
Beginning of year.......................... 48,791,745 40,521,349 246,192,240 177,260,984 189,344,784 94,816,008
----------- ----------- ------------ ------------ ------------ ------------
End of year................................ $71,863,088 $48,791,745 $315,969,300 $246,192,240 $323,201,346 $189,344,784
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
<CAPTION>
SELECT
GROWTH AND INCOME
--------------------------
YEAR ENDED DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 2,954,575 $ 2,261,128
Mortality and expense risk fees............ (2,918,081) (2,108,661)
Administrative expense fees................ (475,036) (343,271)
------------ ------------
Net investment income (loss)............. (438,542) (190,804)
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 849,325 17,526,962
Net realized gain (loss) from sales of
investments.............................. 1,103,007 324,268
------------ ------------
Net realized gain (loss)................... 1,952,332 17,851,230
Net unrealized gain (loss)................. 30,548,177 13,743,540
------------ ------------
Net realized and unrealized gain
(loss)................................. 32,500,509 31,594,770
------------ ------------
Net increase (decrease) in net assets from
operations............................... 32,061,967 31,403,966
------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 15,264,363 14,721,001
Withdrawals................................ (11,976,840) (7,632,571)
Contract benefits.......................... (2,094,743) (1,069,129)
Contract charges........................... (65,775) (54,866)
Transfers between sub-accounts (including
fixed account), net...................... 26,940,573 24,504,584
Other transfers from (to) the General
Account.................................. 5,446,574 7,823,859
------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 33,514,152 38,292,878
------------ ------------
Net increase (decrease) in net assets...... 65,576,119 69,696,844
NET ASSETS:
Beginning of year.......................... 204,820,055 135,123,211
------------ ------------
End of year................................ $270,396,174 $204,820,055
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-4
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
SELECT VALUE SELECT SELECT CAPITAL
OPPORTUNITY* INTERNATIONAL EQUITY APPRECIATION
-------------------------- -------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 1,687,684 $ 908,127 $ 2,621,728 $ 3,685,822 $ -- $ --
Mortality and expense risk fees............ (2,273,384) (1,575,698) (2,307,959) (1,703,767) (1,566,368) (1,185,389)
Administrative expense fees................ (370,086) (256,508) (375,715) (277,358) (254,990) (192,970)
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss)............. (955,786) (924,079) (61,946) 1,704,697 (1,821,358) (1,378,359)
------------ ------------ ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 655,973 21,872,379 -- 5,123,796 22,715,912 --
Net realized gain (loss) from sales of
investments.............................. 420,110 124,769 463,309 355,498 922,786 166,549
------------ ------------ ------------ ------------ ------------ ------------
Net realized gain (loss)................... 1,076,083 21,997,148 463,309 5,479,294 23,638,698 166,549
Net unrealized gain (loss)................. 5,479,539 5,647,860 24,779,920 (4,095,030) (5,203,690) 14,907,829
------------ ------------ ------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss)................................. 6,555,622 27,645,008 25,243,229 1,384,264 18,435,008 15,074,378
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... 5,599,836 26,720,929 25,181,283 3,088,961 16,613,650 13,696,019
------------ ------------ ------------ ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 12,662,724 12,525,397 13,306,352 15,822,978 9,353,854 10,932,867
Withdrawals................................ (8,295,446) (4,937,439) (7,314,601) (5,740,190) (5,713,842) (4,048,564)
Contract benefits.......................... (575,288) (390,911) (685,709) (349,685) (419,195) (326,931)
Contract charges........................... (59,441) (45,532) (64,103) (50,179) (46,233) (38,655)
Transfers between sub-accounts (including
fixed account), net...................... 22,459,345 30,274,306 14,347,051 36,530,634 9,998,422 13,171,289
Other transfers from (to) the General
Account.................................. 3,197,294 6,384,929 2,330,088 7,275,661 1,818,486 6,607,194
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 29,389,188 43,810,750 21,919,078 53,489,219 14,991,492 26,297,200
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets...... 34,989,024 70,531,679 47,100,361 56,578,180 31,605,142 39,993,219
NET ASSETS:
Beginning of year.......................... 165,588,128 95,056,449 161,578,836 105,000,656 118,456,007 78,462,788
------------ ------------ ------------ ------------ ------------ ------------
End of year................................ $200,577,152 $165,588,128 $208,679,197 $161,578,836 $150,061,149 $118,456,007
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
<CAPTION>
DGPF
INTERNATIONAL EQUITY
-------------------------
YEAR ENDED DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 3,818,720 $ 2,511,425
Mortality and expense risk fees............ (1,364,199) (1,067,089)
Administrative expense fees................ (222,079) (173,712)
------------ -----------
Net investment income (loss)............. 2,232,442 1,270,624
------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. -- --
Net realized gain (loss) from sales of
investments.............................. 524,782 363,002
------------ -----------
Net realized gain (loss)................... 524,782 363,002
Net unrealized gain (loss)................. 6,030,154 1,321,628
------------ -----------
Net realized and unrealized gain
(loss)................................. 6,554,936 1,684,630
------------ -----------
Net increase (decrease) in net assets from
operations............................... 8,787,378 2,955,254
------------ -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 6,454,592 7,830,705
Withdrawals................................ (5,616,866) (3,857,969)
Contract benefits.......................... (369,791) (207,583)
Contract charges........................... (34,104) (29,701)
Transfers between sub-accounts (including
fixed account), net...................... 8,564,109 20,741,571
Other transfers from (to) the General
Account.................................. 1,556,191 4,277,465
------------ -----------
Net increase (decrease) in net assets from
contract transactions.................... 10,554,131 28,754,488
------------ -----------
Net increase (decrease) in net assets...... 19,341,509 31,709,742
NET ASSETS:
Beginning of year.......................... 99,158,806 67,449,064
------------ -----------
End of year................................ $118,500,315 $99,158,806
------------ -----------
------------ -----------
</TABLE>
* Name changed. See note 1.
The accompanying notes are an integral part of these financial statements.
SA-5
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP FIDELITY VIP
HIGH INCOME EQUITY-INCOME GROWTH
-------------------------- -------------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 12,578,810 $ 7,884,412 $ 7,149,010 $ 6,423,548 $ 1,980,389 $ 2,066,887
Mortality and expense risk fees............ (2,432,246) (1,720,161) (6,788,549) (5,445,301) (5,516,150) (4,299,523)
Administrative expense fees................ (395,947) (280,026) (1,105,112) (886,444) (897,978) (699,922)
------------ ------------ ------------ ------------ ------------ ------------
Net investment income (loss)............. 9,750,617 5,884,225 (744,651) 91,803 (4,433,739) (2,932,558)
------------ ------------ ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 7,992,786 974,478 25,442,066 32,296,170 51,802,813 9,251,781
Net realized gain (loss) from sales of
investments.............................. (46,537) 203,134 4,980,239 2,786,309 6,211,181 3,287,677
------------ ------------ ------------ ------------ ------------ ------------
Net realized gain (loss)................... 7,946,249 1,177,612 30,422,305 35,082,479 58,013,994 12,539,458
Net unrealized gain (loss)................. (29,941,145) 13,667,456 21,541,366 66,391,863 92,401,524 57,841,299
------------ ------------ ------------ ------------ ------------ ------------
Net realized and unrealized gain
(loss).................................. (21,994,896) 14,845,068 51,963,671 101,474,342 150,415,518 70,380,757
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations............................... (12,244,279) 20,729,293 51,219,020 101,566,145 145,981,779 67,448,199
------------ ------------ ------------ ------------ ------------ ------------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 16,334,143 15,736,449 31,978,182 31,711,858 24,189,477 25,916,377
Withdrawals................................ (10,795,966) (6,766,607) (31,513,789) (23,477,780) (27,468,965) (18,451,418)
Contract benefits.......................... (1,097,609) (424,758) (2,356,266) (1,600,308) (2,039,146) (971,009)
Contract charges........................... (58,071) (51,854) (203,860) (195,262) (191,465) (181,070)
Transfers between sub-accounts (including
fixed account), net...................... 38,988,866 33,013,744 24,052,204 17,682,680 5,764,814 1,235,885
Other transfers from (to) the General
Account.................................. 5,027,099 5,515,208 2,652,365 9,212,572 1,580,856 6,354,543
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
contract transactions.................... 48,398,462 47,022,182 24,608,836 33,333,761 1,835,571 13,903,308
------------ ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in net assets...... 36,154,183 67,751,475 75,827,856 134,899,906 147,817,350 81,351,507
NET ASSETS:
Beginning of year.......................... 173,439,866 105,688,391 508,303,919 373,404,013 386,549,824 305,198,317
------------ ------------ ------------ ------------ ------------ ------------
End of year................................ $209,594,049 $173,439,866 $584,131,775 $508,303,919 $534,367,174 $386,549,824
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-6
<PAGE>
SEPARATE ACCOUNT VA-K ALLMERICA ADVANTAGE VARIABLE ANNUITY AND EXECANNUITY PLUS
VARIABLE ANNUITY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY VIP FIDELITY VIP II T. ROWE PRICE
OVERSEAS ASSET MANAGER INTERNATIONAL STOCK
------------------------- ------------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1998 1997 1998 1997 1998 1997
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends.................................. $ 1,818,875 $ 1,593,893 $ 2,716,853 $ 1,921,322 $ 1,097,794 $ 672,911
Mortality and expense risk fees............ (1,262,186) (1,150,997) (1,241,535) (840,972) (1,054,718) (750,999)
Administrative expense fees................ (205,472) (187,372) (202,110) (136,902) (171,698) (122,256)
------------ ----------- ------------ ----------- ----------- -----------
Net investment income (loss)............. 351,217 255,524 1,273,208 943,448 (128,622) (200,344)
------------ ----------- ------------ ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Realized gain distributions from portfolio
sponsors................................. 5,360,896 6,327,269 8,150,559 4,819,590 387,457 953,290
Net realized gain (loss) from sales of
investments.............................. 856,760 2,767,486 160,609 227,627 237,516 161,070
------------ ----------- ------------ ----------- ----------- -----------
Net realized gain (loss)................... 6,217,656 9,094,755 8,311,168 5,047,217 624,973 1,114,360
Net unrealized gain (loss)................. 3,731,753 (571,995) 3,240,712 5,671,077 10,425,832 (909,997)
------------ ----------- ------------ ----------- ----------- -----------
Net realized and unrealized gain
(loss).................................. 9,949,409 8,522,760 11,551,880 10,718,294 11,050,805 204,363
------------ ----------- ------------ ----------- ----------- -----------
Net increase (decrease) in net assets from
operations............................... 10,300,626 8,778,284 12,825,088 11,661,742 10,922,183 4,019
------------ ----------- ------------ ----------- ----------- -----------
CONTRACT TRANSACTIONS:
Net purchase payments...................... 6,122,888 5,580,597 8,512,565 6,136,311 5,708,803 7,087,778
Withdrawals................................ (6,424,320) (5,698,045) (5,321,586) (3,519,671) (3,090,733) (2,318,926)
Contract benefits.......................... (413,395) (310,083) (653,162) (111,937) (234,511) (302,518)
Contract charges........................... (46,447) (50,533) (23,772) (18,363) (21,793) (16,117)
Transfers between sub-accounts (including
fixed account), net...................... 4,525,206 (10,194,522) 18,036,934 12,603,408 7,450,376 20,482,835
Other transfers from (to) the General
Account.................................. 534,379 847,013 2,193,311 3,355,998 1,566,892 5,001,709
------------ ----------- ------------ ----------- ----------- -----------
Net increase (decrease) in net assets from
contract transactions.................... 4,298,311 (9,825,573) 22,744,290 18,445,746 11,379,034 29,934,761
------------ ----------- ------------ ----------- ----------- -----------
Net increase (decrease) in net assets...... 14,598,937 (1,047,289) 35,569,378 30,107,488 22,301,217 29,938,780
NET ASSETS:
Beginning of year.......................... 92,543,240 93,590,529 84,082,473 53,974,985 73,136,107 43,197,327
------------ ----------- ------------ ----------- ----------- -----------
End of year................................ $107,142,177 $92,543,240 $119,651,851 $84,082,473 $95,437,324 $73,136,107
------------ ----------- ------------ ----------- ----------- -----------
------------ ----------- ------------ ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
SA-7
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Separate Account VA-K, which funds the Allmerica Advantage and ExecAnnuity
Plus variable annuity contracts, in addition to other contracts (the Delaware
Medallion variable annuity contracts), 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
contracts issued by the Company. The Company is a wholly-owned subsidiary of
First Allmerica Financial Life Insurance Company (First Allmerica). First
Allmerica is a wholly-owned subsidiary of Allmerica Financial Corporation (AFC).
Under applicable insurance law, the assets and liabilities of Separate Account
VA-K are clearly identified and distinguished from the other assets and
liabilities of the Company. Separate Account VA-K cannot be charged with
liabilities arising out of any other business of the Company.
Separate Account VA-K is registered as a unit investment trust under the
Investment Company Act of 1940, as amended (the 1940 Act). Separate Account VA-K
currently offers eighteen Sub-Accounts under the Allmerica Advantage and
ExecAnnuity Plus variable annuity contracts. Each Sub-Account invests
exclusively in a corresponding investment portfolio of the Allmerica Investment
Trust (the Trust) managed by Allmerica Financial Investment Management Services,
Inc. (AFIMS) (successor to Allmerica Investment Management Company, Inc.), a
wholly-owned subsidiary of First Allmerica; or of the Variable Insurance
Products Fund (Fidelity VIP) or the Variable Insurance Products Fund II
(Fidelity VIP II) managed by Fidelity Management & Research Company (FMR); or of
the Delaware Group Premium Fund, Inc. (DGPF) managed by Delaware International
Advisers Ltd.; or of the T. Rowe Price International Series, Inc. (T. Rowe
Price) managed by T. Rowe Price-Fleming International, Inc. The Trust, Fidelity
VIP, Fidelity VIP II, DGPF, and T. Rowe Price (the Funds) are open-end,
management investment companies registered under the 1940 Act.
Separate Account VA-K funds two types of variable annuity contracts,
"qualified" contracts and "non-qualified" contracts. A qualified contract is one
that is purchased in connection with a retirement plan which meets the
requirements of Section 401, 403, or 408 of the Internal Revenue Code (the
Code), while a non-qualified contract is one that is not purchased in connection
with one of the indicated retirement plans. The tax treatment for certain
withdrawals or surrenders will vary according to whether they are made from a
qualified contract or a non-qualified contract.
Effective January 9, 1998, Small-Mid Cap Value Fund was renamed Select Value
Opportunity Fund.
Certain prior year balances have been reclassified to conform with current
year presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS -- Security transactions are recorded on the trade date.
Investments held by the Sub-Accounts are stated at the net asset value per share
of the respective investment portfolio of the Funds. Net realized gains and
losses on securities sold are determined using the average cost method.
Dividends and capital gain distributions are recorded on the ex-dividend date
and are reinvested in additional shares of the respective investment portfolio
of the Funds at net asset value.
FEDERAL INCOME TAXES -- The Company is taxed as a "life insurance company"
under Subchapter L of the Code and files a consolidated federal income tax
return with First Allmerica. The Company anticipates no tax
SA-8
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
liability resulting from the operations of Separate Account VA-K. Therefore, no
provision for income taxes has been charged against Separate Account VA-K.
NOTE 3 -- INVESTMENTS
The number of shares owned, aggregate cost, and net asset value per share of
each Sub-Account's investment in the Funds at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
PORTFOLIO INFORMATION
-------------------------------------
NET ASSET
NUMBER OF AGGREGATE VALUE
INVESTMENT PORTFOLIO SHARES COST PER SHARE
- ---------------------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
Growth.................................. 160,470,766 $359,758,297 $ 2.825
Investment Grade Income................. 146,868,630 162,430,235 1.132
Money Market............................ 162,581,881 162,581,881 1.000
Equity Index............................ 103,133,310 235,122,783 3.408
Government Bond......................... 67,287,635 71,294,360 1.068
Select Aggressive Growth................ 128,443,479 234,368,079 2.460
Select Growth........................... 133,115,179 211,148,273 2.428
Select Growth and Income................ 152,011,079 203,910,122 1.779
Select Value Opportunity*............... 119,037,991 172,188,592 1.685
Select International Equity............. 135,331,459 171,518,089 1.542
Select Capital Appreciation............. 91,501,314 136,667,046 1.640
DGPF International Equity............... 7,190,618 98,679,065 16.480
Fidelity VIP High Income................ 18,178,170 216,072,648 11.530
Fidelity VIP Equity-Income.............. 22,979,410 408,931,468 25.420
Fidelity VIP Growth..................... 11,909,345 311,766,409 44.870
Fidelity VIP Overseas................... 5,343,875 86,946,809 20.050
Fidelity VIP II Asset Manager........... 6,588,797 103,227,773 18.160
T. Rowe Price International Stock....... 6,572,893 82,587,256 14.520
</TABLE>
* Name changed. See Note 1.
NOTE 4 -- RELATED PARTY TRANSACTIONS
The Company makes a charge of 1.25% per annum 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 0.20% 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 and are paid to
the Company on a daily basis.
For contracts issued on Forms A3018-91 and A3021-93 (ExecAnnuity Plus 91 and
ExecAnnuity Plus 93), a contract fee is deducted on the contract anniversary and
upon full surrender of the contract when the accumulated value is $50,000 or
less. The fee is the lesser of $30 or 3% of the accumulated value on the
contract anniversary or full surrender date. For contracts issued on Form
A3025-96 (Allmerica Advantage), a
SA-9
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS (CONTINUED)
contract fee of $30 is deducted on the contract anniversary and upon full
surrender when the accumulated value is less than $50,000. The fee is currently
waived for all contracts (ExecAnnuity Plus and Allmerica Advantage) issued to
and maintained by the trustee of a 401(k) plan.
Allmerica Investments, Inc. (Allmerica Investments), a wholly-owned
subsidiary of First Allmerica, is principal underwriter and general distributor
of Separate Account VA-K, and does not receive any compensation for sales of the
contracts. Commissions are paid to registered representatives of Allmerica
Investments by the Company. The current series of contracts have a contingent
deferred sales charge and no deduction is made for sales charges at the time of
the sale. For the years ended December 31, 1998 and 1997, the Company received
$3,200,685 and $3,189,265, respectively, for contingent deferred sales charges
applicable to Separate Account VA-K.
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS
Transactions from contractowners and sponsor were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Growth
Issuance of Units.......................... 35,414,157 $ 88,002,941 43,130,029 $ 91,345,943
Redemption of Units........................ (26,666,754) (65,980,056) (22,583,348) (46,659,496)
------------ ------------ ------------ -------------
Net increase (decrease).................. 8,747,403 $ 22,022,885 20,546,681 $ 44,686,447
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Investment Grade Income
Issuance of Units.......................... 40,947,469 $ 67,361,561 28,304,457 $ 40,432,162
Redemption of Units........................ (25,662,004) (43,370,591) (20,579,115) (28,912,830)
------------ ------------ ------------ -------------
Net increase (decrease).................. 15,285,465 $ 23,990,970 7,725,342 $ 11,519,332
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Money Market
Issuance of Units.......................... 480,585,830 $576,517,573 390,077,704 $ 446,824,506
Redemption of Units........................ (443,526,171) (530,367,846) (390,768,219) (447,674,946)
------------ ------------ ------------ -------------
Net increase (decrease).................. 37,059,659 $ 46,149,727 (690,515) $ (850,440)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Equity Index
Issuance of Units.......................... 43,689,479 $125,016,046 44,575,824 $ 99,696,713
Redemption of Units........................ (21,378,757) (60,520,317) (16,734,613) (35,090,646)
------------ ------------ ------------ -------------
Net increase (decrease).................. 22,310,722 $ 64,495,729 27,841,211 $ 64,606,067
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Government Bond
Issuance of Units.......................... 36,235,069 $ 51,588,649 18,588,389 $ 24,289,010
Redemption of Units........................ (22,565,149) (32,010,421) (14,247,517) (18,372,844)
------------ ------------ ------------ -------------
Net increase (decrease).................. 13,669,920 $ 19,578,228 4,340,872 $ 5,916,166
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
SA-10
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Select Aggressive Growth
Issuance of Units.......................... 41,209,415 $ 96,835,317 39,273,921 $ 83,733,189
Redemption of Units........................ (22,240,992) (52,936,324) (22,457,833) (48,735,040)
------------ ------------ ------------ -------------
Net increase (decrease).................. 18,968,423 $ 43,898,993 16,816,088 $ 34,998,149
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select Growth
Issuance of Units.......................... 50,148,994 $113,239,811 48,217,022 $ 84,427,107
Redemption of Units........................ (23,786,903) (53,077,265) (16,210,356) (27,661,148)
------------ ------------ ------------ -------------
Net increase (decrease).................. 26,362,091 $ 60,162,546 32,006,666 $ 56,765,959
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select Growth and Income
Issuance of Units.......................... 37,081,023 $ 77,642,713 35,766,602 $ 63,156,211
Redemption of Units........................ (21,516,678) (44,128,561) (14,723,868) (24,863,333)
------------ ------------ ------------ -------------
Net increase (decrease).................. 15,564,345 $ 33,514,152 21,042,734 $ 38,292,878
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select Value Opportunity*
Issuance of Units.......................... 32,164,349 $ 63,580,221 37,678,681 $ 65,123,255
Redemption of Units........................ (17,540,671) (34,191,033) (12,696,975) (21,312,505)
------------ ------------ ------------ -------------
Net increase (decrease).................. 14,623,678 $ 29,389,188 24,981,706 $ 43,810,750
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select International Equity
Issuance of Units.......................... 37,484,996 $ 56,306,351 57,085,507 $ 78,522,937
Redemption of Units........................ (23,060,019) (34,387,273) (18,985,695) (25,033,718)
------------ ------------ ------------ -------------
Net increase (decrease).................. 14,424,977 $ 21,919,078 38,099,812 $ 53,489,219
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Select Capital Appreciation
Issuance of Units.......................... 25,808,681 $ 42,819,894 35,616,682 $ 51,985,258
Redemption of Units........................ (16,692,015) (27,828,402) (17,612,505) (25,688,058)
------------ ------------ ------------ -------------
Net increase (decrease).................. 9,116,666 $ 14,991,492 18,004,177 $ 26,297,200
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
DGPF International Equity
Issuance of Units.......................... 19,548,692 $ 32,754,499 28,045,942 $ 44,814,323
Redemption of Units........................ (13,404,183) (22,200,368) (10,328,017) (16,059,835)
------------ ------------ ------------ -------------
Net increase (decrease).................. 6,144,509 $ 10,554,131 17,717,925 $ 28,754,488
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Fidelity VIP High Income
Issuance of Units.......................... 41,047,554 $ 91,158,751 34,859,555 $ 72,871,648
Redemption of Units........................ (19,562,695) (42,760,289) (12,480,024) (25,849,466)
------------ ------------ ------------ -------------
Net increase (decrease).................. 21,484,859 $ 48,398,462 22,379,531 $ 47,022,182
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
* Name changed. See Note 1.
</TABLE>
SA-11
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- CONTRACTOWNERS AND SPONSOR TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
--------------------------- ----------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Fidelity VIP Equity-Income
Issuance of Units.......................... 40,370,670 $120,358,364 43,116,999 $ 110,157,686
Redemption of Units........................ (32,382,953) (95,749,528) (30,112,367) (76,823,925)
------------ ------------ ------------ -------------
Net increase (decrease).................. 7,987,717 $ 24,608,836 13,004,632 $ 33,333,761
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Fidelity VIP Growth
Issuance of Units.......................... 27,217,433 $ 81,585,030 31,617,632 $ 75,684,507
Redemption of Units........................ (26,419,759) (79,749,459) (25,854,345) (61,781,199)
------------ ------------ ------------ -------------
Net increase (decrease).................. 797,674 $ 1,835,571 5,763,287 $ 13,903,308
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Fidelity VIP Overseas
Issuance of Units.......................... 14,517,190 $ 25,690,826 13,825,037 $ 22,465,826
Redemption of Units........................ (12,153,924) (21,392,515) (20,184,580) (32,291,399)
------------ ------------ ------------ -------------
Net increase (decrease).................. 2,363,266 $ 4,298,311 (6,359,543) $ (9,825,573)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Fidelity VIP II Asset Manager
Issuance of Units.......................... 27,248,291 $ 42,989,274 22,356,154 $ 30,447,764
Redemption of Units........................ (13,095,360) (20,244,984) (9,219,052) (12,002,018)
------------ ------------ ------------ -------------
Net increase (decrease).................. 14,152,931 $ 22,744,290 13,137,102 $ 18,445,746
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
T. Rowe Price International Stock
Issuance of Units.......................... 22,433,345 $ 29,223,947 34,218,462 $ 42,222,755
Redemption of Units........................ (13,899,360) (17,844,913) (10,301,277) (12,287,994)
------------ ------------ ------------ -------------
Net increase (decrease).................. 8,533,985 $ 11,379,034 23,917,185 $ 29,934,761
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
</TABLE>
NOTE 6 -- DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Code, a variable annuity
contract, other than a contract issued in connection with certain types of
employee benefit plans, will not be treated as an annuity contract for federal
income tax purposes for any period for which the investments of the segregated
asset account on which the contract is based are not adequately diversified. The
Code provides that the "adequately diversified" requirement may be met if the
underlying investments satisfy either a statutory safe harbor test or
diversification requirements set forth in regulations issued by the Secretary of
The Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of
the Code. The Company believes that Separate Account VA-K satisfies the current
requirements of the regulations, and it intends that Separate Account VA-K will
continue to meet such requirements.
SA-12
<PAGE>
SEPARATE ACCOUNT VA-K (ALLMERICA ADVANTAGE VARIABLE ANNUITY
AND EXECANNUITY PLUS VARIABLE ANNUITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of shares of the Funds by Separate
Account VA-K during the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO PURCHASES SALES
- ------------------------------------------------------- ------------ ------------
<S> <C> <C>
Growth................................................. $ 36,804,762 $ 11,937,216
Investment Grade Income................................ 42,211,202 11,313,870
Money Market........................................... 160,141,982 108,831,461
Equity Index........................................... 82,436,216 10,164,360
Government Bond........................................ 29,409,316 7,337,184
Select Aggressive Growth............................... 45,055,514 5,146,364
Select Growth.......................................... 64,871,281 5,566,271
Select Growth and Income............................... 41,475,097 7,518,994
Select Value Opportunity*.............................. 33,491,083 4,399,149
Select International Equity............................ 25,186,102 3,326,388
Select Capital Appreciation............................ 41,473,637 5,586,634
DGPF International Equity.............................. 16,911,124 4,123,154
Fidelity VIP High Income............................... 73,084,617 6,941,557
Fidelity VIP Equity-Income............................. 69,378,741 20,066,859
Fidelity VIP Growth.................................... 68,678,529 19,469,351
Fidelity VIP Overseas.................................. 15,148,901 5,136,519
Fidelity VIP II Asset Manager.......................... 34,770,297 2,601,402
T. Rowe Price International Stock...................... 14,451,395 2,812,197
------------ ------------
Totals................................................. $894,979,796 $242,278,930
------------ ------------
------------ ------------
</TABLE>
* Name changed. See Note 1.
SA-13
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Financial Statements Included in Part A
None
Financial Statements Included in Part B
Financial Statements for Allmerica Financial Life Insurance and
Annuity Company
Financial Statements for Separate Account VA-K of Allmerica Financial
Life Insurance and Annuity Company
Financial Statements Included in Part C
None
(b) EXHIBITS
EXHIBIT 1 Vote of Board of Directors Authorizing Establishment of
Registrant dated November 1, 1990 was previously filed
on April 24, 1998 in Post-Effective Amendment No. 14,
and is incorporated by reference herein.
EXHIBIT 2 Not Applicable. Pursuant to Rule 26a-2, the Insurance
Company may hold the assets of the Registrant NOT
pursuant to a trust indenture or other such instrument.
EXHIBIT 3 (a) Underwriting and Administrative Service Agreement
was previously filed on April 24, 1998 in
Post-Effective Amendment No. 14 and is
incorporated by reference herein.
(b) Sales Agreements were previously filed on April
24, 1998 in Post-Effective Amendment No. 14, and
are incorporated by reference herein.
(c) General Agent's Agreement was previously filed on
April 24, 1998 in Post-Effective Amendment No. 14,
and is incorporated by reference herein.
(d) Career Agent Agreement with Commission Schedule
was previously filed on April 24, 1998 in
Post-Effective Amendment No. 14, and is
incorporated by reference herein.
(e) Registered Representative's Agreement was
previously filed on April 24, 1998 in
Post-Effective Amendment No. 14, and is
incorporated by reference herein.
EXHIBIT 4 Minimum Guaranteed Annuity Payout Rider was filed on
December 29, 1998 in Post-Effective Amendment No. 15,
and is incorporated by reference herein. Policy Form A
was previously filed on April 24, 1998 in
Post-Effective Amendment No. 14, and is incorporated by
reference herein. Specimen Policy Form B was
previously filed on April 30, 1996 in Post-Effective
Amendment No. 11, and is incorporated by reference
herein.
<PAGE>
EXHIBIT 5 Specimen Application Form A was previously filed on
April 24, 1998 in Post-Effective Amendment No. 14, and
is incorporated by reference herein. Specimen
Application Form B was previously filed on April 30,
1996 in Post-Effective Amendment No. 11, and is
incorporated by reference herein.
EXHIBIT 6 The Depositor's Articles of Incorporation and Bylaws,
as amended to reflect its name change, were previously
filed on September 28, 1995 in Post-Effective Amendment
No. 9, and are incorporated by reference herein.
EXHIBIT 7 Not Applicable.
EXHIBIT 8 (a) Fidelity Service Agreement was previously filed on
April 30, 1996 in Post-Effective Amendment No. 11,
and is incorporated by reference herein.
(b) An Amendment to the Fidelity Service Agreement,
effective as of January 1, 1997, was previously
filed on April 2, 1997 in Post-Effective Amendment
No. 12, and is incorporated by reference herein.
(c) Fidelity Service Contract, effective as of January
1, 1997, was previously filed on April 2, 1997 in
Post-Effective Amendment No. 12, and is
incorporated by reference herein.
(d) T. Rowe Price Service Agreement was previously
filed on April 24, 1998 in Post-Effective
Amendment No. 14, and is incorporated by reference
herein.
(e) BFDS Agreements for lockbox and mailroom services
were previously filed on April 24, 1998 in
Post-Effective Amendment No. 14, and are
incorporated by reference herein.
(f) Directors' Power of Attorney is filed herewith.
EXHIBIT 9 Opinion of Counsel is filed herewith.
EXHIBIT 10 Consent of Independent Accountants is filed herewith.
EXHIBIT 11 None.
EXHIBIT 12 None.
EXHIBIT 13 Not Applicable.
EXHIBIT 14 Not Applicable.
EXHIBIT 15 (a) Participation Agreement with Allmerica Investment
Trust was previously filed on April 24, 1998 in
Post-Effective Amendment No. 14, and is
incorporated by reference herein.
(b) Participation Agreement, as amended, with Variable
Insurance Products Fund was previously filed on
April 24, 1998 in Post-Effective Amendment No. 14,
and is incorporated by reference herein.
<PAGE>
(c) Participation Agreement, as amended, with Variable
Insurance Products Fund II was previously filed on
April 24, 1998 in Post-Effective Amendment No. 14,
and is incorporated by reference herein.
(d) Participation Agreement with Delaware Group
Premium Fund, Inc. and Amendment was previously
filed on April 24, 1998 in Post-Effective
Amendment No. 14, and is incorporated by reference
herein.
(e) Participation Agreement with T. Rowe Price
International Series, Inc. was previously filed on
April 24, 1998 in Post-Effective Amendment No. 14,
and is incorporated by reference herein.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The principal business address of all the following Directors and
Officers is:
440 Lincoln Street
Worcester, Massachusetts 01653
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
NAME AND POSITION WITH
COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------ -----------------------------------------------
Bruce C. Anderson Director (since 1996), Vice President (since 1984)
Director and Assistant Secretary (since 1992) of First
Allmerica
Abigail M. Armstrong Secretary (since 1996) and Counsel (since 1991) of
Secretary and Counsel First Allmerica; Secretary (since 1988) and Counsel
(since 1994) of Allmerica Investments, Inc.; and
Secretary (since 1990) of Allmerica Financial
Investment Management Services, Inc.
Warren E. Barnes Vice President (since 1996) and Corporate
Vice President and Controller (since 1998) of First Allmerica
Corporate Controller
Robert E. Bruce Director and Chief Information Officer (since 1997)
Director and Chief and Vice President (since 1995) of First Allmerica;
Information and Corporate Manager (1979 to 1995) of Digital
Officer Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and Vice President (since 1991) of First Allmerica;
and and Vice President (since 1998) of Allmerica
Chief Investment Officer Financial Investment Management Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President (since
Director, Vice 1986), General Counsel (since 1981) and Assistant
President and Secretary (since 1991) of First Allmerica; Director
General Counsel (since 1985) of Allmerica Investments, Inc.; and
Director (since 1990) of Allmerica Financial
Investment Management Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover Insurance
Company; and Vice President (1993 to 1996) of The
Hanover Insurance Company
<PAGE>
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief
Executive Officer (since 1996) of Citizens
Insurance Company of America
John F. O'Brien Director, President and Chief Executive Officer
Director and Chairman of (since 1989) of First Allmerica; Director (since
the Board 1989) of Allmerica Investments, Inc.; and Director
and Chairman of the Board (since 1990) of Allmerica
Financial Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996)
Director, Vice and Vice President and Treasurer (since 1993) of
President, First Allmerica; Treasurer (since 1993) of
Chief Financial Officer Allmerica Investments, Inc.; and Treasurer (since
and 1993) of Allmerica Financial Investment Management
Treasurer Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since
Director, President and 1990) of First Allmerica; Director (since 1990) of
Chief Executive Officer Allmerica Investments, Inc.; and Director and
President (since 1998) of Allmerica Financial
Investment Management Services, Inc.
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Chief Executive Officer (1996 to 1998)
of Travelers Property & Casualty; Senior Vice
President (1993 to 1996) of Aetna Life & Casualty
Company
Eric A. Simonsen Director (since 1996) and Vice President (since
Director and Vice 1990) of First Allmerica; Director (since 1991) of
President Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management
Services, Inc.
Phillip E. Soule Director (since 1996) and Vice President (since
Director 1987) of First Allmerica
<PAGE>
ITEM 26. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
______________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
30% _________________ _____________
| |
100% 100%
SMA First Sterling
Financial Corp. Reinsurance
Company
Limited
Massachusetts Bermuda
|
______________________________________________________________________________________________________________________
| | | | | |
70% 100% 99.2% 100% 100% 100%
Allmerica Sterling Risk Allmerica Allmerica Allmerica Allmerica
Property Management Trust Investments, Financial Financial Life
& Casualty Services, Inc. Company, N.A. Inc. Investment Insurance and
Companies, Inc. Management Annuity Company
Services, Inc.
Federally
Delaware Delaware Chartered Massachusetts Massachusetts Delaware
|
___________________________________________________________________________
| | | |
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 Plus 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
</TABLE>
<TABLE>
<CAPTION>
<S><C>
Allmerica Financial Corporation
Delaware
| | | | | | |
_______________________________________________________________________________________________________________________
Financial 100% 100% 100% 100% 100% 100%
Profiles, Inc. Allmerica, Inc. Allmerica First Allmerica AFC Capital Allmerica First Sterling
Funding Corp. Financial Life Trust I Services Limited
Insurance Corporation
Company
California Massachusetts Massachusetts Massachusetts Delaware Massachusetts Bermuda
| |
_____________________________________________________________________________________________________________________
| | | | |
100% 100% 100% 100% 100%
Allmerica Allmerica Allmerica Allmerica Allmerica
Investment Asset Financial Services Asset Benefits
Management Management, Insurance Management, Inc.
Company, Inc. Inc. Agency, Inc. Limited
Massachusetts Massachusetts Massachusetts Bermuda Florida
________________ _________________________________
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
Alliance Investment Trust Securities
Insurance Trust
Company
Massachusetts Massachusetts
New Hampshire Massachusetts
|
_______________
|
100% -------------- Affiliated Management Investment Companies
Lloyds
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
AAM AAM
Growth & High
Income Fund Yield Fund,
L.P. L.L.C.
Delaware Massachusetts
-------------- L.P. or L.L.C. established for the benefit of
First Allmerica, Allmerica
Financial Life, Hanover and
Citizens
</TABLE>
<PAGE>
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
NAME ADDRESS TYPE OF BUSINESS
---- ------- ----------------
AAM Equity Fund 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 Trust
AAM Growth & Income Fund, 440 Lincoln Street Limited Partnership
L.P. Worcester MA 01653
AFC Capital Trust I 440 Lincoln Street Statutory Business Trust
Worcester MA 01653
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 Benefits, Inc. 440 Lincoln Street Non-insurance medical
Worcester MA 01653 services
Allmerica Equity Index Pool 440 Lincoln Street Massachusetts Grantor
Worcester MA 01653 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
Allmerica Funding Corp. 440 Lincoln Street Special purpose funding
Worcester MA 01653 vehicle for commercial
paper
Allmerica, Inc. 440 Lincoln Street Common employer for
Worcester MA 01653 Allmerica Financial
Corporation entities
Allmerica Financial Investment 440 Lincoln Street Investment advisory
Management Services, Inc. Worcester MA 01653 services
(formerly known as Allmerica
Institutional Services, Inc.
and 440 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 Plus Insurance 440 Lincoln Street Insurance Agency
Agency, Inc. Worcester MA 01653
Allmerica Property & Casualty 440 Lincoln Street Holding Company
Companies, Inc. Worcester MA 01653
Allmerica Securities Trust 440 Lincoln Street Investment Company
Worcester MA 01653
Allmerica Services Corporation 440 Lincoln Street Internal administrative
Worcester MA 01653 services provider to
Allmerica Financial
Corporation entities
<PAGE>
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
Citizens Corporation 440 Lincoln Street Holding Company
Worcester MA 01653
Citizens Insurance Company of 645 West Grand Multi-line property and
America River casualty insurance
Howell MI 48843
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 Multi-line property and
Ohio Street casualty insurance
P.O. Box 342250
Columbus OH 43234
Citizens Management, Inc. 645 West Grand Services management
River company
Howell MI 48843
Financial Profiles 5421 Avenida Computer software company
Encinas
Carlsbad, CA
92008
First Allmerica Financial Life 440 Lincoln Street Life, pension, annuity,
Insurance Company (formerly Worcester MA 01653 accident and health
State Mutual Life Assurance insurance company
Company of America)
First Sterling Limited 440 Lincoln Street Holding Company
Worcester MA 01653
First Sterling Reinsurance 440 Lincoln Street Reinsurance Company
Company Limited Worcester MA 01653
Greendale Special Placements 440 Lincoln Street Massachusetts Grantor
Fund Worcester MA 01653 Trust
The Hanover American Insurance 100 North Parkway Multi-line property and
Company Worcester MA 01605 casualty insurance
The Hanover Insurance Company 100 North Parkway Multi-line property and
Worcester MA 01605 casualty insurance
Hanover Texas Insurance 801 East Campbell Attorney-in-fact for
Management Company, Inc. Road Hanover Lloyd's Insurance
Richardson TX Company
75081
Hanover Lloyd's Insurance 801 East Campbell Multi-line property and
Company Road casualty insurance
Richardson TX
75081
Lloyds Credit Corporation 440 Lincoln Street Premium financing service
Worcester MA 01653 franchises
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
Sterling Risk Management 440 Lincoln Street Risk management services
Services, Inc. Worcester MA 01653
<PAGE>
ITEM 27. NUMBER OF CONTRACT HOLDERS
As of February 28, 1999, there were 88,843 Contract holders of qualified
Contracts and 25,236 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 judgment, except in relation to matters as to which he shall be
finally adjudged in such action, suit or proceeding to be liable for
negligence or misconduct in the performance of his duties as such Director
or Officer; and the foregoing right of indemnification or reimbursement
shall not affect any other rights to which he may be entitled under the
Articles of Incorporation, any statute, bylaw, agreement, vote of
stockholders, or otherwise.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Allmerica Investments, Inc. also acts as principal underwriter for the
following:
X VEL Account, VEL II Account, VEL Account III, Select Account III,
Inheiritage Account, Separate Accounts VA-A, VA-B, VA-C, VA-G, VA-H,
VA-K, VA-P, Allmerica Select Separate Account II, Group VEL Account,
Separate Account KG, Separate Account KGC, Fulcrum Separate Account,
Fulcrum Variable Life Separate Account, and Allmerica Select Separate
Account of Allmerica Financial Life Insurance and Annuity Company
X Inheiritage Account, VEL II Account, Separate Account I, Separate
Account VA-K, Separate Account VA-P, Allmerica Select Separate
Account II, Group VEL Account, Separate Account KG, Separate Account
KGC, Fulcrum Separate Account, and Allmerica Select Separate Account
of First Allmerica Financial Life Insurance Company.
- Allmerica Investment Trust
(b) The Principal Business Address of each of the following Directors and
Officers of Allmerica Investments, Inc. is:
440 Lincoln Street
Worcester, Massachusetts 01653
NAME POSITION OR OFFICE WITH UNDERWRITER
---- -----------------------------------
Abigail M. Armstrong Secretary and Counsel
Emil J. Aberizk, Jr. Vice President
Edward T. Berger Vice President and Chief Compliance Officer
Richard F. Betzler, Jr. Vice President
<PAGE>
Philip L. Heffernan Vice President
Daniel Mastrototaro Vice President
John F. Kelly Director
William F. Monroe, Jr. Vice President
David J. Mueller Vice President and Controller
John F. O'Brien Director
Stephen Parker President, Director and Chief Executive Officer
Edward J. Parry, III Treasurer
Richard M. Reilly Director
Eric A. Simonsen Director
Mark G. Steinberg Senior Vice President
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Each account, book or other document required to be maintained by Section
31(a) of the 1940 Act and Rules 31a-1 to 31a-3 thereunder are maintained by
the Company at 440 Lincoln Street, Worcester, Massachusetts.
ITEM 31. MANAGEMENT SERVICES
The Company provides daily unit value calculations and related services for
the Company's separate accounts.
ITEM 32. UNDERTAKINGS
(a) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to
file with the Securities and Exchange Commission ("SEC") such
supplementary and periodic information, documents, and reports as may
be prescribed by any rule or regulation of the SEC heretofore or
hereafter duly adopted pursuant to authority conferred in that
section.
(b) The Registrant hereby undertakes to include in the prospectus a
postcard that the applicant can remove to send for a Statement of
Additional Information.
(c) The Registrant hereby undertakes to deliver a Statement of
Additional Information promptly upon written or oral request,
according to the requirements of Form N-4.
<PAGE>
(d) Insofar as indemnification for liability arising under the 1933 Act
may be permitted to Directors, Officers and Controlling Persons of
Registrant under any registration statement, underwriting agreement or
otherwise, Registrant has been advised that, in the opinion of the
SEC, such indemnification is against public policy as expressed in
the 1933 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by Registrant of expenses incurred or paid by a Director,
Officer or Controlling Person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
Director, Officer or Controlling Person in connection with the
securities being registered, Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed
in the 1933 Act and will be governed by the final adjudication
of such issue.
(e) The Company hereby represents that the aggregate fees and charges
under the 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.
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 of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Worcester, and Commonwealth of Massachusetts, on the 2nd day of April,
1999.
SEPARATE ACCOUNT VA-K OF
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Abigail M. Armstrong
--------------------------------
Abigail M. Armstrong, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Warren E. Barnes Vice President and Corporate April 2, 1999
- ------------------------- Controller
Warren E. Barnes
/s/ Edward J. Parry III Director, Vice President, Chief
- ------------------------- Financial Officer and Treasurer April 2, 1999
Edward J. Parry III
/s/ Richard M. Reilly Director, President and
- ------------------------- Chief Executive Officer April 2, 1999
Richard M. Reilly
John F. O'Brien* Director and Chairman of the April 2, 1999
- ------------------------- Board
Bruce C. Anderson* Director April 2, 1999
- -------------------------
Robert E. Bruce* Director and Chief Information April 2, 1999
- ------------------------- Officer
John P. Kavanaugh* Director, Vice President and April 2, 1999
- ------------------------- Chief Investment Officer
John F. Kelly* Director, Vice President and April 2, 1999
- ------------------------- General Counsel
J. Barry May* Director April 2, 1999
- -------------------------
James R. McAuliffe* Director April 2, 1999
- -------------------------
Robert P. Restrepo, Jr.* Director April 2, 1999
- -------------------------
Eric A. Simonsen* Director and Vice President April 2, 1999
- -------------------------
Phillip E. Soule* Director April 2, 1999
- -------------------------
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated April 1, 1999 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(33-39702)
<PAGE>
EXHIBIT TABLE
Exhibit 8(f) Directors' Power of Attorney
Exhibit 9 Opinion of Counsel
Exhibit 10 Consent of Independent Accountants
<PAGE>
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Richard M. Reilly,
John F. Kelly, Joseph W. MacDougall, Jr., and Sheila B. St. Hilaire, and each of
them singly, our true and lawful attorneys, with full power to them and each of
them, to sign for us, and in our names and in any and all capacities, any and
all amendments, including post-effective amendments, to the Registration
Statements on Form N-4 of Separate Account VA-K, Separate Account VA-P,
Allmerica Select Separate Account, Separate Account KG, Separate Account KGC and
Fulcrum Separate Account of Allmerica Financial Life Insurance and Annuity
Company, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys and each of them, acting alone, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys or any of
them may lawfully do or cause to be done by virtue hereof. Witness our hands on
the date set forth below.
Signature Title Date
- --------- ----- ----
/s/ John F. O'Brien Director and Chairman of the Board 4/1/99
- ------------------------------ ------
John F. O'Brien
/s/ Bruce C. Anderson Director 4/1/99
- ------------------------------ ------
Bruce C. Anderson
/s/ Robert E. Bruce Director and Chief Information 4/1/99
- ------------------------------ Officer ------
Robert E. Bruce
/s/ John P. Kavanaugh Director, Vice President and 4/1/99
- ------------------------------ Chief Investment Officer ------
John P. Kavanaugh
/s/ John F. Kelly Director, Vice President and 4/1/99
- ------------------------------ General Counsel ------
John F. Kelly
/s/ J. Barry May Director 4/1/99
- ------------------------------ ------
J. Barry May
/s/ James R. McAuliffe Director 4/1/99
- ------------------------------ ------
James R. McAuliffe
/s/ Edward J. Parry, III Director, Vice President, Chief 4/1/99
- ------------------------------ Financial Officer and Treasurer ------
Edward J. Parry, III
/s/ Richard M. Reilly Director, President and 4/1/99
- ------------------------------ Chief Executive Officer ------
Richard M. Reilly
/s/ Robert P. Restrepo, Jr. Director 4/1/99
- ------------------------------ ------
Robert P. Restrepo, Jr.
/s/ Eric A. Simonsen Director and Vice President 4/1/99
- ------------------------------ ------
Eric A. Simonsen
/s/ Phillip E. Soule Director 4/1/99
- ------------------------------ ------
Phillip E. Soule
<PAGE>
April 1, 1999
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, MA 01653
RE: SEPARATE ACCOUNT VA-K (EXECANNUITY PLUS / ALLMERICA ADVANTAGE)
OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
FILE NO.'S: 33-39702 AND 811-6293
Gentlemen:
In my capacity as Assistant Vice President and Counsel of Allmerica Financial
Life Insurance and Annuity Company (the "Company"), I have participated in the
preparation of this Post-Effective Amendment to the Registration Statement for
Separate Account 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-qualified 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 variable annuity contracts, when issued in accordance with the
Prospectus contained in the Post-Effective Amendment to the Registration
Statement and upon compliance with applicable local law, will be legal and
binding obligations of the Company in accordance with their terms and when
sold will be legally issued, fully paid and non-assessable.
In arriving at the foregoing opinion, I have made such examination of law and
examined such records and other documents as in my judgment are necessary or
appropriate.
I hereby consent to the filing of this opinion as an exhibit to this
Post-Effective Amendment to the Registration Statement for Separate Account VA-K
on Form N-4 filed under the Securities Act of 1933.
Very truly yours,
/s/ Sheila B. St. Hilaire
Sheila B. St. Hilaire
Assistant Vice President and Counsel
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 16 to the Registration
Statement of Separate Account VA-K Allmerica Advantage Variable Annuity and
ExecAnnuity Plus Variable Annuity of Allmerica Financial Life Insurance and
Annuity Company on Form N-4 of our report dated February 2, 1999, except for
paragraph 2 of Note 12, which is as of March 19, 1999, relating to the
financial statements of Allmerica Financial Life Insurance and Annuity
Company, and our report dated March 26, 1999, relating to the financial
statements of Separate Account VA-K Allmerica Advantage Variable Annuity and
ExecAnnuity Plus Variable Annuity of Allmerica Financial Life Insurance and
Annuity Company, both of which appear in such Statement of Additional
Information. We also consent to the reference to us under the heading
"Experts" in such Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 22, 1999
